Poverty, Credit and Kiva

P1010018Hartford Sixty odd students at the University of Connecticut School of Social Work along with people from the Working Families Party, ACORN, MoveOn, and so forth came together to learn about Professor Bob Fisher’s newly released edited volume, The People Shall Rule, and Citizen Wealth. Good pizza, good feeling, good folks, and good, hard questions were the order of the day.  Dropped ball by the campus bookstore left me scrambling to sell all eight copies I happened to have stuffed in the car.  Just another night working the road and eating what we kill.

All of which left me thinking about a question Monday afternoon that a perceptive student had picked up in a Springfield College calls on wealth and poverty.  I can’t remember how it came up in the dialogue, but I offhandedly mentioned that I was not a huge fan of debt as a poverty reduction strategy, and mentioned that we should talk about the tension around that issue in the current fad for micro lending.  One young woman challenged me later about mortgage based lending and foreclosures and how that squared with home ownership as a citizen wealth strategy.  An excellent point obviously and a correct one in my mind, even though it was easy to plow through in a discussion about equity and the net gains in home ownership despite the high foreclosure rate even among subprime loans if values recovered and equity right sized the loans.  Nonetheless, it is absolutely true that all of this ideology about homeownership does not square with good public policy for cities or for poverty reduction, even though that has been the big game in the USA for a long time.

All of this brings me to Kiva, which I’ve written about for years in a largely positive vein, despite my skepticism.  Kiva’s attraction for small donors was the ability for someone in developed countries to use their internet tools to directly connect to people in other countries who were seeking loans for their individual micro-lending projects.  The Premal Shah, director of Kiva, in the 2008 Tides Momentum conference had movingly and ambitiously described his hopes of the huge scale of person-to-person direct lending possible from Kiva model, as well as the exciting sustainability of the Kiva model based on simply asking the regular person lender/donor to pitch in a little more to pay for the small Kiva staff.

There was a signature debunking piece by Stephanie Strom in the Times a couple of days ago that picked up on a blogger report by David Roodman, a research fellow at the Center for Global Development.  To quote:

“But Mr. Roodman’s blog post said that lenders like Mr. Kristof were not making direct loans. Borrowers like Ms. Cruz already have loans from microfinance institutions by the time their pictures are posted on Kiva’s Web site.

Thus, the direct person-to-person connection Kiva offered was in fact an illusion. Kiva’s lenders were actually backstopping microfinance institutions, and since Kiva and other online giving and lending models pride themselves on their transparency, Mr. Roodman and others suggested it might better explain what its lenders’ money — about $100 million over four years — was really doing.

“The person-to-person donor-to-borrower connections created by Kiva are partly fictional,” he wrote. “I suspect that most Kiva users do not realize this.””

Frankly, I’m still confused.  I understand that it was an “illusion” but where was the money really going?  Strom was less than transparent on her reporting here, but if the borrowers already have loans are the small lenders simply transferring their money to the big microfinance agencies to build their lending pools or hedge against defaults from the small borrower?  Was a Kiva lender simply greasing the process?

Reading more doesn’t necessarily make it easier to sort out as you can see below when Strom parses Shah’s effort to defend and other critics’ comments:

“Premal Shah, Kiva’s president, said he could foresee a day when Kiva really did provide person-to-person connection, once some legal hurdles are cleared and when people in the developing world began using their mobile phones to use credit and make payments.

“That’s the future of Kiva,” he said, “when through that disintermediation process you can bring down the costs of these transactions and put them directly in the hands of people.”

For now, however, analysts are raising questions about Kiva’s model, which relies in part on its own data, offers lenders no recourse against default and deploys volunteers to do most of its auditing.

Mr. Ogden goes so far as to question Kiva’s role in the lending process. “Kiva’s new documentation explains, if you read it, that Kiva is a connector not of individual lenders to individual donors, but of individual lenders to microfinance institutions,” he said. “If Kiva’s users want to be connected to an individual borrower, Kiva doesn’t do that, and so the big question is, do Kiva’s users want to be connected to a microfinance institution — in which case, why do they need Kiva?”

Indeed, individual lenders can support microfinance institutions directly through, for example, Microplace, or make donations to support nonprofit groups like the Grameen Foundation and Acción that support microfinance.

Mr. Shah said he thought Kiva’s distinct advantage was in making it easier for small lenders to support microfinance than the other programs.

The difficulty is in engaging the person who wants to lend $25, a mother of three in Des Moines, for instance, “and create a simple way for her to participate in microfinance, which is what we do,” Mr. Shah said.

The question is, does the lender understand that his money may not be supporting the loan he picked on Kiva’s Web site?

The uproar has proven beneficial in an unexpected way. “If anything, it has drawn more people into the nuance and beauty of this model of microfinance,” said Mr. Shah, who joined Kiva from eBay. “It’s highly imperfect, but it’s like a 3 1/2-year-old child: it has a lot of potential.”

He said he had so far seen no impact on Kiva’s business, which set a record with $293,000 lent on the day he was interviewed and celebrated its fourth anniversary last month by announcing it had lent more than $100 million all told.”

And, kill me now if anyone feels better for the future as they read about a future “disintermediation process.”  Communications doctor for Brother Shah, stat!

Maybe Shah is right, and people are ok with moving their money to lenders through Kiva as an intermediary?  I don’t know.

What I do know having spent recent years out there in the world where this work happens is that the unwillingness to really empower direct connections, particularly using community-based organizations where there is huge capacity to do this job, has been frustrating and divisive.  Community organizers in Kenya and the Philippines have often complained to me that they to survive they have seen their roles reduced to being microloan collectors.  Of course the Kiva-type model is sustainable especially if they are not vetting the borrowers but off loading that on to their silent microfinance partners.  Having to sustain a real infrastructure in the field even at a minimal or transactional level is necessary, as even bankers will concede.

In many cases these microloans at best provide survival based informal employment rather than sustainable poverty reduction programs in most cases, and the process of getting and repaying the loans is difficult and involves interest rates that often verge on the predatory.  That’s the facts.

Several years ago I remember a hopeful set of conversations I had with some of the visionary leaders of the Credo/Working Assets team about whether or not some of the Kiva or Prosper type models could be applied on person-to-person work in the USA and elsewhere.  I talked to them about the people ACORN leaders and organizers knew who needed bridge loans at regular rates to staff off foreclosures or in the Katrina case to finish construction and rebuilding in the lower 9th ward and elsewhere.  I thought we could privilege the base and provide the direct connections.  There was excitement and interest, but the more they talked to the folks around the Bay Area involved with these projects, the more another great idea seemed to wither on the vine.

Now I wonder if they didn’t figure out the real story back then as they looked under the hood?

All of this can be done, but it requires something more like trust and community than just some click and “send” features on computer terminals with microfinance NGO color pictures.  It also requires perhaps a little extra in terms of an actual gift and not just a no interest/low interest loan.

We need to make sure in the rage of debunking that we don’t throw out more babies with more bath water.

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