Kiva Is Not Quite What It Seems

[MD] We at Money Delusions deeply want to see a “real” money process instituted. We see a lot of the world’s problems and injustices vanishing if that could be accomplished. And it could and would happen “organically” if people just knew what is going on…on what should be going on.

Occasionally we run across an initiative that is “trying to be money”. KIVA looked like just such an initiative. Their site is full of “do-gooder” gook. In groping it (looking for “what’s in it for them”) we come across their “terms of agreement”. These “terms” documents read like an enumeration of lawsuits lost. This one is 11,924 words. An average novel is said to have 70,000 to 100,000 words. So these terms are 1/3rd to 1/10th of a novel.

Now we know the complete essence of a “real” money process can be stated in less than 500 words. That’s 1/20th the number of words in KIVA’s “terms of agreement”. So how many words must it take to explain what they’re doing…how they do it…and what they get paid for doing it…and how transparent their operation is. How do we even find out?

Frankly, when you peel the onion on these do-gooder initiatives, you need to have a barf bag at the ready. This is no exception. But luckily, it looks like someone already has them on their radar. This is an article by just such a person. Let’s see what’s going on.

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David Roodman

October 02, 2009

Update: Matt Flannery, CEO and Co-Founder of Kiva, replied to this post as a guest blogger. Kiva has also changed its site, and I have blogged more.]

[MD] Note, this article is already over 13 years old. I noted they updated their “terms” less than 2 months ago. He says he’s “blogged more”. But that link is broken. That’s why we like to capture the actual articles as well as give the links. They can run, but they cannot hide.

This post is so long it needs an executive summary.

Kiva is the path-breaking, fast-growing person-to-person microlending site. It works this way: Kiva posts pictures and stories of people needing loans. You give your money to Kiva. Kiva sends it to a microlender. The lender makes the loan to a person you choose. He or she ordinarily repays. You get your money back with no interest. It’s like eBay for microcredit.

[MD] “Path-breaking, fast-growing,….”. Questions: Where do we find an enumeration of microlenders? Actually, that’s an obvious subject for another investigation. “It’s like eBay for microcredit”. Actually, that “is” what a “real money process” is…without the eBay.

You knew that, right? Well guess what: you’re wrong, and so is Kiva’s diagram. Less that 5% of Kiva loans are disbursed after they are listed and funded on Kiva’s site. Just today, for example, Kiva listed a loan fepor Phong Mut in Cambodia and at this writing only $25 of the needed $800 has been raised. But you needn’t worry about whether Phong Mut will get the loan because it was disbursed last month. And if she defaults, you might not hear about it: the intermediating microlender MAXIMA might cover for her in order to keep its Kiva-listed repayment rate high.

[MD] Contrasting to a real money process: (1) It’s not about “loans”…it’s about promises. (2) There are no disbursements…just a transparent entry into a journal and ledger for all to see…immediately. (3) If she defaults you “will” hear about it. That’s the natural negative feedback loop. (4) The amount promised is not denied to responsible traders…and irresponsible ones pay interest up front (which is returned if they don’t default). (5) And the “microlender” is just a federated agent…like an insurance salesman. In fact, a “real money process” is virtually identical to a mutual insurance company (where the customers “are” the company). The main difference is there’s no money to be made in a “real money process”. With an insurance company, the money is made as investment income…which may also be lost.

In short, the person-to-person donor-to-borrower connections created by Kiva are partly fictional. I suspect that most Kiva users do not realize this. Yet Kiva prides itself on transparency.

[MD] In a “real” money process, it’s person-to-process at all times. The person is the “trader”. The process is the “score keeper, default detector, interest collector”.

