Friday, April 20, 2007

"Grameen vs Kiva?"

An email exchange with Pär on microfinance:

Hey Ben!

I was just browsing https://www.kiva.org/ and Karen pointed out that you'd referenced the Grameen Foundation in Other Cities. I was curious how you feel about the former in contrast to the latter. My uninformed gut reaction is that Kiva could probably become a much more viral phenomenon than Grameen, leading to more loans to people who need it.

On the other hand, I am uneasy about how the loan money gets distributed, and why. Going down the list of these people who want to borrow money, what will catch people's eyes? If your chance of getting a loan depends on your ability to appealing to the average American lenders... What does that mean? Pictures of the pathetic-yet-heartwarming or the rough-yet-honest? Whole Foods style neohippie semantics? I am pretty sure that I would rather a NGO distribute the funds.

As with virtually everything these days, I am torn and unable to come up with an opinion either way. I guess I approve of the initiative. At the end of the day my aesthetic qualms pale in importance to getting some of these people a better life.

But I am very curious how you feel.

Zell

(My answer after the cut...)

From the looks of it, for now, kiva strikes me as pretty cool.

Grameen is all about replication. GF-USA, which the Other Cities chapbook contribution actually went to, is actually in the business of setting up (including providing seed capital to) and supporting (including promoting knowledge transfer, and troubleshooting) microfinance lenders in various countries. "Small pieces, loosely joined" applies here -- local conditions vary dramatically, so you want a lot of different little institutions, not some monolithic agency (the big monolithic agencies like the WHO and the World Bank are able to tackle problems that might be out of the reach of small NGOs, but they're also, so I hear, overpoliticized, inefficient, and riddled with jobniks and corruption and top-down thinking).

If Grameen's expertise is in setup and technical aid for local microfinance institutions, kiva looks like a very efficient way of funnelling money to (more or less) those same institutions.

In fact it seems like a HUGELY efficient way of funneling money, at present -- from their FAQ, they're not taking a cut, the lenders get no interest, and Paypal is waiving the transaction fee, so $50 from you is $50 directly to the in-country microfinancier at least. It looks like it means $50 to the borrower. The borrower is paying interest to the microfinance institution, whom kiva.org will be charging 2% interest. I think that's pretty low in traditional banking terms. Microfinance interest rates can sometimes be quite high.

So ideally, this is not a "competitor" to Grameen (and since the pool of poor businesses is so vast, I think they'd be in favor of any "competitor" anyway), but rather a web-era, convenient, low-transaction-cost way of gathering and funnelling money from random Western individuals to the insititutions Grameen is helping to seed.

It is NGOs distributing the funds -- it's not just Americans doling money directly out to individuals with no oversight or quality controls. I don't know the NGO partners individually, and I'm sure microfinance institutions come in all levels of reliability, honesty, and efficiency, but presumably if kiva has any clue at all, they can weed out problem partners and develop good ones.

I don't have too many qualms about the whole foods pictures-of-the-downtrodden aesthetic. At best, a real connection between individuals from different worlds is a bonus on top of the good effects of microfinance. At worst, there is some exoticizing, fetishization, voyeurism, whatever. That doesn't bother me much. I care about effects, not motives. Presuming that the field partners doing the selecting are reasonably serious and ethical, the idea that more of the dollars will be channelled towards the cuter third-world businesspeople seems like a minor effect. If kiva manages to get more money to flow from Iowa to the poor of Uganda, I'm not all that bothered if the good-looking or whole-foods-ethic-compatible poor of Uganda benefit disproportionately from that extra money. The perfect, here, the enemy of the good, I think.

What I do wonder about is how sustainable this model is. Can they keep their costs so low? At the moment they are living on VC money. If this is a huge boom, maybe they can take a very small fee and keep going. If it's a niche, they may have to start charging more. Or maybe not, if they can keep the site and the organization lean. If they continue not to pay lenders interest, it may be hard to attract more than a niche market. If they do want to pay lenders interest, they may run into all kinds of regulatory hassle which may bog down them down and force them to increase organizational costs a lot.

It's worth keeping an eye on all that. For the moment, though, this seems like a very quick and efficient way to target small microfinance NGOs and painlessly lend money to them. I believe access to capital is a huge barrier to alleviation of global poverty, and it seems like this can only help.

Ben

For those willing to do a little more research, it's worth looking into the general topic of microfinance; thirty seconds of research yields sites on microfinance as an industry and about microfinance funds as investment instruments.

It's worth noting that, in terms of allieviating global poverty, there are some distinct limits to what microfinance can do: it can't end wars or slavery or government corruption or crime or abusive labor practices for workers in industrial settings; and it probably isn't an efficient instrument for getting people clean water, good schools, decent medical care, or transportation infrastructure (though it might help with some of these things -- e.g. the institution of the often microfinance-funded village cell phone lady seems to have revolutionized communications infrastructure in some places -- notably Bangladesh, where Grameen Phone is built on this model).

Microfinance has distinct limits, but I do think it's a piece of the puzzle.