The Challenge of Cheap, Charitable Capital for For-Profits

Milford Bateman, "a confessed microfinance sceptic" made a serious and novel (to me) charge against Kiva on the devfinance mailing list, that Kiva's cheap capital is padding the profits of any for-profit microfinance banks through which it lends. I tweeted his message, so I ought to share with you the reply I received from Kiva. First Milford:

If you go to Kiva’s website it is very bizarre to find that the default percentage is ZERO for every single current partner MFI but one (Zene za Zene from Bosnia which registers 0.13% default). Given we know that default rates do exist (it seems that Kiva has dropped several MFI partners as a result of high default rates – go to the bottom of their list of current partners to find ex-partners) and defaults are growing of late almost everywhere, how come current partner MFIs have an almost perfect record? Well, if you think about it, why would anyone want to risk interest free money by advertising a default rate over zero if they don’t have to? I mean, an MFI would be silly to risk losing interest free cash offered by Kiva. Even if it simply popped the cash into an interest bearing account, a partner MFI could benefit from the interest generated, present Kiva with a few photo’s of current clients every now and again to keep them happy, and then return 100% of the original cash amount to Kiva at the end of the year. Nice work if you can get it! How do we or Kiva know that some MFIs don’t simply do this? How do we know that MFI managers don’t simply use the juicy Kiva margin to inflate their own remuneration? After all, from a variety of websites it is clear that few if any MFIs offer lower interest rates to Kiva clients. This would ‘spoil the market’, as market fundamentalists would say. So Kiva clients (if such a distinction is even made) get exactly the same offer as other non-Kiva clients in the main. OK, I found one MFI - Xac Bank in Mongolia – stating that it offers Kiva clients the Kiva margin earned at the END of their Kiva loan, placed in a savings account at Xac Bank. This sounds better than if it were used to inflate managers/owners own salaries, but, still, it usefully helps to develop new savings clients for Xac Bank probably more than it helps fulfil Kiva’s stated aim to create jobs and incomes for the poor.

To which I replied in the same venue:

When I met with Premal Shah, the president of Kiva, he contrasted Kiva with other Northern sources of capital for microfinance by pointing out that most microfinance investment vehicles are looking for a hurdle rate of 6% or the like, where as Kiva’s users accept 0%. It is a special, highly risk-tolerant source of capital, so Kiva’s goal is to support the 2nd, 3rd, 4th-tier MFIs that cannot attract capital from elsewhere very easily. How well it is currently living up to that goal, I do not know. Milford points out a worrying example, the for-profit Xac Bank, whose profits are perhaps being padded by Kiva users. I don’t know all the facts here, nor how typical this case is. I bet it would be easy and interesting for someone to analyze how much Kiva money is going to MFIs that can easily obtain more expensive capital elsewhere, and who, being for-profit, have more of an obligation to maximize profits than to use the implicit Kiva subsidy for social ends…which is to say have a strong incentive to capture the rents inherent in underpriced capital by pocketing the spread---not what Kiva or its users want. The list of Kiva partners is at http://api.kivaws.org/v1/partners.html. I think Milford is raising an important issue, because it could mean that my Kiva charity is *not* going to a borrower, but to MFI shareholders instead. But he seems to be making the charge based on one case and I’d like to see a more comprehensive analysis to be convinced that this is a widespread problem.

Premal just wrote me this morning (quoted and edited with permission):

hey david - just catching up w/ the devfinance thread. Real quick re: your 3rd point where Xacbank is mentioned as an example.... While XacBank is commercially focused and by no means a Tier 2, 3 or 4 MFI, they are---as a precondition to working w/ Kiva---utilizing Kiva's 0% lending interest rate to return 9% of the interest paid from borrowers. Here's an example listing: http://www.kiva.org/app.php?page=businesses&action=about&id=156799&_tpos=1&_tpg=1 That said, this is the key thing for Kiva to get right---we need to constantly outperform all other MIVs [microfinance investment vehicles] in terms of channeling the internet community's low cost risk tolerant capital towards less profitable and / or riskier MFIs / microfinance activities. This is the way we can make the most social impact in my opinion. i'm pretty sure that an analysis of our portfolio vs. just about any other MIV in microfinance would reveal that we have a portfolio w/ more Tier 2, 3 and 4 MFIs. We're not perfect and we still have a long way to go, but this nuanced point is largely missed by the casual user and i suspect a lot of industry insiders. p

Ben Elberger, a former coworker who is Kiva's Regional Director for Anglophone Africa and South Asia, added:

David,As a note on XacBank, they are using Kiva funding to do uncollateralized lending to borrowers. Prior to Kiva funding, my understanding is that they only offered collateralized lending so the securities pledged are lower and the risk to XacBank/Kiva lenders is therefore higher on Kiva loans.Best,Ben

A recurring theme from Premal here: we aren't perfect and we will keep perfecting. I do think Milford raises an interesting question that goes far beyond Kiva. If social investors provide capital at prices below commercial rates to enterprises with "double bottom lines" (profit and social benefit), how do the investors assure that their cheap capital isn't being used to boost just one of those bottom lines?