I hasten to temper this criticism. What Kiva does behind the scenes is what it should do. Imagine if Kiva actually worked the way people think it does. Phong Mut approaches a MAXIMA loan officer and clears all the approval hurdles, making the case that she has a good plan for the loan, has good references, etc. The MAXIMA officer says, “I think you deserve a loan, and MAXIMA has the capital to make it. But instead of giving you one, I’m going to take your picture, write down your story, get it translated and posted on an American web site, and then we’ll see over the next month whether the Americans think you should get a loan. Check back with me from time to time.” That would be inefficient, which is to say, immorally wasteful of charitable dollars. And it would be demeaning for Phong Mut. So instead MAXIMA took her picture and story, gave her the loan, and then uploaded the information to Kiva. MAXIMA will lend the money it gets from Kiva to someone else, who may never appear on

[MD] With a “real money process”, Phong Mut does not have to jump through any hurleds if she is a “responsible trader” (i.e. no default propensity). But he described the microlender as having already made the loan. Further, it assumes MAXIMA has money…it doesn’t create it nor allow Phong Mut to create it. Where does it get the money?

Moreover, the way Kiva actually works is hidden in plain sight. On the right of Phong Mut’s page, you can see that MAXIMA lent her the money on September 8 and listed her on Kiva on September 21. So while Kiva is feeding a misunderstanding, it isn’t technically hiding anything.

[MD] So it’s deceit in plain sight?

And finally in Kiva’s defense, its behavior is emblematic of fund-raising in microfinance and charity generally, and is ultimately traceable to human foibles. People donate in part because it makes them feel good. Giving the beneficiary a face and constructing a story for her in which the donor helps write the next chapter opens purses.

[MD] I submit there is no such thing as altruism!

Our sensitivity to stories and faces distorts how we give, thus what charities do and how they sell themselves. What if the best way to help in some places is to support communities rather than individuals? To make roads rather than make loans? To contribute to a disaster preparedness fund rather than just respond to the latest earthquake? And how far should nonprofits go in misrepresenting what they do in order to fund it? It is not an easy question: what if honesty reduces funding?

[MD] Help communities? You can only do that if the community is a “government”. A “real money process” may be considered a community…a trading community. But every trader is an individual…not a member of a community. As soon as you introduce a community, you introduce community leaders, and you introduce leverage and corruption. “What if honesty reduces funding?”. What if “funding” isn’t involved at all.

The big lesson is that the charities we observe, the ones whose pitches reach our retinas, are survivors of a Darwinian selection process driven by our own minds. An actual eBay venture called MicroPlace competes with Kiva; but MicroPlace is more up-front about the real deal. Its page for sample borrower Filadelfo Sotelo invites you to “invest in the organization that helped Filadelfo Sotelo: Fondo de Desarrollo Local” (FDL). This honesty is probably one reason MicroPlace has badly lagged Kiva. Who wants to click on the FDL icon when you can click on a human face?

[MD] Looks like this article is rich in targets.

Nicholas Kristof once tweeted that he “Just made a new microloan on to a Nicaraguan woman. Great therapy: always makes me feel good.” We should not feel guilty about the pleasure of giving. It should not just be eating your brussels sprouts. Indeed, Kristof might argue that’s ability to make the user feel good is its greatest strength, for it draws people into an experience that stretches their horizons, educates them about global poverty, and entices them to contribute money they might otherwise spend on potato chips.

[MD] A “real” money process is not about “giving” or “feel good”. It’s about making a trade spanning time and space. Any time someone is in the business of making you feel good…well, don’t do business with them. Would poverty of any kind exist if we had a “real” money process? I submit a lot less of it would exist if people were just enabled to make promises and motivated to deliver on them. It’s a far better (and simpler) way to do life than stealing.

Still, we should take responsibility for how our pursuit of that pleasure plays out. Surely it is better to invest in an institution such as FDL without requiring it to incur the expense of posting pictures and stories of every borrower. Historically microcreditors have scaled to reach millions of people by cutting costs to the bone. Surely it would be better for us to give in a way that allows the microfinance institutions to put more of their limited energies into helping poor people manage their difficult lot and less into making us feel good.

[MD] This whole notion of an “investor” and “investing” is part-and-parcel to the scam which is “money as we have it today”.

I do not know the full answer to this conundrum, this tension between the need to draw donors and operate efficiently. Still, subtle dissembling makes me uneasy, perhaps because good intentions so often go awry. If a charity obscures how it operates, should we trust its claims about its impacts?

Long version

My wife Mai heard someone say that the world needs both playwrights and critics—if more playwrights. I treasure this observation because, as this blog must make obvious, I’m a critic. I can testify that being a critic can be bruising, especially when the playwrights you critique are alive. It’s solace to think that the world needs me.

