Yesterday, a friend named Ariana published a negative post about Kiva “Why I’m No Longer Using Kiva To Earn Points And Miles.” In that post, Ariana complained about the “farce” of Kiva’s peer to peer lending, Kiva partners’ sky high interest fees, the repayment rate myth, and lending inefficiency. This post concerned me deeply. In the past 7 years, I’ve lent nearly half a million dollars through Kiva (not all at once of course!) and received almost all of it back. During that time, I’ve viewed Kiva primarily as an easy way to earn credit card rewards, and secondarily as a way to do good in the world. Was the second part all wrong?
For many years, microloans were touted as a cure for poverty and a solution for empowering women. The problem that microloans seek to solve is the fact that most traditional lending institutions refuse to offer loans to the poor in developing countries. There’s simply too little potential profit, and too much risk to bother. As a consequence, it’s nearly impossible for an aspiring entrepreneur to lift herself out of poverty through entrepreneurship. It takes money to make money.
Starting in the early 1980’s, micro-lending institutions became a big thing. In most cases, they charge interest to borrowers, and also apply for grants and other sources just to cover their costs. Microloans are often short term. Some may be expected to be fully paid in as few as four months, for example. As a result, the annualized interest rates appear to be excessive and maybe even predatory. For example, a 10% fee on a 4 month loan is like a 30% annual interest rate if you simply multiply by 3 (the number of 4 month periods in a year), but the effective annualized rate is 33.1%.
Kiva is a nonprofit organization that helps supply funds for microloans across the world. They do this by contracting with microlending institutions who post information to Kiva’s website about each of the microloans that they have funded or intend to fund. Kiva displays these loans to lenders (like me) who want to fund these loans. Lenders can optionally add a charitable donation to Kiva, along with each loan, but that is not required. Money collected by Kiva (not counting charitable donations) goes to the the microlending organizations. This helps those organizations make many more loans. When the loans are repaid with interest, the microlending organizations keep the interest payments to cover their expenses and return the principal to Kiva. Kiva then returns that money in full to each lender.
Kiva criticism evaluated
Ariana’s negative post about Kiva was based on a 10 year old blog post published by a site called the Center for Global Development, and a 5 year old blog post published on a site called Next Billion. To me, Kiva’s response to Next Billion’s post so thoroughly discredited the article’s “facts” that I don’t think the original article is worth debating except at a very high level when questioning whether or not microloans are a force for good in the world. I’ll get to that debate in a moment.
Kiva Is Not Quite What It Seems
The Center for Global Development post, Kiva Is Not Quite What It Seems, is more thoughtful. It points out that the way Kiva displays loans on its website is misleading. And it is. Kiva makes you think that the borrowers you choose to fund will not get their loans unless you and other Kiva lenders support them. In reality, many loans are funded by the microlenders before they make their way to the Kiva website. Ironically, the author goes on to argue that Kiva’s duplicity is the right thing to do. He makes the case that presenting information the way Kiva does encourages lending, and that the pre-funding of loans is the only realistic way to make the process work. Kiva responded by acknowledging the problem and promising to do better in the future. They wrote:
A main focus of the article has to do with the fact that most of Kiva’s loans are disbursed before they are funded on the Kiva site, which is true. The article points out, rather accurately, that most lenders on the site do not understand this. It goes on to imply that Kiva is taking an active role in perpetuating this misperception.
My response to this critique is two-fold. First, I believe that allowing pre-disbursal is necessary for the success of this model. Second, I think we can do better at educating our users about how and why this is the case.
And now, when looking at Kiva’s website 10 years later, have they fixed the problem? In my opinion, no. The “how Kiva works” page shows the journey of a Kiva loan in a way that I think is still a bit misleading. To be fair, it definitely does not say that the loan is disbursed after fundraising, but the diagram doesn’t dispel that assumption either.
It’s necessary to read the FAQ at the bottom of the page to find the the full story (bolding is mine):
How does the money for the loan get to each borrower?
Loan funds reach borrowers through Kiva’s Field Partners, or through the money transfer platform PayPal.
