A random traveller from Kiva’s Milepoint team (a group of people who like flying and have lent about $4m through Kiva) contacted me a week ago suggesting I join some online video chat with Kiva and ask them a tricky question. Kiva had refused to join me in a live radio show in their home town, San Francisco, although two other US-based MF networks did call in, Zidisha and Opportunity Network. Respect. It was a fun debate.

Anyway, why not ask Premal a question? I figured I’d keep it simple: why haven’t you guys responded to the allegations in the book? The comedian host (literally) seemed confused initially, but Premal picked up the (not entirely subtle) thread. His response is interesting. The entire thing can be watched here, from minute 50. I warn the listener that the video is pretty tedious, I personally wouldn’t have called it Kiva Insights, so I’ve copied Premal’s response to the question here:

So Hugh it’s good to finally talk to you in person, we reached out to you by email but got no response… Hugh Sinclair is the author of a book that is critical of microfinance and is critical of Kiva, I think there’s a lot of real valuable criticisms in the book, actually, but then I think there’s a lot of things in the book that probably weren’t as well researched and that I don’t agree with, and Hugh, I’d welcome a conversation with you at any point, to basically inform you about some of the things that we think are inaccurate, but also the general spirit of what you are trying to do  which is, um, in microfinance too much of a good thing can be bad, and credit needs to be used responsibly, and there’s a real important role for all of us to not only just be overly-excited, but to be sceptical, and to make sure we are really doing our due diligence, there are times in Kiva’s history where, you know, I think we got it wrong, or we maybe weren’t as careful as we should have been, and as a learning growing organisation that helps basically point out the areas that we need to invest in more. So Hugh, you have a really important role in this sector, because if we are all overly zealous and happy all the time I think we miss opportunities for real improvement, and the stakes are too high, especially with issues like over-indebtedness, which we saw here in the US, so we are starting to screen for that, and starting pull out of certain markets, and that’s what’s categorising the client credit limits. Looking at things like Client Protection and how we can get beyond being just people endorsing things like fair pricing and fair collection practices to actually how do we verify that, and so part of the borrower verification process that Kiva fellows do, which is they randomly sample a group of clients posted on the website in addition to making sure that the data on the website is true that that person exists, that the loan amount is really what was posted on the website, they’re starting to ask questions around about “how do you feel you are treated?” and basically if we start seeing deviations from the norm that’s an opportunity for us to double-click and start asking deeper questions on that partner, and we really want to lead the charge as investors to keep our MFIs accountable. So Hugh, you know, Matt Flannery, my Kiva co-founder and CEO I think reached out to you, we’d love to have a conversation with you to figure out how we can actually start addressing some of the issues that you bring up. Thanks for your question.

So, first of all, hat off to Kiva for taking the question, hat off for actually pretending to answer it. I have little respect for most of those implicated in the book that have made absolutely no comment whatsoever, these guys rose to the challenge. With some caveats.

First of all, neither Premal nor Matt Flannery ever tried to contact me. I am hardly a difficult person to reach, the website is written across the back cover of the book, visible in any Google search, and the email is clearly on the website. The most random people have managed to contact me since the book was published. The publisher is also based in San Francisco and well-known. And I’ve been in touch with these guys over the years, as explained in the book in some fairly graphic detail. So, it’s simply untrue that they’ve tried to contact me. Perhaps a mis-communication?

Suggesting the text was poorly researched is strange. It was peer-reviewed, vetted by two separate sets of lawyers, is heavily annotated, and remains unchallenged to this day.

So, the question was why Kiva hadn’t responded to the issues raised in the book, and my main concern with Premal’s answer is that he didn’t respond to any of the issues raised in the book. So, in terms of answering the question, a low score. What are the issues that remain outstanding?

• Why did Kiva ignore information about specific Kiva client exploitation at LAPO when presented with firm data demonstrating this to be the case?
• In spite of this information, which was accepted by Kiva, why did Kiva continue to take funds from the (predominantly US) general public to the tune of $5m, with LAPO becoming the biggest Kiva partner?
• Why deny the charges of the NYT (“We’ve grown comfortable over time with [LAPOs] approach”) and then pull out of LAPO a fortnight later?
• How come they can lend to cock-fighting rackets and coca leaf salesman if these activities are illegal under California state law? It’s “traditional” apparently.
• Any comment on the flawed repayment rates (MFI repayment rates are lower, but MFIs boost them in order to keep Kiva happy and maintain the flow of interest-free capital)? This even made it to the Kiva Wikipedia page.
• Doubts over whether all the clients actually exist.
• Kiva is a brutally inefficient way to channel capital to the poor compared to a microfinance fund, which may be excusable if Kiva were a P2P, but is it?
• What’s with the vast buffer of uninvested Kiva user funds and cash sitting idle generating a tidy income to Kiva ($42m according to latest statements)?
• Why do Mexican’s pay 10x more for a loan than Americans? Are default rates lower in Mexico than the US, and operating costs higher?

