Over the past two weeks, a debate has been simmering about the way in which Kiva (a microfinance organization) describes how they operate. It all started when David Roodman wrote a post on his Microfinance Open Book Blog titled “Kiva Is Not Quite What It Seems”. David is writing a book about microfinance and by live blogging his progress he is soliciting feedback. In the post, David wrote:
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.
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 for 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.
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.
In other words, Kiva tells lenders (users of the site) that the money flows like this:
Lender picks entrepreneur to fund and gives the money to Kiva.
Kiva transfers the money to a local microfinance institution (MFI).
The MFI gives the money to the entrepreneur.
The entrepreneur pays the loan back to the MFI.
The MFI gives the money back to Kiva who returns it to the lenders account.
But in fact, the money flows like this:
An MFI lends money to an entrepreneur.
The MFI puts information about the loan on Kiva.org.
Kiva lenders (users) select a loan to have their money credited towards.
If an MFI reports that a borrower is delinquent, Kiva calculates the amount to deduct from the lender’s accounts.
You can see the two versions displayed in graphics in a post on the GiveWell blog. Note that Kiva shows version one to lenders and version two to MFIs. However, due to the debate, Kiva has updated the version they show donors to more accurately reflect the process [update: GiveWell’s chart compares Kiva’s updated version, but still implies that it is misleading]. In fact, in a guest post on Roodman’s blog, Kiva CEO Matt Flannery offers an excellent response in which he acknowledges that much of what Roodman argues is true, promises to be more transparent and then gives the back story of how Kiva’s model has morphed from the direct lending process to the more efficient process of having MFIs make the loans before asking Kiva lenders for the money.
So here’s where it gets interesting for me. Roodman argues that while Kiva is misleading donors, the process they are using is good:
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 kiva.org.
In Kiva’s defense, this subtle misleading is not unique to Kiva; most NGO’s operate this way especially in disaster relief, child sponsorship, and alternative gifts (like giving a cow or a goat). The reason it’s so prevalent is that the donors demand it—and they vote with their dollars if the NGO is unwilling to provide the illusion of a person-to-person connection. Kudos to Roodman for exposing the illusion in a comprehensive and thoughtful way. While I think trafficking in such illusions is wrong, I understand why they are perpetrated in the name of the “greater good.“ I wish Kiva and others would abandon this practice, but I also acknowledge that they can’t until donors stop requiring NGOs to mislead them.
So here’s the take away. Donors like to believe that they are helping other individuals. They want their money to go directly to benefitting the people they seek to help. We see this in the Kiva model, in the child sponsorship concept and even in the way that donors want nonprofits to spend nothing on overhead.
Taken together, it seems that donors simply see nonprofits as bureaucratic intermediaries who play a necessary role of linking the donor to the recipient, but who otherwise should get out of the way. Nonprofits, recognizing the way donors think, play into the illusion by reallocating overhead expenses to program costs and then trumpeting their low expense ratio or subtly reframing how money flows as Kiva has been doing to make their process better align with the donor’s illusion.
I’m really not sure what to make of all this. On the one hand, you can’t fault nonprofits for spinning what they do to best satisfy donors. This is exactly what for-profit companies do. Satisfying your customer or donor is the job of an organization. But at the same time, this illusion that donors want to believe in, that they can support individuals rather than nonprofits, is poisonous because it creates an atmosphere where the best nonprofits are the ones who can best stay out of the way rather than the ones who can create the most robust organizations.
According to Roodman, Kiva’s actual process is better at helping poverty stricken entrepreneurs than the illusion of direct lending that Kiva spins for its donors. But would you as a donor rather make direct loans? What should we think about the fact that what we want as donors is not what is best for the recipient? Especially when we tell ourselves that we want to take direct action because we think doing so is the best way to help the recipient?