Some time ago the President of Kiva, Premal Shah, posted a thoughtful response to my article Zidisha vs. Kiva Zip. Zidisha is a nonprofit website that I founded as an alternative to traditional microlending servies such as Kiva, whose loans must be passed on to borrowers at high interest rates (~35%) to cover field partners’ administrative costs. Zidisha reduces the cost of microloans by eliminating field partners and allowing today’s internet-capable borrowers to transact directly with lenders via an international person-to-person lending platform.
If Zidisha has created something of value, it’s because we stand on the shoulders of giants: Kiva was a main source of inspiration for Zidisha, and one of my earliest exposures to microfinance was through work with a Kiva field partner in 2006. Kiva has done immense good by supplying microfinance organizations with much-needed lending capital, and its vision of human connection across geographic barriers has fired the imaginations of people worldwide.
It would be a shame if this vision were to grow static and atrophy through failure to adapt to changing technology. The world is so different now from a decade ago; many microfinance borrowers are online and can be served in new and better ways. It’s why I’ve dedicated my life to building Zidisha, and is why I disagree with Mr. Shah’s dismissal of innovations that disrupt the “classic” Kiva model.
The essence of Mr. Shah’s comment (originally posted here and reproduced in full below) seems to be that traditional microfinance models such as Kiva are more worthy of support than disruptive models such as Zidisha. This conclusion seems to rest on two flawed assumptions, and one debatable value judgment. The flawed assumptions are 1) the use of field partners results in high repayment rates at the borrower level, and 2) direct person-to-person models like Zidisha cannot offer financial sustainability to lenders. The debatable value judgment is that philanthropic microlending platforms like Kiva and Zidisha should optimize predictable returns for lenders, rather than higher profits for borrowers.
I think these three myths are shared by many thoughtful people who care deeply about the future of microfinance, and I’d like to address them here.
Myth #1: Over 98% of Kiva borrowers repay their loans
Mr. Shah cited a figure of “4% loans at risk on ‘classic’ Kiva.org,” and I see that 98.85% of loans made through Kiva.org have been repaid to lenders. However, my understanding from analyses such as this one is that the repayment rate at the borrower level is probably far lower than 98%. The reason, from my understanding, is that the field partners typically cover borrower defaults unless the partners themselves go out of business. The field partners do this to preserve their ability to raise funds through Kiva. The cost is borne by borrowers, who pay hefty interest and fees to cover the partners’ operating costs.