Do Kiva loans actually go to the borrower you choose?

Discussion in 'Kiva | Loans That Change Lives' started by jbcarioca, May 24, 2011.  |  Print Topic

  1. jbcarioca
    Original Member

    jbcarioca Gold Member

    Messages:
    17,507
    Likes Received:
    57,455
    Status Points:
    20,020
    There are regular posts and quotes that describe Kiva lending as deceptive because the loans you make, they say, do not go to the borrower you select. Almost all such posts and blogs are made by people who are unfamiliar with how finance works, so they misunderstand the facts. In this thread I will try to help explain the way it works, and why it works that way.

    1) Most micro-borrowers have very urgent needs. They may need seeds, fertilizer, inventory or equipment without which their livelihood is threatened. However, if they can get the loans they can often improve their lives by having the things they need at the time they need them. So, a fisherman needs the boat fixed now, not after a few months. A farmer needs seeds when it is time to plant, not after the season is over. So, what to do?
    2) Micro-lenders rarely have adequate funds on hand to make these loans immediately. Whether they obtain funds through Kiva or through other groups, that still takes time. If they wait for that time to make the loan the loan invariably will arrive too late to help the borrower. So, again, what to do?
    3) Because the need usually comes before the funds have been raised and the vast majority of lenders, people like us, want to lend to specific borrowers for specific projects, Kiva came into existence. Kiva adapted the normal commercial and investment banking loan origination practices to a micro-lending environment. The huge innovation was that they developed a platform that allows that process to be done very cheaply and efficiently. So, what is the process?
    4) This needs some vocabulary and functional explanation:
    a. Portfolio investors= Kiva members: in the banking world investors buy loans that are made and serviced by others. They may buy all or part of a loan. We as Kiva members are doing that so we buy;
    b. Loan participations. That means we own the bit of the loan we buy. We do lend to the borrower we choose, but we are buying it from the original lender who made a:
    c. Bridge loan. The original lender advances money while they wait for other lenders to buy the loan from them. Thus, Kiva gives money to the lender to allow them to make the loans when the money is needed, then sells the loans to us. When Kiva asks for donations, they cover operating expenses. But they also have large donors who advance money before they raise it from people like us.
    d. Interest rates. Kiva does not pay us interest, but we get back our principal. The subsidy we give is interest-free lending, and Kiva also does not charge the field partner interest.
    e. Field partner=loan originator and servicer. The local micro-lenders actually make the loans and service them. They help form borrower teams (BTW, the ‘secret ingredient’ to micro-lending results) and handle day to day communications. That is very expensive and time-consuming when it is done well.
    5) How can you know when the field partner is a good one? The Kiva website gives partner statistics and stories. It is well worth reading them. Loan default rate is a superb ‘measure of merit’ because abusive practices always will show up in loan losses and a second measure, delinquencies. Yield is also good to see. A field partner should have a positive yield if they are operating well, but not too high. What is “too high” must be figured out by comparing with local costs, interest rates and bureaucracy. All that is fairly complex so the easy thing to do is focus on loss rate and delinquency. You’ll not go wrong on those two measures.

    There is much more, but this is a beginning. Please ask questions or make comments.
     
  2. KyRoamer
    Original Member

    KyRoamer Gold Member

    Messages:
    3,715
    Likes Received:
    17,469
    Status Points:
    10,620
    Thanks. That answers a lot of questions for me.
     
    nime01 and jbcarioca like this.
  3. jbcarioca
    Original Member

    jbcarioca Gold Member

    Messages:
    17,507
    Likes Received:
    57,455
    Status Points:
    20,020
    Please ask anything else you want to. If I do not know the answer I will find it for you. Because this issue is so contentious and is so often used to denigrate Kiva I want to do everything I can to make certain the actual facts are known to the world.

    I am happy this has helped.
     

Share This Page