Gumball Capital

David Roodman, on his microfinance blog, recently posted somewhat of an expose on Kiva, causing a raucous debate in his comment section and on other blogs. Basically, Roodman stated that Kiva doesn’t function the way it claims. (Since this post, due to outrage on the internet, Kiva has updated its “how Kiva works” page. An archived version is available here.) Actually,

“[l]ess 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.“

This may come as a shock to some Kiva users, but its deception is only on the surface. Discovering how Kiva actually works is not that difficult for those Kiva users who look a little deeper. As Roodman says in his post, if you look at many of the loan on Kiva, the “date disbursed” date will usually be a few weeks before the “date posted” date. Anyone who finds this odd and starts to ask questions will soon find the answer.

Kiva staff are very open to discussing their actual business model. I became involved in Kiva early on, in March of 2007, by starting a campus microfinance group. I contacted Kiva around that time to ask them a few questions, and they were very straight-forward about how they operated. (They even sent me the “real” loan diagram, in contrast to the one on the site.) I was surprised at this, but my commitment to the organization didn’t falter and I kept raising campus resources for them. The campus group eventually started to move beyond Kiva, and now we are making direct loans to MFIs in several different countries, but that move away from Kiva was only in part because of their “deception.”

At the end of his post, Roodman questions the efficiency of Kiva requiring MFIs to take photos of the entrepreneurs and write up profiles after loans have distributed:

“Surely it is better to invest in an institution…without requiring it to incur the expense of posting pictures and stories of every borrower. Historically microcreditors have scaled to reach millions of people by cutting costs to the bone. Surely it would be better for us to give in a way that allows the microfinance institutions to put more of their limited energies into helping poor people manage their difficult lot and less into making us feel good.”

Unfortunately, Kiva would not have been as successful at channeling money to MFIs without the person-to-person connection its somewhat deceptive advertising creates. This deceptive advertising only hides their true operations on the surface, yet it lets them raise, literally, millions of dollars. Because anyone who does a small amount of digging can see what actually happens, I think what they have done is justified.

Beyond that, I think Kiva has been a great window into the world of microfinance, and by extension, global poverty. The person-to-person contact of Kiva (and microfinance in general) has made many individuals think more about people’s lives in the Third World. Donating on Kiva makes people feel good and it makes people want to learn more. Microfinance has opened up a lot of mutually empowering opportunities and connections between the US and the Third World, most of them created and spread by Kiva.