[MD] If the world doesn’t need you, you’re not of value. That can be serious when it comes to trading for food and shelter.

But the observation also helps me appreciate playwrights. They are the people who create things that weren’t there, the people who are a tad insane in the sense that they confuse fantasy and reality. They see something in their mind’s eye and believe they can make it real. Precisely because I am not like them, I hold playwrights—visionaries—in some awe. The most skillful, passionate, and lucky of them “put a dent in the universe” as Steve Jobs said. (An early employee described Jobs’s uncanny ability to create a reality distortion field that altered bystanders’ perceptions of the technologically possible.) Without playwrights, we might be still living in caves. At least, we wouldn’t have iPhones.

[MD] “Playwrights confuse fantasy and reality”? Actually, writing a novel is a very effective way to introduce ideas. For example, suppose someone knowing the essence and importance of a “real money process” wrote a novel about it. Suppose the premise of the novel was that the “real money process” was already in wide use. Suppose the premise is that the corrupt money-changer instituted process we all know and hate was being “sold” as a replacement. That would be an interesting novel. I submit a good way to test an idea is to (1) assume that the idea is actually in place and working. Then (2) take the existing working process and sell it against the idea. This puts the existing process on defense…rather than the proposed process. It reveals the warts of the existing process. BTW: The famous Col. Edward M. House became famous by writing just such a novel (“Philip Dru: Administrator“).

We also probably wouldn’t have the Grameen Bank, BRAC, and dozens of other successful microfinance institutions (MFIs) made by driven visionaries. And we wouldn’t have Kiva, the person-to-person microcredit web site founded by Matt Flannery and Jessica Jackley.

[MD} More rich targets. Need to look into Flannery and Jackley. Fannery’s Wikipedia article has been removed. Is this a thickening plot?

On the other hand, without critics—analysts driven to understand the world rather than change it—we might not have mastered electricity. So we needed them too to get to iPhones. Critics and playwrights are yin and yang. Of course the two essences exist within all of us.

Critics seem to parse matters into quantities and concepts while playwrights seem to speak, and perhaps think, more in pictures and stories. (Or am I over-reaching here?)

Like most innovations, Kiva is not entirely new. Rather, it is an ingenious fusion of older ideas. One is child sponsorship, which Save the Children pioneered in 1940. A family in a rich country sends $10 or $20 each month to a designated child in a poor country via a charity. In return, the family receives a photo and an update at least once a year. When I was perhaps eight, my family sponsored Constance, a Greek girl about my age, through Save the Children. I remember looking at her solemn face in two successive black and white portraits, trying to judge how much she had grown in a year.

[MD] “ingenious fusion of older ideas”. Refinement of a bad idea? Send money…help a child…feel good. There’s a outfit near me that does this with donkeys. What’s not to love?

Child sponsorship grew explosively in the United States in the 1990s, thanks mainly to groups with names like the Christian Children’s Fund, Children International, and Childreach (now Plan International). Then an exposé in the Chicago Tribune in March 1998 brought it crashing down (hat tip to Tim Ogden). Starting in 1995, editors and reporters at the paper sponsored a dozen children in such countries as Guatemala and Mali. Then the reporters tracked down the children:

The Tribune’s yearlong examination of four leading sponsorship organizations…found that several children sponsored…received few or no promised benefits. A few others received a hodgepodge of occasional handouts, such as toothpaste, soap and cooking pots. Some got clothing and shoes that frequently did not fit.Sick children were sometimes given checkups and medicine, but not always.One child, a 12-year-old Malian girl sponsored through Save the Children, died soon after being sponsored, although the charity continued to accept money on her behalf for nearly two years after her death. A subsequent investigation by Save the Children found that at least two dozen other sponsors had sent the charity money on behalf of dead children in Mali for varying periods of time, in two cases as long as five years.

