(Note: This article was originally written to fulfill class work.)
Kiva is a platform I have some familiarity with, having made 487 loans, to date. The idea is simple, connect microfinance lenders with capital from the Western do-gooders to re-shape economic destiny in the poorest of countries. The most common recipient is often female, illiterate, and wanting to help their families.
The unbanked billions not only have no place to place their pesos at night, they also fail to earn interest on any savings they do have. What turns out to be even more important, though, is that they have no access to credit.
For those of us with multiple credit cards, lines of credit, mortgages and other loans, a lack of credit seems like a blessing rather than a curse. Yet, access to even a small amount of credit can do wonders to get people through hard times. Since for the poorest in our world, there are only hard times, microfinance is touted as a way to close the gap, providing small loans to those who wouldn’t traditionally have access to any credit.
It’s not all sunshine and roses, though. Already in 2010, The Economist found that microfinance companies were charging rates of 27% (“Leave Well Alone,” 2010). By 2013, India’s microfinance industry had gone from being worth billions to crashing (“Road to redemption,” 2013). The companies justify their rates and strong-arm tactics by pointing out the difficulties of administrating these loans.
- The loans are tiny, meaning that the human time required to even consider them is worth much more than the profit that can be derived.
- The loans go to rural areas, where loan collectors often meet danger to get the money.
- The loans go to people with no credit history or collateral, making the risk of such loans defaulting much higher. Though in truth, microfinance default rates tend to be much lower than other types of loans.
While Kiva’s website provides a number of benefits to the microfinance industry, perhaps the main one is the gamification of the platform using personal connection, statistics, competition and cooperation. Kiva’s platform not only connects capital with lenders, it also aims to make the experience personal, with details about what the loan will be used for and some personal information about the borrower. This personal touch increases engagement from the community. The platform also allows for competition and cooperation in the form of stats that can be compared and teams formed. These teams can be anything from groups at work to charitable organizations. Statistics drive both competition and cooperation. All of this keeps Kivians coming back.
Macro economic reviews of microfinance are also beginning to appear. Raihan et al. (2017) studied the effects of microfinance on Bangladesh. They found that microfinance was about more than just credit and led to improvements in “enterprise financing, asset accumulation, consumption smoothing, meeting unexpected shocks” as well. Their “estimates suggest that microfinance has contributed somewhere in the range of 8.9-11.9 percent of the GDP of Bangladesh and somewhere in the range of 12.6- 16.6 percent of rural GDP” (Raihan et al., 2017).
Photo by Uneebo Office Design on Unsplash
References
Leave well alone. (2010). https://www.economist.com/leaders/2010/11/18/leave-well-alone Raihan, S., Osmani, S., & Khalily, M. B. (2017). The macro impact of microfinance in bangladesh: A CGE analysis. Economic Modelling, 62, 1–15. Road to redemption. (2013). https://www.economist.com/finance-and-economics/2013/01/12/road-to-redemption