How Your Loan Affects an MFI: Behind the Scenes of Microfinance
Most people reading this blog already agree that microfinance is a promising way to help people work their way out of poverty in a dignified manner. I agree, obviously, or I wouldn’t be here in Togo. It is heartwarming, and we should be inspired by it. But we should also be critical of it, to keep ourselves honest and to make sure it’s really having the effect we hope it is. In this post I will outline one of the biggest challenges facing the world of microfinance – becoming sustainable despite high administrative costs – and how Kiva and the Kiva Fellows contribute to a solution.
It is very difficult for Microfinance Institutions (MFIs) to target the poorest of the poor while maintaining some level of sustainability, or cost-effectiveness. There are many variables that affect the sustainability equation and make lending to the poor particularly difficult – increased risk, access to lending capital, regulatory environments, and administrative costs, to name a few. Administrative costs are arguably the biggest obstacle to the microfinance movement. The poorer a client is, the smaller their loan will be, and the smaller the potential interest revenue will be for the MFI. However, no matter what the size of the loan is, an MFI employee needs to spend a certain amount of time meeting the borrower, visiting their business, checking their legitimacy, and processing paperwork – and, as we all know, time is money. So, the smaller the loan, the smaller the profit margin for the MFI. Kind of obvious, but crucial to understanding the workings of an MFI (and crucial to understanding why microfinance interest rates often range from 15%-80%).
So, where does Kiva fit in? Through the generous contributions of its lenders, Kiva provides interest-free capital to partner MFIs, thus increasing their ability to target poor clients. In my opinion, and the opinion of many experts in the field, the eventual goal of MFIs should be to end any dependence on this type of subsidized funding by covering all costs with interest income, because only sustainable, independent MFIs can provide the poor with permanent access to financial services. However, as Kiva’s partners work toward this goal, the interest-free capital provided by Kiva lenders serves as a vital stepping-stone toward financial self-sufficiency.
Unfortunately, there is an additional administrative expense associated with the Kiva relationship. As you might imagine, it takes a good deal of time to gather all the necessary information for new business posts and journal updates, then to send the information to the Kiva site and report repayments. This process needs to be as streamlined as possible to maximize the MFI’s returns on their – and your – investment.
Enter the Kiva Fellow.
When a Fellow arrives on the job, there are a few specific things he is supposed to accomplish during his 1 to 3 month stint at a partner MFI. These things are:
- Verify borrower data. The most basic and essential function of a Kiva Fellow is to ensure that an MFI and its borrowers exist, and that the loans posted on the Kiva site are accurate in every way.
- Write journal updates and new business descriptions. Kiva Fellows help with the general workload of managing the Kiva relationship.
- Blog and spread the word. Kiva Fellows are meeting lenders and getting their hands dirty, and are able to share a more visceral experience of what it means to be Kiva.
- Help with process improvements and templates. Though this step is often less visible, it is the only “sustainable” mark a Kiva Fellow can leave on an MFI, and ties directly into the cost-effectiveness equation.
At our week-long training at the Kiva headquarters in San Francisco, we become experts on the Kiva/partner process. Upon arrival in-country, we learn how our MFI carries out this process, and we look for opportunities to make things more efficient. Sometimes we might train loan officers on how to take better photos of their borrowers, thus improving the quality of new business posts and hopefully getting their loans funded faster. Or, we might see that the work is being split between 10 different field offices in an inefficient way, and help our MFI centralize the process. I’m currently trying to convince my MFI to implement a sort of mini-commission plan for journal updates per loan officer, since they’re having trouble meeting their deadlines right now (in my previous life, I was a compensation consultant). These are just examples of the types of changes a Fellow might try to implement at their MFI. It can be a frustrating process, and one that takes a lot of initiative, but in my opinion it represents a Kiva Fellow’s greatest opportunity to truly instigate progress.
Microfinance is more than just promising – it already has changed the lives of many poor people. But, there is still a great need for innovation to improve the efficiency of the sector and its ability to empower the poor, and I am humbled by the opportunity to contribute to that goal.
I apologize that this post has been quite dry – no heartwarming stories or funny anecdotes – but I think understanding this subject is crucial to understanding how Kiva, the MFIs, the Kiva Fellows, and YOU, the Kiva lenders, contribute to the success of small business owners in a sustainable way.
I’m going to get that word tattooed on my forehead.
In case anyone made it all the way through, here’s a funny anecdote and a picture to boot.
I went into the kitchen the other day and opened the freezer to look for a bottle of water. Instead, I found a wild animal, jumping out at my face! Well, it didn’t really jump, because it was frozen (since it was in the freezer). But it was a wild animal, and it was gross. I ran and got Abozu (see my previous post – Why I Can’t Give Abozu My Camera) to ask him what it was. “Un renard.” He said. I ran to my French-English dictionary (I was doing a lot of running – it’s not every day you get attacked by a mysterious frozen animal) and found that “renard” means “fox.” If you take a look at this picture, you’ll understand why I was a bit skeptical:
Hm…that doesn’t look like a fox.
The next night, as my homestay sisters were roasting the ENTIRE ANIMAL over the fire, I asked again what it was, and they explained that it was an “agouti.” I ran (again) for my dictionary, but “agouti” is apparently not important enough to be included in the 300,000 words in my dictionary. Thanks to Wikipedia, I found out the next day that an agouti (same word in English!) is a relative of the guinea pig, and sometimes called a “bush rat.” How delicious-sounding!
I ate it that night, and it wasn’t bad – kind of like a weird mix between beef and chicken, if you can imagine that. (But it wasn’t that good, either.)
At least I’ve managed to avoid trying dog meat so far. (Yes, I’ve been offered.)