But, I guess my main question relates to Kiva’s refusal to publish the interest rates on the actual loans, and stick doggedly to the portfolio yield, which everyone in the sector knows is a fairly meaningless, easily manipulated and self-reported statistic. Other P2Ps manage to post the interest rate to two decimal places, at the individual loan level, and if Kiva is a P2P, capable of producing all manner of stories, photos and details about the client, why not the interest rate? This question is not simply interesting because the rate might be 85.65% instead of 84%, a mere detail, but because it actually cuts to the heart of the Kiva lending model.

I do not believe Kiva is fundamentally about lending money to poor people, but about giving Americans a nice fluffy feeling that they’re doing something useful. What actually happens in the field to the poor is well documented elsewhere – the overall impact is approximately zero.

But the impact is not zero to the Milepoint folk, Kiva Christians ($5.3m) or Team Europe ($2.7m) – these folk actually believe they are making a difference, and pay Kiva handsomely for the service (via donations and interest earned on idle funds). Hundreds of Kiva volunteers run around the planet apparently eradicating poverty with interest rates to the poor often approaching 100%, and no one has managed to find much supporting evidence for this being particularly helpful to the poor. Many of the MFIs that use Kiva have quit, or been closed down, for some unknown reason, most likely related to the fact that the benefit of obtaining interest-free credit is not sufficient to justify the hassle of dealing with Kiva. Capital may cost 10%, but how much does it cost to go to the field, write the little story, translate it, hire a few people in the MFI, fill out all the forms, have volunteers pestering you the whole time?

But, I applaud the fact that Kiva are attempting to improve this. They need to be careful to do so in such a way as to not render their model entirely unattractive to the MFIs, particularly when the microfinance funds are sitting on piles of uninvested funds that they are desperate to lend at reducing rates. My forays onto Kivafriends proved utterly pointless: as with the over-arching analogy in the book about the microfinance devotees operating with cult-like fanaticism, it is impossible to prompt change at such institutions. I pleaded with Kiva to investigate LAPO because I had seen, first hand, the exploitation that was taking place. I had the original repayment schedules of some Kiva clients proving the rates these poor women were actually paying (versus the 24% cited on Kiva at the time). One of Kiva’s first donors urged them to listen, and all the evidence that emerged since demonstrated beyond doubt that this was entirely valid information, confirmed by the NYT and four rating reports, and Kiva did eventually pull out. Being armed with the truth, with evidence, with facts, is simply not enough, especially with $5m in play. They cannot play the ignorance card – that is their problem – they knew what was going on and turned a blind-eye, simple as that.

I’ve said it before, and I’ll say it again, there is a total mis-alignment of interests between the poor, the ultimate investors and the intermediaries employed to bridge the two. Kiva acts in its own best interests, as do all the intermediaries, and there is no reason to suppose these match the interests of the investors or the poor. This is so well documented in finance that it has its own title, the principle-agent problem, which apparently doesn’t apply in microfinance. Gibberish.

The only way to reign in these folk is full, formal regulation. Kiva is an investment fund in all but name. Just because it doesn’t pay interest to lenders and operates under the guise of an NGO and takes deposits as low as $25 doesn’t change the essence of the activity, so why not regulate them? Sure, regulation is not perfect, as US citizens are well aware. But is total lawlessness a solution? For as long as Kiva can take funds from the unwitting general public, pump them to dodgy banks in Nigeria or to cock-fighting rackets in Peru, I remain sceptical of any claims that the US financial sector is remotely sensibly regulated.

My anonymous buddy at Milepoint made an interesting comment: “I am suggesting using more tact in approach, but tact does not seem to be one of your demonstrated strengths (as illustrated by your blog and essentially calling myself and almost a million other Kiva lenders stupid (though not to worry on a personal level, I thought it funny and my skin is pretty think anyway.”

I acknowledge the comment regarding my tact, but I don’t think the Kivans are stupid. I think they are ill-informed, well-meaning, naive, don’t look into matters particularly deeply, don’t understand the often brutal reality of microfinance in the field, are bombarded with nice looking photos and stories and spin, and trust their intermediaries blindly.

So, Kiva, if you want to respond to the claims in the book, do so here. Not to other claims, those in the book. It you want to promote Kiva, please chose a different venue. The book’s available on Amazon if you haven’t read it yet (may as well secure an additional book sale here!).

To the Kivans – start asking just slightly intelligent questions about what is actually happening with your money, and start with demanding what the interest rate is. Plenty of P2Ps can tell you this simple fact, because they are actually doing what they claim, so consider switching platform until Kiva can sort out this gaping hole. Or are you of the mind that the poor don’t care about interest rates, as some claim? If so, I give up. You also might want to pick up the book (bang – another million sales!).

To the armies of volunteers, if you want to learn about microfinance go volunteer at an MFI. It might not be so 21^st-century-dot-com-California-cool, but what’s your goal?

And to the regulators: wake up.

I’ll end this post with a quote from the House of Representatives hearing, by a gentleman called Wagane Diouf of Mecene Investments, who was called to testify:

“I get seriously worried when these institutions [MFIs] start mobilizing funds from institutions that attract capital from individuals in the US and other western countries, such as, um, I won’t mention their name, but institutions that have web-driven mechanisms to attract investments, but the financial reporting of the institutions that are receiving these funds are not up to standard at all, they are very poorly regulated, it’s a very opaque part of the industry.”[emphasis added]