[MD] It’s all about leverage. The beneficiary may get a little…but the organizer gets a lot. And it’s like so much that happens downstream of our flawed money process. In order to dodge inflation and avoid taxation, scams abound. With a real money process there would be no inflation to dodge. And taxation would be less necessary since there’s no interest collection in it for the money-changers (that’s where your taxes go folks…the stuff government actually does it does through counterfeiting…impossible with a real money process)

There was more to the story. Clover and John Dixon of Bellingham, Washington, received faked New Year’s letters from a West African child who had died in a donkey cart accident. Sponsorship peddlers sent heart-string-tugging appeals for extra $25 contributions on birthdays, Christmas, Easter, and the purpose-built International Hug Day. Childreach ran a disastrous experiment in Ecuador with a novel intervention called “microcredit.” Local workers embezzled funds; in protest, borrowers burned loan documents.

[MD] Valentines day, Mothers and Fathers day, Easter, Christmas, even the pledge of legance to the flag…etc. They got instituted for a “commercial” reason. “Burned loan documents”? Now there’s a novel idea. Wonder why they didn’t think of that before with the money-changers and the governments they institute?

Undoubtedly some hard-sell charlatanry was at work. But the problem was deeper than that: a tension between creating the psychological experience of connection that raised money and the realities of fighting poverty. Often the fairest and most effective way to help poor children is by building assets for the whole community such as schools, clinics, and wells. Often charities contract with locals to build these things. Often things go wrong because of corruption, bad luck, or arrogance among outsiders thinking they know what will work. In the best cases, charities learn from failure. All these factors break the connection between giving and benefit, sponsor and child. But admitting that would have threatened the funding base:

[MD] Here he goes again with the “collective” being the solution. Nonsense!

“For a segment of the public, there will be nothing else that will reach those people the way that child sponsorship does,” says Charles MacCormack, the president of Westport, Conn.-based Save the Children, the nation’s oldest and best-known sponsorship agency….As MacCormack puts it, “An awful lot of people who sign on to a personal human being will not sign on to a well.”…”[The charities] are addicted to it, because if they stop, they lose their identity as Save the Children,” says Michael Maren, a veteran aid-agency worker in Africa and author of “The Road to Hell,” a book critical of private foreign assistance organizations including Save the Children.”That’s their thing,” Maren says. “They invented it. That’s their problem. The Catch-22 is that the only way to raise money is sponsorship, but that is not the way to development. The show is the biggest part of what they do. So, they say, let’s keep the show going, but try to find ways to make it better.”

[MD] “The only way to raise money is sponsorship”. Nonsense. Raise it like the rich people do. Create it yourself. The only thing that keeps you from doing that right now is the rich people’s claim that that advantage is their exclusive domain. It is not!

Within a year of the Tribune series, the Missouri attorney general had slapped restrictions on Children International while the non-profit umbrella group InterAction committed to developing a set of voluntary industry standards. Many of the rule changes related to how clearly the charities disclosed how they operated.

[MD] And here again we see the failure of “legal” solutions. Laws dilute the only law we need…that being the golden rule. If someone disputes what you’re doing, make your golden rule argument in your defense. You quickly see that such a defense doesn’t exist under virtually everything that is disputed.

Matt Flannery penned a history of Kiva’s first two years for MIT’s innovations journal in 2007. Two years later, he wrote a second installment in the same periodical. Flannery’s authentic, conversational voice makes both articles readable and engaging. As he tells his own story, he comes across as an approachable man of vision, passion, and action.

[MD] More rich targets. I wonder if we can locate that history and the installment (the link supplied is broken). “…a man of vision, passion, and action…”. How does his golden rule defense come across?

Flannery tells how another Kiva ingredient, microcredit, first mixed in his mind with child sponsorship. Fittingly, it happened through hearing a story:

One night, [Jessica] invited me to come hear a guest speaker on the topic of microfinance, Dr. Mohammed [sic] Yunus. Dr. Yunus spoke to a classroom of thirty people and shared his story of starting the Grameen Bank. It was my first exposure to the topic and I thought it was a great story from an inspiring person. For Jessica, it was more of a call to action that focused her life goals.

[MD] Another target. Need to reach Dr. Yanus and get him to read I suspect that’s easier said than done.

