The debate over the effectiveness of microfinance is still going on, but I can tell you that charity rating group GiveWell has one microfinance group that they think is doing very effective work. You’ll find more info here.

I started doing loans with Kiva in 2007. I’ve become good at finding loans which repay quickly. As a result, I have loaned about $20K, with an actual investment of about $5K.

Upon reading all this I have concluded that KIVA is, in part, a kind of ponzi scheme. That doesn’t mean it will all crash and burn like a Madoff enterprise. That’s why I said, in part. This notion of lenders using new money to pay back old loans is part of what I’m referring to; the other part is a virtual ponzi scheme. As Roodman points out, KIVA plays on our need to feel good, just as Madoff and other hucksters play on our greed.

Interestingly, the one thing that’s not covered in this is the interest rates and fees that KIVA partners charge, staring at a low of about 15% (credit card rates) and going all the way up to almost 80% (loan sharking rates). KIVA has justified this saying this is the cost of loaning money to people who couldn’t get a leg up otherwise.

I guess I question how well KIVA’s partners manage their operations that they have to charge this much to stay afloat, or get ahead.

That’s why I look carefully at the this aspect before I loan. If I find a loan I like with a low portfolio yield (that’s KIVA’s term for interest and loan fees – just like credit card jargon), I lend that person(s) money.

If I could find an organization that does KIVA work, only better, I’d pull my KIVA money and go there…

…any suggestions?

But I would prefer to put my money in something like this where I can grow my “portfolio” putting in more money as I go along, but I can see the same initial $25 work again and again and again to benefit these people and their community… rather than see it “disappear” upon payment like charitable donations. Regarding it as charity probably helps soften the blow of losing your investment though… when that happens.

And I’m not a donor… I’m a lender. This is not really philanthopy except that I’m investing without promise of interest.

To answer your question no I don’t think it would be good to make direct loan. In my personal experience I think there are two major road blocks that people overlook when thinking about these type of direct loans.

To copy and paste from another comment I just made:

1) Banking – Until banking systems improve or sites like paypal extend there reach its very hard to send money directly people in developing nations. Yes I sending money directly to people who need it would be great but I don’t think its realistic just yet. Believe it or not its actually faster and cheaper for my family in Panama to send me money than it is for me to send them money.

2) Finical Responsibility – I think even if we could directly fund individuals it might not be a great idea. Finical literacy and responsibility are not as common place. Even if I could give $5,000 to improve their store, its hard to tell if that is what they would use it for. I want to be careful here and make sure no one takes this the wrong way.

I am not saying that people bad and that they blow the money on something else. However the reality is that when you just make enough to get by, you get a fresh source of income and something goes wrong you are going to use that new income even if its not meant for that reason. I say from personal family experience.

Lending to people directly might seam like a nice idea but it practice its a lot harder to pull off. I Kiva.org is doing a great job of making this as transparent and direct as possible.

A fantastic discussion. A great post and many brilliant comments. From my point of view, social enterprise is struggling mightily to re-conceptualize marketing from a science of the partial lie to the simplicity of transparency and the truth. Personally, I look to Kiva to continue to struggle with these issues with integrity. Their track record has always been to make their mistakes publicly and correct their course accordingly.

Maybe to just indulge myself, I have taken excepts from several comments that I helped me gain insight in to this issue. Thank you all for your engagement here, it is very helpful to me as I try to find my way in this world.

Kate Cochran says:
October 13, 2009 at 11:19 am

I think you raise the right comment in wondering how poisonous it is to perpetuate a notion that nonprofits are merely there to reallocate resources to needy problems. Problems don’t need resources–they need solutions.

Emily Gerth says:
October 13, 2009 at 1:51 pm

I guess I disagree a bit with the conclusions some people are drawing here. I think donors are actually drawn to Kiva because they want to see impact, not just because they want their money to pass-through to individuals.

Joanne Fritz says:
October 14, 2009 at 5:32 pm

I don’t think anyone asked to be deceived, and I’m having trouble understanding why the donor is being blamed. Good public relations means that you never mislead the public, and if you do, that you accept full responsibility and apologize, no matter what the consequences are.

Angela says:
October 14, 2009 at 10:44 pm

In reading this post and the comments the message that comes through is simple disdain for the average micro-donor. I realize that people who spend their work life in the nonprofit arena probably get jaded about fickle donors – but many of these comments and observations are condescending to those of us who donated through Kiva again and again because we were ‘naive’ enough to think we had some choice in how and where we wanted to donate.

So I’d just like to state on my own behalf that I have nothing but the deepest respect for people who give at any level. Regarding Kiva, I think it is clear that the way they described their process was (and still is) misleading. I don’t think this is acceptable.

In my post, I tried to elevate the discussion from an expose on Kiva to a broader discussion of why Kiva might promote the idea that they do direct lending when in fact they don’t. I very much do not believe that “small donors are simply too stupid to understand the real world” which is one of the reasons I write this blog. But I do believe that donors of all sizes (including many foundations with hundreds of millions or billions in assets) do behave in ways that do not serve the best interests of the people they are trying to help.

The comments here make it really clear that us silly peons who wish to have some impact personally should just get over ourselves. We should just blindly write a check to Kiva and leave the important task of thinking about who deserves money to the big boys.

But that over simplifies the Kiva question. Does it not seem at all plausible that those who donate at Kiva would also support other large organizations by donating without restriction to the overall mission of the organization?

They way this organization so aggressively pushed the personal connection is deceptive. As many point out, it takes money to support the administrative side of nonprofit work. But don’t forget that with every loan made they also asked for an additional administrative fee/donation. So on top of giving the false impression that one person might actually make a difference with a small donation, and that all of the criteria for deciding what type of project you would like to donate to would be honored, they also implied that the administrative fees were incremental to the donation.

Sorry but I simply do not see how it is defensible to so overtly obfuscate the process. Claiming that small donors are simply too stupid to understand how the real world works will quickly alienate all of us small timers and the result will be that we do not click to donate. Making your donors feel like nudges for investing time, emotion, and money, results in no more donors.

Your main point is that nonprofits should treat donors as intelligent people who can handle complicated issues. Treating people like they are dumb never gets you anywhere.

Kiva gives the impression that if lenders do not fund a project, that project will not happen. Right now there’s a project with $250 left to go, and it “expires” in 8 hours, 15 minutes. That gives me a sense of urgency. I might even give the whole amount. But if the loan has already been made, then the “expiration” isn’t true. There is no real choice.

I worked for a number of years at DonorsChoose.org, and I can tell you that giving donors an actual choice is hard. Good projects will go unfunded. You have to return credits to donors who have partially funded a project that never happened, and convince them to reapply those funds to a new project, which itself might not be fully funded, etc. Tracking it all is no piece of cake, either. But if you don’t do all of this, you’re not being transparent, and you’re not giving your donors real choice.

I don’t believe that microphilanthropy (or microfinance, peer-to-peer giving, etc.) is a good solution for most problems. DonorsChoose.org has an advantage, in that they are funding discrete classroom projects within public schools, but do not have to fund the infrastructure of the schools themselves. Most problems just couldn’t be solved in this way. (“I’d like to fund only the violas in the orchestra, please.”) But if you’re going to advertise yourself as giving choice to the donor, you’d better do it.