The Challenges of Kiva
By James Allman-Gulino, KF11 Uganda
Kiva funds are a great thing for microfinance institutions (MFIs) operating overseas because they come in the form of “no-interest” loans. Unlike traditional sources of financial capital like large banks, which may charge upwards of 10% on their loans, Kiva is able to loan funds at 0% thanks to:
- Kiva lenders’ willingness to invest without an expected financial return, but simply the social return of empowering entrepreneurs in the developing world
- Kiva lenders’ willingness to make additional donations to Kiva, helping to cover the organization’s operating expense (traditional capital sources just cover operating expenses through the interest rate they charge on funds)
The 0% rate on Kiva capital allows MFIs to devote more of their resources towards providing borrowers with loans, which is a great thing. But it’s worth noting that the “0%” certainly doesn’t mean Kiva funds are “free” to MFIs; there are a number of big challenges that MFIs face in working with Kiva, which lenders might not know about. Some of the major ones:
Currency Exchange – Because Kiva works in so many different countries, and couldn’t make loans in all those countries’ local currencies, all Kiva funds are distributed in US dollars. This means that MFIs receive monthly payments from Kiva in US dollars, but then have to “buy” back US dollars to make repayments. When the value of the dollar appreciates significantly, as it has in the last few months, this creates a large expense for MFIs. For instance, at the beginning of 2010, each US dollar was worth about 1900 Ugandan Shillings. Today, the dollar is trading at about 2270 Ugandan Shillings – that’s about a 19% change in just six months! This means that it’s now significantly more expensive for Ugandan MFIs to “buy” dollars to make repayments to Kiva.
As of now, Kiva lenders can’t really do anything about this – lenders can choose to cover currency exchange risk, but only in cases of extreme inflation in local currency. And to be fair, the dollar can always depreciate as well, which would make it less expensive for MFIs to borrow (though this is rare, because developing country currencies tend to fluctuate more and aren’t apt to appreciate against the globally-used dollar). But in the future, I wondered if Kiva lenders might be interested in covering all risk from currency exchange for MFIs. For instance, if you lent $25 to a Ugandan MFI at the 1900 UGX/dollar rate referenced above, and then the exchange rate changed to 2270 UGX/dollar, if the MFI repaid in the same amount of local currency you would get about $20.90 back. So how about it – would lenders be willing to risk that loss?
Administrative Costs – Kiva is incredibly unique in its peer-to-peer lending model, which connects Kiva lenders to individual entrepreneurs around the world. However, this means that MFIs have to create lots of content for Kiva, whereas for regular sources of capital they don’t really need to create any (Kiva Fellows can help on this front, however). This can become quite expensive for the MFIs, especially when Kiva lenders demand such a strong connection to borrowers. Keeping track of a Kiva borrower’s business description, monthly repayment amounts, and journal updates for Kiva lenders requires much more work than for a non-Kiva borrower. This information also has to come from the MFI’s branch offices, which may be located far from the MFI’s headquarters and lack the ability to send documents digitally. For instance, my current MFI, BRAC Uganda, has 89 branch offices throughout Uganda, some of which are over 10 hours from the headquarters in Kampala and in very rural areas. Collecting information from all of an MFI’s branches and posting it to Kiva is quite difficult; sometimes it results in inaccuracies, in which case a loan may be refunded or the error might be communicated in a journal update to Kiva lenders. MFIs are generally excellent about record-keeping for Kiva, so these inaccuracies are usually rare; but it certainly happens, especially given the litany of challenges that posting Kiva loans can present.
This is all just to make lenders aware of the significant amount of work that MFIs do for Kiva, and the many challenges involved with maintaining the lender-borrower that our lenders value so much. As the leadership of my MFI has said, they are very happy to work with Kiva because of the organization’s social mission and goal of connecting people across the world. But it isn’t always easy!