Kiva’s Supply & Demand “Problem”

Recently, Peter Panepento, a reporter for the Chronicle of Philanthropy wrote about my Kiva brainstorming on the Give & Take blog:

The founder of Kiva, a charity that encourages donors to make loans to needy entrepreneurs, took questions about his organization’s supply-demand dilemma during Tuesday’s weekly Chronicle online discussion.

And one of the most pointed questions came from Sean Stannard-Stocton, a financial consultant and the author of Tactical Philanthropy, who suggested that the organization change its lending terms to direct less money to the recipients of its small-business loans.

Mr. Stannard-Stockton suggested that Kiva should keep 10 percent of the pledged money as a contribution. That money would then be used to build a support staff that can identify more potential loan recipients.

Peter is an excellent reporter and someone I like personally very much. But I think the quote above mischaracterizes my position on Kiva. Here’s my thoughts on Kiva:

Kiva has a supply & demand imbalance. This is a new type of problem because historically the nonprofit/philanthropy world has not used exchanges and market based model to distribute aid. I’m intrigued by the implications of the imbalance and the precedent that Kiva will set by how they respond to the imbalance.

As reader Phil Steinmeyer points out (as does David from Ashoka), the imbalance may not be a problem but actually a huge positive. Steinmeyer writes:

I can see two sides to this:

1) If the supply/demand situation is unbalanced LONG term, then yes, they should put more effort into ways to balance things. Flannery’s response seems based on the idea that they have an excess demand (donors) much greater than 110% or so of supply (projects). But the value of taking a 10% slice for Kiva itself is NOT so much in reducing demand by 10%, but rather, in using that money to hire staff and increase supply.

2) On the other hand, if the surge in donors is temporary, it may be undesirable to change the terms. Look at the Wii – the hot video game system of the moment. It is priced at ~$250, and has been largely sold out almost since it’s release over a year ago. But part of the reason why it has been so popular was it’s attractive pricing relative to other systems (especially the PS3). If Nintendo raised the price, they could bring things into balance in the short term, but might hurt themselves long term, by losing the ‘low price’ vibe they have going.

Nonprofits are use to operating in environments where they have to chase funders, but social capital markets set up a situation where donors must compete to fund nonprofits as well. By being “sold out”, Kiva may be creating a situation where they are increasing their chances of long term success (would you rather go to a restaurant where there was always an open table or one where you had to make a reservation months in advance? Without any other information, which restaurant do you assume is better?).

But let’s assume for the moment, that the most good can be achieved if Kiva’s supply and demand is in balance long term (most markets achieve stability over time, even if in the short run they are imbalanced). My point is that the best way to balance supply and demand is to have “prices” adjust rather than by putting caps on how much supply or demand is allowed in to the system.

In response to my question, Flannery wrote:

Your idea of only sending 90% of lender money to entrepreneurs would save us 10%, which wouldn’t get us that far. Our supply/demand disequilibrium is much greater than that. Secondly, it breaks the purity of our p2p (peer-to-peer) intentions. It’s really powerful to say “100% of your loan goes to the entrepreneur” and that’s something we are not going to back away from as long as I’m here.

First I’d like to say that I agree with Matt’s point of the power of “100% goes to the entrepreneur.” But he’s missed the point of my suggestion (which is offered as a way of brainstorming, not a recommendation because I’m not in a position to second guess Matt, he understands microfinance far better than me). What I suggested was:

Another way to balance supply and demand would be to reduce the lending terms (for instance lenders only get 90% payback of their loan back with the other portion being a gift to Kiva or to someone else in your financial chain).

I’m focused on what does the lender “pay” for the transaction of working with Kiva? Currently, they pay nothing. They get all their money back, but they forego the interest they would make in a normal loan, so they do have an opportunity cost from lending through Kiva. What if they were paid negative 5% interest? We already know lenders will over supply the market at a 0% interest rate. Might some lenders be willing to accept a negative rate for the “privilege” of engaging with Kiva? Market theory suggests they would, but we don’t know how it would affect demand. Giving lenders a 90% payback would not reduce demand 10% has Flannery implies. Under this concept, you’d have to believe that a 0% payback would result in no lenders, but we know that many people do in fact accept a 0% payback (ie. a donation). Supply and demand changes with price along a curve and the slope of that curve determines how much the supply and demand changes. If the price of gasoline doubles, would you drive half as much? History shows us that demand for gas is “inelastic”, meaning that it does not change much as the price changes. What if the price of store brand cola doubled? Since it would cost more than Coke or Pepsi, demand would probably fall to zero. This is an example of a highly elastic demand curve.

We don’t know the elasticity of supply for Kiva. But I hope they experiment and find out.

Also, both Flannery and Panepento assume that anything not paid back to the lender would go to Kiva. When money is lent through Kiva, it is lent to a microlender who then lends the money (and charges interest) to the actual borrower. If the donor/lender accepted a negative interest rate, the savings could accrue to Kiva, the middleman or the final borrower. My focus is on the “price” charged to the donor/lender and how this will affect supply.

Lastly, let me stipulate again that all of this is just brainstorming. A lot of assumptions have to be made because we do not have much historical experience with social capital markets. For instance, a closer look at Steinmeyer’s example of the demand for Wii systems and the relevance to Kiva suggests that maybe Kiva lenders are not “supply” at all, but in fact are “buyers” of a luxury product. Maybe Kiva is selling “good” and lenders are buying it.

It can be a Looking-Glass world sometimes.  But that makes this all the more interesting.