For most loans on Kiva, our local Field Partners are responsible for distributing the funds to borrowers. Depending on the Field Partner, the funds may be given to each borrower before, during or after the individual loan is posted on Kiva. Most partners give the funds out before the loan is posted (what we call pre-disbursal) because it allows borrowers to use the funds immediately. So when a lender supports a partner loan on Kiva, the borrower may already have those funds in hand. However, support for that loan is still needed and as the borrower makes repayments, they’re passed along to the specific Kiva lenders who supported the loan.
So, yeah. If you don’t pay careful attention to the details on Kiva’s website, you won’t know that loans are often pre-funded. But now you know. Do you care? I don’t. To me, the more important question is whether Kiva loans are a force for good or bad in the world.
Kiva loans: good or bad?
Next Billion’s scathing post about Kiva (The Kiva Fairytale: It’s a microlending superstar – but who is it really serving?) argues that microlending not only does not alleviate poverty but it makes it worse (bolding is mine):
Does Kiva work? In terms of poverty-alleviation using microcredit, Kiva’s apparent aim, the answer is no. Despite many years of trying, independent academics have been unable to find any convincing data confirming an overall positive impact on poverty reduction achieved by indebting the poor. David Roodman at the Center for Global Development summarized its impact most succinctly: “zero.” With interest rates often exceeding 100 percent, it is not hard to see how microcredit can progressively increase rather than decrease poverty, as demonstrated poignantly by crises in Andhra Pradesh and elsewhere.
As I mentioned earlier in this post, Kiva effectively discredited most of Next Billion’s article. But Kiva didn’t have much to say about whether or not microlending helps to alleviate poverty. In fact, in another post, Kiva admited that “there’s limited evidence that microfinance has helped alleviate poverty.” But they went on to say that they’re working the problem:
Kiva’s mission is to connect people through lending to alleviate poverty, so we’ve been following these findings closely to learn as much as possible about how we can evolve Kiva to make the biggest difference.
I personally spent several hours yesterday reading newer research findings to try to find an up-to-date answer. Do microloans do good or not? Here are some of the articles and research papers that I found most informative:
Six Randomized Evaluations of Microcredit: Introduction and Further Steps
By Abhijit Banerjee, Dean Karlan, and Jonathan Zinman
American Economic Journal: Applied Economics 2015, 7
This research paper analyzed six studies which used randomized assignment methods to evaluate the impact of microlending on various outcomes including income and consumption. The overall headline finding was this: “there is little evidence of transformative effects.” On the positive side, the article states that there is some evidence of positive outcomes “on occupational choice, business scale, consumption choice, female decision power, and improved risk management.” Further, the article states that there is little evidence of harmful effects “even at a high real interest rate.” The paper also goes into detail about why the studies were underpowered for answering these questions. In other words, the lack of positive or negative findings should not be considered conclusive: There isn’t really enough data (at least in the studies they examined).
According to an article in FiveThirtyEight, one of the authors of this evaluation, Dean Karlan, founded Innovations for Poverty Action which is “a nonprofit organization that works with researchers to conduct studies that measure the impact of global anti-poverty programs. IPA is now working with organizations, including the microlender Kiva, to help them find ways to make their programs more effective.”
Does microfinance reduce poverty? Some international evidence
By Quanda Zhang
The B.E. Journal of Macroeconomics 2017-05-10
I have to admit, I didn’t actually read this research paper since it was behind a pay-wall, but I did read the author’s summary, found here: Yes, microlending reduces extreme poverty. In this paper, the author compared “microfinance participation” (meaning the extent to which people sought and received microloans) to poverty and found a negative correlation. In other words “the more people in a given country received small loans, the less poverty it registered.” It’s important to note that this was not an experimental study. There were no experimental groups vs control groups. This is significant because there may be other unmeasured variables that led to this correlation. In other words, while the author used the correlations to infer that microloans reduce poverty, the author had no causal evidence.