Some months later, Jessica went off to East Africa to perform “impact evaluations” for the Village Enterprise Fund, which works intensively with poor farmers, providing grants (not loans) and training to help them start business activities. Jessica’s work gathered data on indicators of poverty among participants, asking “questions like ‘Do you take sugar with your tea?’ and ‘Do you sleep on a mattress?’.” The couple kept in touch by phone. Then came the epiphany:

[MD]”…providing grants, not loans…”: Another bad idea. Institute a real money process. A really good idea.

When the words “Sponsor a Business” entered our phone conversation, it set off a chain of ideas. We had both grown up sponsoring children in Africa through our church and families. Why not extend the core of that idea to business? However, instead of donations, we could focus on loans. This seemed like a dignified, intellectual, and equitable extension that appealed to us at this point in our lives. Instead of benefactor relationships, we could explore partnership relationships. Instead of poverty, we could focus on progress.

[MD] “Sponsor a Business”? Again, this isn’t how successful businesses come to be. They begin by someone providing a service or good to someone else. And the business grows. When the business is “sponsored”, if it grows at all, it grows into the hands of the sponsor.

Soon after, Matt joined Jessica in Africa. He brought his video camera, which embodied the third key ingredient in Kiva, information technology. “I planned to spend most of my time making a short documentary of small business stories. I was also intent on investigating the viability of our new idea.”

Back in the United States Matt and Jessica began their impressive passage across the desert in pursuit of their vision. She networked for advice and support. He built the website after-hours, and eventually quit his job. Together they wrote the business plan.

Once the site was ready, we needed loan applications in Africa to post on the site. That’s where our friend Moses came in. Moses Onyango is a pastor in Tororo, Uganda, whom Jessica had stayed with after I left. Moses is a community leader in Tororo and is highly connected to the Internet. We had been in close contact over the past year and Moses was ready to post and administer the loans of seven entrepreneurs in his community….Once Moses had posted the seven businesses, the site was ready to go. We sent out an email to our wedding invite list and waited to see what would happen. We emailed about 300 people, and all seven businesses were funded in a weekend. That was April 2005, and we raised $3,500 in a few days. We were blown away; everything worked.

[MD] And now comes the question asked of me (to my embarrassment) about one of my ideas: “How do you make money with it?”. I didn’t have an answer. I just felt if you do something of value, the money will come as a result of that trade. Actually I think it does. But MBA’s are taught to look at everything as a “value” proposition…as a “business model”. If people looked at the money-changers that way, the money-changers would be out of business.

Right there, Kiva hit the tension in the sponsorship—more currently, “person-to-person” (P2P)—model: the need to find and post enough stories to keep up with demand. It led instantly to fraud, though Matt Flannery didn’t know it when he wrote the two-year history. As he recounts in the four-year history, a Kiva Fellow (volunteer) sent to Uganda discovered that Moses was producing many stories about individual borrowers the easy way, from whole cloth. Flannery flew to Uganda:

I spent two weeks organizing a clean-up operation. We hired accountants and lawyers. I spent hours with Moses, trying to figure out exactly what happened. He was very apologetic, but our conversations didn’t go anywhere. The money had vanished into a series of bad investments and a new house. Moses had a growing family. His new son was named for me: Matthew Flannery Onyango.

[MD] “We hired accountants and lawyers”… where did the money come from for that?

Admirably, Kiva went public with the information:

…we alerted our users that not all of their funds made it to the intended recipients….The reaction from our user base was telling. Overwhelmingly, they thanked us for our honesty and poured their refunds back into loans to other MFIs on the site. They reinforced an important lesson: whenever possible, be completely transparent. Transparency pays huge long-term dividends….If you are running an organization and are considering withholding valuable information from your customers, just don’t. There are a million reasons to withhold information. Lawyers will warn you about liabilities. Marketing people will preach about tarnishing the brand. Investors will encourage you to look bigger and better than you are. Most of this is just tired and outdated thinking.Operating transparently is a great way to keep an organization accountable for its actions. Before you act, ask yourself: would you be OK doing this if you had to tell your entire user base about it? Would you be proud if your actions were described on the front page of the New York Times? These are great tests that I often use to vet a decision.

