Kiva reveals they don't fund loans as described, begins altering website to be more transparent

The biggest story this week has to be the revelation that Kiva, the darling of international microfinance, is not what it seems.  For years Kiva's website and all of its marketing has been designed to convince you that you were actually funding a loan to an individual entrepreneur in a third world country, managed and overseen by an in-country partner.  You looked at photos of the grantees, read their stories, and chose among them which ones would receive your dollars.

In short, Kiva had brought accountability and measurement to charity fundraising that people desperately craved.  How else to explain the US$100million total raised that Kiva recently announced? 

Look at how this loan is described a little lower down on this grantee's Kiva.org page.

It seems pretty clear that the loan is being made from you to her, and that's where your money is going.  (I have given several times to Kiva, and never once caught what "Date disbursed" really meant.)

A blog post by microfinance researcher David Roodman, and a New York Times article ("Confusion over where money lent on Kiva goes") have revealed that this is not how it works.  Some of the revelations:

• It turns out the grantees on the website are examples of real projects by in-country partners, but that your money does not go directly to the grantee, but instead funds the work of the in-country partner.
• The grantees you see probably already have their loans, as in-country microfinance charities fund their loans, and then put the grantees up on Kiva.org to backfill their loans.
• And the worst part: an in-country microfinance charity may not reveal that a borrower has defaulted on their loan in order to keep their Kiva.org listed "repayment ratio" looking good.

This is an enormous PR problem for Kiva, as it goes directly to their bottom line brand integrity.  The Twitter chatter agrees, which means Kiva has a long way to go to fix this mess.  The hardest part about all of this is that it's clear that Kiva has helped fund microfinance organizations that have done a lot of good work in developing nations.

To his credit, Kiva co-founder and CEO Matt Flannery responded on Roodman's blog.  The summary of his response was not "You are incorrect, our money goes straight to the grantee".  It was more like:

• Most people don't understand microfinance;
• Pre-disbursements are necessary in microfinance; and
• We don't do a very good job of disclosing that.

To the accusation that most people don't understand microfinance, this Kiva-authored 2008 version of Kiva's About webpage of how their service works is part of the reason we don't understand: Kiva was instrumental in establishing that misunderstanding.  That copy is taken from the Internet archive, and the page is much different now.

Generous mea culpas and making changes to the website to increase disclosure and transparency will allow Kiva to ride out this controversy without long-term impact.  However Kiva's real loss is the marketing "point of connection to the grantee" feature.  That connection is why I and many give to Kiva.  It is connection to the grantee that is the emotional hook that brings in dollars.  Without it, Kiva isn't as compelling an ask.

Comments

[www.facebook.com/profile.php?id=505815327]

Thanks for a great overview of the Kiva issue and why it is a real problem!

Always refreshing to read your posts where you speak the truth when most consultants remain quite when people who they agree with do bad things or do not do them right.

The silence on the KIVA fraud from most of the non-profit consulting community needed to be broken.

The danger of not rooting out the players who deceive the public is the increased cynicism among prospective donors to all charities.

[Shabbir]

I do not believe what we're seeing here rises to the level of fraud. I believe it's an incredibly poor managing of expectations of the donor fueled by bad judgement at Kiva. At some point one or more people at Kiva had to realize that this was a problem, and they began making changes at the website (like the Disbursement Date field) to try and make things right.

They didn't do enough, but they weren't actively hiding all traces it. Everything Roodman cited was findable on the Kiva site, it was just disclosed poorly.

This much disclosure would be unheard of in the financial industry, which is where we're actually seeing fraud these days.

I have given to Kiva before, and I might very well give again, but as I said above, it's no longer as compelling an ask for me. Something like DonorsChoose.org has always been my other default charity.

[Dan]

It is sad to see such negative comments over what, in itself, is perfectly normal and acceptable process. Prefunding has been an almost universal standard in financial markets of various kinds.

The real question is whether the Kiva lender fully takes over that particular loan, with its own repayments and potential defaults. As far as I can determine, this does in fact occur most of the time. I say most of the time because some MFIs apparently are retaining the default risk-- which is a troubling interference with the peer to peer lending that Kiva espouses. But to imply that prefunding means that Kiva lenders don't lend to that particular borrower is an illogical and unfounded jump.

[Shabbir]

I believe you misunderstand the article. The problem isn't with prefunding, only with the poor way in which Kiva communicated this through their tools. As I said, now that they've started taking measures to both explain this and update their materials, they'll probably survive it. This is because pre-funding itself isn't an inappropriate act, when adequately disclosed.

A real serious problem, intimated by the Roodman article and what you mention, is the potential that defaults are carried by the in-country partner. That truly would break the linkage between Kiva lender and in-country borrower.

[Dan]

I guess when the article ends with the following:
"However Kiva's real loss is the marketing "point of connection to the grantee" feature. That connection is why I and many give to Kiva. It is connection to the grantee that is the emotional hook that brings in dollars. Without it, Kiva isn't as compelling an ask."

I have to assume the article is concluding that the "point of connection" is imaginary--mostly because of prefunding (and slightly due to MFI default risk insurance).