Monday, April 20, 2009

Kiva Update

I just received a note that my microloan through has begun to be repaid!

Specifically, I have been repaid 3.03 of the $25 I loaned (that's 12%). Mrs. Adedeyinbo borrowed a total of $950, and has begun paying it back. The truth is, she's a bit behind at the moment. She was supposed to pay back $118.75 per month for 8 months, but only paid $115.36 in this, her first payment.

I'm not worried - and I hope she's not too worried either. I'm sure she'll make it up in the coming months.

I'll keep you posted.


Mark said...

I think the whole microloan thing is a pretty cool concept. I might even give it a try myself.

However, I wonder about the lack of worry that you expressed. If you had lent her the full $950 yourself, wouldn't you be more worried? And if she was being charged interest and/or penalties for late payment, wouldn't she be more worried? (Actually, I'm a little unclear on this from the Kiva website. Where they explain how microfinance works, they talk about high interest rates, but the repayment terms seem to be just the principle divided by the number of months. Sorry if my misunderstanding skews the rest of this commentary...)

I suspect you don't worry too much about default on your $25, because hey, it's just a few bucks, and hopefully it does some good even if it doesn't get paid back. Participating in this program has essentially zero net effect for your financial state (it will neither enrich you nor make you destitute). And for Mrs. Adedeyinbo, there seems to be little downside as well - even in the worst case she still gets $950 free, right?

I guess I would postulate that the distinguishing feature of these "microloans" is not that they are small (i.e. "micro") but rather that they are in the gray area between a business contract and a charitable gift. There are no counterbalancing forces of risk/reward for either party involved (perhaps some risk by the third-party in this case, at stake is their reputation and future business) which are so fundamental to any other economic scenario. So while I like the concept, I think it needs a better term (other than microloan) that does not connote "business as usual, just on a small scale".

The Dan Ward said...

@Mark - I'm not worried for a couple reasons, but mostly because she did pay 97% of that first payment... and she's got several months ahead to make up the remaining 3%. But knowing me, I think I would still be optimistic even if I'd lent the whole $950.

And yes, as you pointed out, it's only $25 of my money. That's part of the risk management strategy. Microloans have an impressively low default rate, but even still, a place like Kiva spreads the risk across a larger number of donors.

And actually there are different types of microloans. Kiva does it a bit more indirectly than some, tapping into "social lenders" like me who don't actually make any interest. But the borrower does indeed pay some interest.

Here's info from the Kiva website:
Kiva works with microfinance institutions (MFIs) to raise debt capital directly from social investors via the Internet. Kiva provides MFIs 0% interest US dollar debt capital in exchange for client impact transparency on the internet. MFIs on-lend this capital at prevailing interest rates and keep the interest income. Losses arising from client default are borne by Kiva's social investor.

So, is that business or charity? I think it's a social-minded approach to helping ensure transparency and wider access to capital. And while the capital losses are borne by the "social investors," the various MFI's do have some skin in the game (as does Kiva) and thus the risk/reward you're looking for is indeed present - albeit in a different scale & scope than traditional loans.

Mark said...

Ah, I missed that point... the MFIs do charge interest to the borrower, but you (and the rest of the original lenders) do not charge interest to Kiva, so to speak. So it does have the same economic physics in play as far as the borrower and the MFI are concerned, but for the social lenders it seems to me more like a charitable endeavor. I'd say it's a busarity, or perhaps a chusiness. Cool.

The Dan Ward said...

Yeah, I had to dig around a bit to find out who the borrower pays the interest to.

I think you nailed it - it's got *some* of the same economic factors, but it's getting a boost of some free capital from people like me. I guess we all get a hand up from someone - in this case, it's a more visible and obvious hand.

You should totally try it. :)