Kiva Lending and Borrower Interest
A bit has been said around the traps at how unclean Kiva loans are as the lender charges interest to the borrower on money that is provided for ‘free’, the quote was something like “They are charging 30% interest on money provided interest free”.
Now taken at face value it is incongruous at best and a seeming misrepresentation of helping others via lending.
So why is this the way it works? This is my explanation having been involved in banking and lending it is not meant to be an explanation of how Kiva actually works, it is my opinion.
In order for Kiva to work they require additional monies, they ask for an additional 15% of the loan amount as a donation towards the operation costs of Kiva itself. This I suppose defrays the cost of running/developing the website, administration, legal and other doo-dads required of a registered charity in the USA (I am Australian, charities here have various rules and regulations imposed upon them by the government). That is the ‘standing cost’ then they need to locate ‘partners’ to do the lending and I would say that there is some sort of oversight all of which adds cost. None of this cost is transferred to the end borrower.
Next is the loan itself, lending interest rates are not set simply by the cost of obtaining the funds there are a range of additional costs that are ‘built-in’ to any lenders rate these include;
- The base cost of the money, normally financial institutions need to pay for the money they lend, either to depositors or by other means.
- The cost of maintaining the business, same as Kiva costs money to simply exist a lending institution has fixed expenses.
- Transactional costs relating to repayments, both local and remittances back to Kiva
- Bad Debts (some Kiva partners repay the loan regardless of default)
- Community activity in the provision ongoing advice to the borrower
Now as Kiva has a 15% donation request (effectively you can view that as an interest rate in your head as a consideration) you should be able to see that the ‘free’ loan still incurs substantial costs at the pointy end of the stick. Reasonable consideration could end up with a 30% effective rate quite easily even for 0% capital input, especially in out of the way places.
The other issue is, what would the borrower be paying if this ‘free’ money wasn’t available. I can’t see that any normal western economy loan wise is too far different than Australia. If you are lucky, have assets and a good credit record you can access relatively cheap loans, subject to movement of course around 13% for general lending, 13%-20% for credit cards and 6% for a mortgage (accurate as at 17th January 2014). The payday lenders are running at 20% per month (ie 240% pa) then you are at the pawn broker level.
As you can see easily, I hope, depending on your situation an Australian can be easily paying 240% on small urgent borrowings that make 30% pale in comparison. Then consider this fact most of the people taking out Kiva loans do not have the same access to money as we do, 240% lending would probably be a normal charge to them if they borrowed money in their local community. The situation is far from perfect, would I prefer that the people I lend money via Kiva get a better deal, YES! Am I able to lend to these people directly NO!
So am I helping someone by doing Kiva, I believe so. If the world were perfect there would be reasonably priced access to money available to everyone, but until that utopia arrives I will continue to Kiva!