Sunday, July 20, 2008

Kiva -- loan sharks?

I really like the idea of but I keep getting dissuaded by one fact -- they charge a very high interest rate to borrowers, but expect you to loan them money interest free.

On the info page of any field partner (the local agency that actually lends the money and collects payments), you can see stats about how much interest they charge for Kiva loans. For instance, Fundación Paraguaya charges 20% interest, and you can see that the average charged by all Kiva partners is 22.77%. I have to ask... why?? The money is entirely put up by sponsors so there's zero risk to the lending partner. I understand that they have overhead costs, but come on, this is an outrageous interest rate. I could understand 5% - 10% to recover costs, but 20%?

Keep in mind that even though these are micro-loans, to the people borrowing the money they can be fairly large, like the equivalent of a year's income. Imagine getting a loan equivalent to your salary and then paying 22% interest on it! Good luck actually making a profit on your new farm equipment or whatever.

1 comment:

Michelle Kreger said...

My name is Michelle Kreger, and I work with as the Microfinance Partnerships Manager for the Latin American region. Over the past year, I have had the pleasure of working with the staff of our dynamic field partners across the Latin American region, including Fundación Paraguaya. In a recent conversation with their management team, this blog post was mentioned. I wanted to make sure to respond and share some more information that I hope helps you and your readers better understand the reason for the interest rates that you see posted on the Kiva site, and that are charged by our field partner, Fundación Paraguaya.

Administering small loans to poor, underserved, and often very rural populations is a very costly affair. It is not uncommon at microfinance institutions to have loan officers travel 2-3 hours on poorly maintained dirt roads to meet with a women's group, or to collect a repayment from a borrower. Also, the process of evaluating a borrower for a microcredit can take much more time and resources than in more traditional financial institutions as borrowers often have little documentation, and no credit score. So what that means is that credit officers must visit their house and speak with members of their community in order to understand their credit worthiness, and also to evaluate what is an appropriate loan amount (so as not to lend an amount that the borrower cannot pay back given their income streams).

This type of client evaluation can mean that literally hours of staff time are dedicated to each client upfront, and then more throughout the course of the loan term. In addition to that, as many MFIs in Latin America, including Fundación Paraguaya, work in rural areas, there is an additional cost of maintaining up-to-date and informed records on the institutional level when power outages are frequent, and access to internet or network systems is often non-existent. Finally, as many MFIs also work in higher- risk environments, security is a concern, and any responsible MFI must also invest a significant amount of resources in making sure that its staff, assets, and borrowers are safe.

All of these costs are factored into the product pricing of any MFI.

In terms of the specific rate that Fundación Paraguaya charges, its important to keep in mind as well that Paraguaya has one of the smallest average loan sizes of all of the MFIs in Latin America (right now it hovers around $443 USD). This low amount means that the cost per loan is much higher than, say, if the average loan size was $2000+ USD. As it is this MFI's mission to reach poor and underserved borrowers, higher rates are a reality or these clients would simply not be reached. In addition, while Kiva loans are 0% return for our lenders, we also recognize that our partner MFIs must cover their costs. If Kiva did offer a return to our lenders, this financial cost to the MFI would likely be passed on to the borrower in the form of higher interest rates, so while we can't as yet work with our MFIs to offer very discounted rates, as a lending community Kiva is driving down the cost of funds for many of our partner MFIs, which eventually means better and / or cheaper loans , or access to other financial or non-financial services for the end borrower, who, and the end of the day, are the reason that we do our work.

I hope these thoughts help give you a bit more of a perspective on the rates charged by Fundación Paraguaya. If you have additional questions or comments, or would like more information on further literature about microfinance interest rates, please don't hesitate to contact me at