[MD]”…whenever possible, be completely transparent…”: If it involves money creation and isn’t transparent, that’s a show stopper. “…before you act, ask yourself…”. Hmmm. Where have we heard that before. The golden rule. Don’t hear it any more do we.

Flannery describes the “story factory.” Running one—collecting and posting stories—imposes a significant expense on MFIs but is evidently offset by the low 2% 0% (hat tip Ben Elberger) interest rate that Kiva charges on capital:

[MD] Notice how getting it wrong to begin with, they redouble their efforts…in the same wrong direction.

Out in Cambodia, I got to watch firsthand how a sophisticated MFI gets content on the site. It is quite an operation….In the field, loan officers carry Kiva questionnaires along with a host of other loan documents. When they visit a village, they gather women and tell them about the opportunity to apply for a loan. If a woman decides to apply, the loan officer takes down information on paper—some for the Kiva site and some for other business purposes. The Kiva questionnaire asks for information that interests lenders. For instance, how many children do you have? And how will the loan make an impact on your family? This is all done in the local language—Khmer. They also take photos of the applicants.Returning to the branch, the loan officer enters the data into a computer and sends the information—via Yahoo! Messenger—to the Kiva coordinators at the headquarters in a major city. Kiva coordinators are typically young, Internet-savvy males who get paid a few thousand dollars a year. It is a desirable job and about ten of them are now working in Phnom Penh. We train them in the art of synthesizing the Kiva questionnaire into a readable narrative; then they spend their days writing stories and uploading pictures….As a kid, I would write letters to [sponsored] children a few years younger than me in Africa and South America. I imagined my letters being delivered to a thatched-roof hut halfway around the planet. It sparked my imagination and gave me a sense of connectedness. Through Kiva, we can provide some of that to a new generation of kids.Looking back now, I imagine that the transaction wasn’t as simple as I had thought. A lot of intermediaries were involved, lending a certain production quality to the experience. Plus, it was expensive. Delivering the child sponsorship experience was often as expensive as the child sponsorship itself. At Kiva, it’s not as simple as it seems, either…

[MD] And this whole gambit is based on a “tug the heartstrings” business model. What if they proposed “make a promise and keep it” model?

The back-story

innovations invited to Sam Daley-Harris, who was central to teaching Americans about microfinance and serves on Kiva’s advisory board, to comment on Flannery’s four-year retrospective. While praising Kiva’s “profound contribution to the field of microfinance and international development,” he worried about the transaction costs, and noted one other concern:

[MD] Again we find “comment on Flannery’s four-year retrospective” link is now gone.

…there is still a bit of deception in the notion that the moment that a loan is funded, the client in Kenya or Cambodia receives his or her microloan with those particular dollars. Indeed, there are real people receiving real loans to start or grow real enterprises, but if a client in a remote village qualifies for a loan, the MFI will not likely make that client wait for the Kiva lenders to put up that last $25. Said another way, loan funds are fungible, and a larger MFI on Kiva’s website will use Kiva’s loans as one important source of their lending pool, but it’s not actually those precise dollars going to that precise client.

[MD] This describes a “non-issue” for a “real money process”. When a trader makes a “money creating promise spanning time and space”, it’s “his” promise to the “process”. No one else is involved. Nothing else is involved. And the promise, and the delivery on the promise, is fully transparent for all to see. If he changes his reason for making the promise, that is of no import. The only thing important is the delivery as promised…or mitigation by interest collection and marking as an “irresponsible trader”. There are no heartstrings at all.

As I noted at the top, Sam is right. In fact, I wrote a little program in Excel to extract data from It shows that for September 2009, only 4.3% of loans were disbursed after Kiva users had fully funded them through the site. And probably some of those the local lender had already committed to make before Kiva users had funded them. And in a new report on what happens to investors when microfinance institutions collapse, Daniel Rozas computed from data on that the failure of just three lending institutions caused 93% of all Kiva defaults to date. No doubt many of those institutions’ borrowers were faithfully repaying at the time of collapse. Conversely, if a borrower defaults, the lender will often cover for him in order to maintain a good reputation on Kiva. So whether you get your money back as a Kiva user depends overwhelmingly on the solvency of the lenders, not the borrowers.

