Is Kiva really the right place to invest?

By Justine Desmond ‘13Staff Writer

Click on the Kiva homepage, and an image of a potential beneficiary pops up instantly. “Victoria” is 45 years old, lives in Pucallpa, Peru, and a mother of three. She needs $400.00 to buy a greater supply of soft drinks to sell at her store. The window asks for just $25.00 to help empower Victoria and would-be entrepreneurs around the world that need capital to jump start their business.

Over 918,000 lenders have been moved by Kiva’s depiction of entrepreneurs in the developing world. As of April 15, 2012, the Scripps College Economics Society joined the growing list of supporters, and invested $747.45 into a micro-lending project. Board members determined that the funds would empower women in developing countries in an economically sound way, and, in fact, 86 percent of the borrowers that received the assistance are female. While I was not a board member when that decision was made, it had my full support: I opened an account with Kiva back in 2006, just a year after it was founded.

This past spring, one of our board members, Taryn Ohashi, suggested divesting from Kiva and finding a new microfinance organization. I had just joined the board as communications chair, and was taken aback to learn that Kiva and certain practices associated with microfinance had drawn such criticism. Together, our board, in dialogue with Professor Latika Chaudhary, an Assistant Professor of Economics at Scripps, decided to look into the matter. An investigation yielded some disappointing realities.

Questions had been raised about Kiva’s economic soundness. When Kiva first took off, lenders in developed countries believed they could help bolster local economies in countries like India by giving small loans to entrepreneurs. Kiva was presented as a go-between to advance this worthy goal. It seemed efficient, and with rising domestic demand in India, China, and other hubs of the developing world, the need for capital was self-evident. Years later, however, critics concluded that the plan failed to take into account economies of scale and shifting demand in global markets.

Governments are leaving behind dated, protectionist policies. India embraced economic reforms in 1991 while China backed dual track reforms in 1978. These markets are changing at a rapid pace.

For instance, after facing seemingly insurmountable barriers to entry in India, Walmart finally gained access to domestic markets in Dec. 2012. As Professor Chaudhary points out, “Eventually, Walmart will come. Small-scale traders will not be able to compete.” She explains, developing countries need to embrace economies of scale. Microfinance does not provide the proper economic incentives to help countries along in this process.

In addition, some microfinance organizations do not recognize the dynamic nature of these markets as they continue to invest in nonviable sectors like basket weaving. In the short term, stores like 10,000 Villages continue to sell products produced through microfinance initiatives, expecting socially conscious individuals to make a charitable purchase of beaded earrings, or a wicker basket. But outfits like 10,000 Villages can do little to solve the developing world’s rapidly expanding need to market goods abroad.

Second, while we wanted to use microloans as tool for promoting women’s long-term economic independence and empowerment, new research suggests that we may actually do them a disservice by introducing programs that only offer short-term solutions. As Chaudhary argues, “We are not even giving people real skills. We are perpetuating an enterprise that they are probably not running very well. Teaching something that would be more marketable that would get them more money in the future would be better than helping them with this business.” Why encourage women to become basket weavers when there is a growing demand for informational technology (IT) professionals?

Admittedly, some microfinance NGOs have met the need for education. Sadly, Kiva does not appear to be following this path.

Further, the model of group borrowing, still practiced by certain groups within Kiva, has faced additional scrutiny. While we are all for accountability, the pressure put on women within these groups can be over the top. A Wall Street Journal article tackled the issue in 2009, pointing to difficulties repaying loans and public shame as two common outcomes of group lending in Ramanagara, a town in India.

A last major concern of SCES regarding microfinance institutions like Kiva is that they simultaneously exploit our sympathy for women like Victoria while claiming to be business-minded. Is Victoria an entrepreneur or a charity case? Professor Chaudhary offers her clear judgment: “I don’t like the idea of a business that is not a business, and that is my qualm with microfinance.” At best, this is simply a marketing strategy that grips the attention of socially conscious individuals in the West. At its worst, the advertisements featuring women like Victoria are manipulative and patronizing.

The criticism of Kiva serves to remind well-intentioned investors—including small-scale investors, like the Scripps Economics Society, that they should research and evaluate the short and long-term goals of such organizations.

The money we take out of Kiva will still stay in microfinance, but in a new organization. Currently, as of April 12, we have $181.28 available Kiva credit, which we plan to invest in the Small Enterprise Foundation. Unlike Kiva, this organization focuses on the long-term benefits of the loans it provides to entrepreneurs in South Africa. SEF gives regular feedback on its clients’ financial health, self-sufficiency, well-being and future plans. While SEF also uses the model of group borrowing, it makes sure to keep track of clients’ repayment rates, savings rates, and attendance at meetings to protect against shaming and harassment by group members. While SCES still has some reservations about microfinance in general, we feel that our money will be put to much better use in SEF.