Is Kiva.org an efficient charitable microfinance organization?
There is no doubt that Kiva.org is a well managed organization running well managed micro-financing programs. Its 685.903 volunteer lenders, $281M in loans and 99% repayment rate (as of 2012-01-30) speak to it. Its average loan delinquency rate is 1.76%. The average delinquency rate on loans and leases in the US is 5.66 according to the data available as of 2012-01-30.
The program allows people (e.g. yours humbly) to lend money to poor people (mainly entrepreneurs) to develop their businesses or improve their lives. Lenders receive no interests, and usually make donations to Kiva.org. I have been contributing my share since 2008. The experience has been positive - 9 loans with a zero delinquency rate and a zero default rate.
However, the borrowers do pay interests, and the interests are fairly high - 20% to 30% normally. This has been giving me a little bit discomfort. I cannot help examining the cost of this micro-financing from the social benefit point of view.
The only beneficiaries are the borrowers. Let us take a look at the cost of offering them loans. Please remember these are loans, not grants. In other words, money is transferred to the borrowers, then back to the lenders. The cost of this transfer comprises of two parts: 1. The interests and fees paid by the borrowers (Portfolio Yield as defined by Kiva.org). 2. The donation to Kiva.org. For this discussion, it does not matter where the cost goes. Kiva.org has a very high transparency which should be complimented. Thanks to such a transparency, we know that the average portfolio yield is 36.26% as of 2012-01-31. The default suggested donation to Kiva.org for each loan is 15% of the loan size. This means the cost is 51.26% from the society point of view. Microfinance is costly because its loan sizes are small, but its overhead is not much different from larger loans. The question is: is 51.26% justified? This rate is close or even higher than some local commercial loan interest rates. Microfinance pioneer Muhammad Yunus argues that microfinance institutions that charge more than 15% above their long-term operating costs should face penalties.
One way to reduce the cost is relying more on volunteers on both the lender side and the borrower side. Zidisha is the first peer-to-peer lending platform to connect individual lenders directly with microfinance borrowers in low-income countries hence eliminating the middlemen. Zidisha is a nonprofit organization fully managed by unpaid volunteers. Their average lender interest is 3.03% as of 2012-01-31. It requires computer literacy for borrowers, this may reduce the pool of borrowers significantly.
If the model of Kiva.org can be improved by utilizing field partners that are volunteers, the cost will be reduced significantly. Zidisha can expand its reach by having vested volunteers to bridge borrowers and lenders. For now, Zidisha appears to be more appealing.