[MD] “The failure of 3 caused 93% of defaults”: But that’s irrelevant. A real money process has no third party at all. The only one that can fail is the trader. Now there would be a “servicer”. But a servicer doesn’t fail. If they can’t collect, the default is immediately applied as interest on their “irresponsible” trader pool wanting to create new money. But it would be interesting to know KIVA’s default experience.

Kiva deserves kudos for being transparent enough for Rozas and myself to extract such data. But I wondered whether Kiva might become the Save the Children of P2P microcredit, the reasonably responsible pioneer who is imitated and overtaken by less scrupulous actors who pull the whole industry down a muddy slope into hucksterism. So I checked out MYC4, Wokai, and Babyloan (motto: “micro credits, great stories”; and no, it doesn’t make loans to babies: it’s French). To my surprise they were more honest about the P2P relationships they (seem to) forge. Here’s Babyloan in enjoyably imperfect English:

Note: Babyloan works as a REfinancing platform and not as a direct financing system. It can happen that the MFI already “advanced” the microcredit to the entrepreneur when you make the online social micro loan. Indeed, as we are still in a launching phase and particularly for seasonal projects , we did not want to make the realisation of the project  “dependant” on the Internet users’ good will and click. Babyloan is no microfinance reality show of ! However, we limit the funding time of the project not to create too much time discreprency between the projet and your micro loan, so your money is really used to finance the project. After the delay of 3 months maximum , we send all the money even if the funding has not been completed by the Internet users. The MFI will complete the funding.

[MD] “Refinancing” is just another way of saying “rolling over” defaults. A real money process tells it like it is…a default. That default can be eradicated by delivering on both the original default, and the refinance covering default. Regarding “time discrepancy”? With the “real” process, everything is in “real” time. There is no latency whatever.

So these sites are refinancing mechanisms. Kiva-linked microlenders make loans, then “sell” them to Kiva and its users. Might we rescue the P2P conception by observing that the lenders make their loans anticipating refinancing on Kiva? Yes, but only partly. Kiva limits itself to providing at most 30% of any lender’s capital. So a lender will make at least three loans for every one it chooses to post on Kiva (hat tip to Molly’s dad).

[MD] This is carried over from the mortgage loan scam. One party goes out and creates the loan. That loan is then sold to another party. And a third party “services” the loan (i.e. collects the payments…principal and interest; pays the taxes; and pays the owner of the loan. ) The loan may be sold and resold many times before the creator of the loan (the trader) makes the final payment and is released from the lien. With a “real” money process, this all happens transparently. There is no reselling of the loan…because it isn’t a loan. It is a promise.

The end

Kiva brings microcredit and microchips to child sponsorship. Like sponsorship charities, it is all about stories: it was inspired by them and it succeeds by telling them. As a result, it operates in a pincers between the giver’s desire for personal connection and the costs and constraints that imposes on business of serving poor people. In fact Kiva can be seen as an ingenious finessing of this old tension. Technology has brought down the cost of transmitting stories and images.

[MD]…and this is all wrong from what it should be. There is no “giver” with a “real” process. There is a “trader” (like you and me) making a “promise” to the “process”. There is no begging. There is no heart-string tugging. There is no one to thank but the trader himself. There are no poor people. There are just people willing to promise and deliver… and those not willing to promise and/or deliver. The world doesn’t need to deal with the latter. They are entitled to be their own worst enemy. They can choose to stop being that any time they want. And do-gooders, if they really want to do good, would be about educating these so-called “poor” people. There’s never any excuse for it when a “real” money process is in place. When you don’t have a “real” money process, poor people are not a consequence…they are an intention. It’s got to stop.

Indeed, Kiva’s P2P connections are more solid than those of child sponsorship 15 years ago. The people in the pictures, we can assume, really do get microcredit. Following in the Tribune‘s footsteps, Nicholas Kristof tracked down one of his borrowers, a Kabul baker, with little difficulty.