Group-based microfinance for collective empowerment: a systematic review of health impacts
By Lois Orton, Andy Penningto, Shilpa Nayak, Amanda Sowden, Martin White & Margaret Whitehead
Bulletin of the World Health Organization 2016;94:694-704A
This bulletin evaluates research into group-based microfinance (where groups rather than individuals obtain microloans) and looks specifically at health outcomes rather than poverty. In this study, the researchers weeded through 4,050 articles to find 23 studies that met their criteria. Within those studies, they found a number of positive health outcomes associated with group-based microfinance. They noted though that very few studies employed “robust designs.” By that, I think they mean that there may have been other reasons for improved health outcomes. For example, they note that some of the microlending organizations may have “health-promotion and/or health-care components” which may have led to the positive results.
Greg’s research summary: Identifying whether or not microloans are a force for good in the world is a surprisingly difficult task. Recent(ish) reports have found some positive outcomes, but they’re not conclusive enough to be the final word.
My take on Kiva
I’ve had the opportunity a couple of times in the past to meet Kiva’s staff and leadership at their headquarters in San Francisco. It’s hard to describe how refreshing it was to talk one on one with people who seemed to truly believe that they were making the world better. They told heart warming stories where they personally witnessed the positive transformative power of microloans. And while I’m routinely skeptical of corporations and politicians that rely on stories to try to assert big picture “truths,” in this case I believe. More accurately, I believe that they believe. And I don’t believe articles that insinuate that evil motives underlie Kiva’s innocent facade.
To be clear: I’m not convinced that my loans made through Kiva are really doing good for the world. I think the loans are tipping things in a positive direction, but I don’t have proof of that. However, I am convinced that Kiva as an organization means well. And I believe that they’re working every day to find ways to make loans more effective. My bet is that loans made today do even more good than loans made 7 years ago.
Kiva is not my charity
I make Kiva loans primarily for earning credit card rewards and secondarily to do good. Separately, I donate money to highly rated charities that help alleviate homelessness, feed the hungry, provide medical aid in the most desperate places, etc. Those are my charitable donations. I’m pointing this out not for a pat on the back, but rather to explain partly why I’m inclined to give Kiva the benefit of the doubt. If Kiva loans were my primary “do good” strategy, I’d probably be more concerned about reports suggesting that they don’t do good or that their motives are impure.
Credit card rewards via Kiva
Here’s how to use Kiva to help earn credit card rewards (for more details, see this post):
- Use Kiva’s filters to find “safe” loans (loans most likely to pay back in full).
- Use your credit card to fund those loans (there’s no fee for credit card processing)
- Wait for the loans to pay back (this can take anywhere from about 6 to 12 months depending upon the specifics of each loan)
- Withdraw the funds to Paypal and then to your bank account
The best credit cards to use with Kiva are those with which you are working towards completing minimum spend requirements for a new welcome bonus, or one of the many cards with big spend bonuses, or a card that has very high rewards for everyday spend.
There are obvious downsides to using Kiva for credit card rewards:
- You may lose money. There is no guarantee that your loans will be paid back.
- Your money is tied up for many months. This is a lost opportunity. During that time, you could have made money with your money via interest payments or investments.
- It can be time consuming to find and fund many loans.
There are ways to alleviate these issues: Use kivalens.org to lend in bulk, filter to “safe loans”, sort by the loans that pay back more often and more quickly, make many small loans rather than few big ones, etc.
I’ve been loaning through Kiva for years, but I haven’t always followed what I now consider to be best practices. A little over a year ago, though, I created a new account and started lending the exact same amount every month and followed these practices to the letter. The goal is to have real world results showing what is likely to happen if you follow these same practices. So far, so good. My default rate is only 0.68%, and I’ve been paid back for most loans a bit more quickly than I expected. I’ll cover this experiment in more detail in the future.
I plan to write up a new guide soon, but for now if you want more details about earning credit card rewards via Kiva, please see: Manufacture Spend (and do good) with Kiva and Kivalens.
There is some evidence that microlending is a good thing, but the evidence isn’t strong. Regardless of past outcomes (or lack thereof), I believe Kiva is a good organization that intends to make the world a better place. Still, if your primary goal is to use your money to make the world better, you may be better off simply donating to highly rated charities. But if you want to do good and earn credit card rewards, I think that Kiva is worth a look.