Kiva, and microfinance.
So, a week or two ago I posted asking if anyone knew about the Kiva website. No-one really did, but people were interested, so I did some research.
Kiva is a website designed to support microfinance - that is the provision of financial services to poor or low-income clients. These clients fall into a gap between those people catered for by the traditional banking system, and those who live in extreme poverty. Traditional banks do not provide services for these people because the sums of money they would want to deal in are too small to generate enough revenue to pay their massive bonuses cover the costs of the banking overhead and infrastructure. Likewise charities in the developing world tend to focus on the most needy people living below the poverty line, or on developing community infrastructure or education. Microfinance attempts to bridge the gap in financial services available to people in poorer or developing countries by offering them credit for small loans for investment, as well as secure savings services. The theory is that by giving people these services, people can take advantage of economic opportunities, grow their enterprises and promote a more stable economy in the region. This in turn can provide more jobs and help lift more people in the area out of poverty.
So how does Kiva fit in? Kiva partners with microfinance institutions (MFIs) in developing countries. The MFIs look for people in need of small loans (anywhere from around $200 to $5,000 US), and report their details back to Kiva. Kiva then puts that entrepreneur's information on their website, and asks for philanthropic types from wealthier nations to lend their money to them in sums of $25 or more, via the website and PayPal. Once all the lone amount has been collected, Kiva passes that loan to the MFI, who in turn passes it to the entrepreneur. As the loan is paid back, the money returns to the lender so that they may use it to loan to further people.
All sounds good doesn't it? Well, turns out there are some criticisms and caveats.
With Kiva:
In short, I am torn about the whole thing. I Am Not An Economist, and it's hard to accurately gauge whether the net impact of this these organisations is positive, or if all it manages is to give a feel good feeling to the wealthy west (btw, if you are an economist or know someone who is, I'd value informed input). It doesn't help that microfinance pioneers Grameen Bank and it's founder have managed to be awarded the 2006 Nobel Peace prize, and then criticised by their home nation's prime minister for being corrupt. Mixed messages much? *sigh* I think I will wait for more evidence before I wade in with my good intentions.
Kiva is a website designed to support microfinance - that is the provision of financial services to poor or low-income clients. These clients fall into a gap between those people catered for by the traditional banking system, and those who live in extreme poverty. Traditional banks do not provide services for these people because the sums of money they would want to deal in are too small to generate enough revenue to pay their massive bonuses cover the costs of the banking overhead and infrastructure. Likewise charities in the developing world tend to focus on the most needy people living below the poverty line, or on developing community infrastructure or education. Microfinance attempts to bridge the gap in financial services available to people in poorer or developing countries by offering them credit for small loans for investment, as well as secure savings services. The theory is that by giving people these services, people can take advantage of economic opportunities, grow their enterprises and promote a more stable economy in the region. This in turn can provide more jobs and help lift more people in the area out of poverty.
So how does Kiva fit in? Kiva partners with microfinance institutions (MFIs) in developing countries. The MFIs look for people in need of small loans (anywhere from around $200 to $5,000 US), and report their details back to Kiva. Kiva then puts that entrepreneur's information on their website, and asks for philanthropic types from wealthier nations to lend their money to them in sums of $25 or more, via the website and PayPal. Once all the lone amount has been collected, Kiva passes that loan to the MFI, who in turn passes it to the entrepreneur. As the loan is paid back, the money returns to the lender so that they may use it to loan to further people.
All sounds good doesn't it? Well, turns out there are some criticisms and caveats.
With Kiva:
- Loans are unsecured, so if the entrepreneur defaults you lose any money that they don't pay back. The MFIs work to keep the default rate low, but the risk is still there.
- Interest is charged on loans for the MFI to cover their costs. Kiva tries to work with MFIs delivering relatively low interest rates, but these are still necessarily higher than those found in the developed world due to economies of scale. Arguably these are still better than the scant alternatives on offer.
- Kiva uses flat interest rate loans, which are controversial as they imply a lower rate of interest than the western standard of APR rates.
- There is currently little empirical evidence to support the theory of strengthening economies from the bottom up - most evidence gathered has been anecdotal.
- The dangers of debt are bad enough in the developed world with welfare systems. The consequences of becoming debt-dependant in the developing world could be pretty bad, I imagine.
In short, I am torn about the whole thing. I Am Not An Economist, and it's hard to accurately gauge whether the net impact of this these organisations is positive, or if all it manages is to give a feel good feeling to the wealthy west (btw, if you are an economist or know someone who is, I'd value informed input). It doesn't help that microfinance pioneers Grameen Bank and it's founder have managed to be awarded the 2006 Nobel Peace prize, and then criticised by their home nation's prime minister for being corrupt. Mixed messages much? *sigh* I think I will wait for more evidence before I wade in with my good intentions.