On the other hand, the P2P connection comes at a cost, is one-way, and is partly synthetic. The baker was surprised by the encounter because he had never heard of Kristof. For his part, Kristof might be surprised to learn that most of the Kiva loans he helped fund were disbursed before he saw them on Kiva. And the cost of collecting the baker’s story, translating it into English, taking his picture,and uploading it over a balky Internet connection may still be significant relative to the small loans and the great needs in Afghanistan.

Is it so terrible that Kiva modestly misleads in order to raise money for a cause about which it is passionate? No. But as a critic I offer these points:

[MD] When you have a misguided and outright flawed process based on false premises, where should the criticism begin? You’re trying to put lipstick on a pig.

  • As I have discussed in connection with the interest rates on loans, the test of disclosure is whether people get the message. Technically, you see on Kiva’s site that most loans are disbursed before they are funded. But the How Kiva Works page creates the opposite impression, and my casual survey of Kiva users reveals widespread misunderstanding. In the wake of the Tribune scandal, sponsorship organizations adopted standards on disclosure, among other things, in order to “preserve and protect the trust of sponsors and other donors by ensuring the accuracy and transparency of each [child sponsorhip organization]’s approach to child sponsorship and the manner in which its sponsorship funds are used.” In this respect, Kiva is violating its stated ideal of transparency and ignoring a lesson from its family history.
    [MD] All this happens as the natural operation of a “real” money process. None of this is, nor can it be an issue.
  • Kiva may fear that complete honesty would undermine growth. If so, they might be right. But I am optimistic that Kiva will make and survive the leap of faith in its users. So take this interesting, small hypocrisy as the camel’s nose under the tent, a way into the larger theme of how our behavior as donors rewards charities for distorting and contorting themselves. Why has Kiva succeeded by doing microfinance as opposed to community-level projects such as well and school construction? Such construction would stray from the P2P construct. Why has it succeeded by doing just credit despite the longstanding idea that services such as savings are at least as valuable and less dangerous? Because only well-regulated institutions should hold other people’s money; building them is hard and is neither photogenic nor atomizable into P2P.
    [MD] When you have a “real” money process, the notion of “savings” is strictly an insurance policy. The misguided process we have now considers savings to be the source of funds. It multiplies it by ten and gives the money-changers the advantage over the rest of us…calling it a loan and collecting interest on it. And a “regulating institution” is just another place to inject corruption. It isn’t needed when the process is totally open and transparent for all to see…and to discipline. No OPM (Other People’s Money) is involved at all.
  • And why has Kiva, like most other microcredit fundraisers, succeeded while mythologizing the power of microcredit? You already know: storytelling works. Indeed, the most misleading thing about is not obfuscation about sequencing that this post has dwelled upon but the smooth telling of the simplistic story about microcredit. In this Kiva is not unusual. The borrowers are all “entrepreneurs” even though we know the poor often use loans to pay for food or school. Meanwhile, as I have discovered over the last year, the evidence on the effects of microcredit on poverty and empowerment is rather ambiguous. “Kiva lets you lend to a specific entrepreneur, empowering them to lift themselves out of poverty.” What part of that home page slogan is grounded in reality?
    [MD] “Credit” of all stripes is myth. Story telling is not needed. Rather what is needed is “responsible behavior”. And it’s much easier to be responsible when some money-changer or regulator isn’t able to pull the rug out from under you on a whim. And if the poor are using these loans for food, the problem is clearly not in the ability to make and deliver on a promise. You need to know why these people are poor. And that’s not at all hard to find out. It’s because of their own irresponsibility…or because of someone else’s actions. Both of those issues are easy to discover and mitigate.
  • Carol Adelman, among others, has argued that private philanthropy is superior to government aid in many respects because it is more flexible and subject to a market test. But we see here that we all, as private philanthropists, have our irrationalities too. Private aid therefore cannot perfectly substitute for public aid. No doubt it is best to do some of each, while striving to improve both.
    [MD] “Private philanthropy is superior to government aid”? With government taking 3/4ths of what you earn, is it “aid” for them to give it to someone who they have snuffed out with that very behavior? Does a private organization that has 10x the advantage over others (an advantage they openly grant to themselves) do a better job of stealing than government? Aid isn’t what’s needed here. What’s needed is a level trading field…and a tiny bit of re-indoctrination for both the rich and the poor.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

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