News and Commentary

Microfinance’s Circular Firing Squad

Much ado

I, like many in the microfinance community, have been following the debate that David Roodman initiated on his Open Book blog with regard to Kiva’s transparency. It’s a worthwhile discussion, certainly, and one that has already prompted action from Kiva–with a change to their “How Kiva Works” page–and from constituents–with at least one lender calling for a general strike on the Kiva Friends page. The New York Times has picked up the debate, vaulting it into the awareness of a much broader segment.

And while the discussion of Kiva’s tranparency is helpful–particularly Roodman’s thoughtful analysis–much of the ensuing criticism, even outrage, says more about the critic than the critiqued. Hidden envy over Kiva’s success is manifesting in a bit of schadenfreude, I’m afraid. Add to that the malcontents–those who love to hate a good thing–and the result is a wave of negative publicity which threatens to stanch the flow of loan capital.

The good folks at Kiva must be feeling blindsided right now as they try to put out a PR fire. Of all the potential elements of the Kiva model that could have resulted in this kind of negative publicity, the question of their transparency must not have been high on the list. For, in fact, Kiva has been exemplary in its transparency. Compare the amount of data available on the Kiva site to any other P2P lending platform. Or consider Kiva’s response to graft at microfinance institution partners. Or the way virtually everyone at Kiva, from Matt Flannery on down to the newest Kiva Fellow, writes raw, honest posts about their successes and failures.

The real debate

There are much greater concerns about microfinance to get worked up about than whether Kiva gets an A or an A+ for its transparency. It feels a bit like arguing over the color of the drapes while the house is on fire. In fact, the problem in microfinance, orders of magnitude greater than concerns over Kiva’s transparency, is: Does microcredit work? Does it alleviate poverty?

Dean Karlan is asking that question, using randomized control and treatment groups to study the effect of microcredit. And, dishearteningly, the studies find only a negligible impact. (For a complete article on the subject, check out the Boston Globe’s “Small Change“.) The proponents of microcredit respond by saying that the study is too limited in its time frame, that the effects of microcredit happen over decades or generations. That may very well be the case.

But what if there were an aspect of microfinance that showed positive impacts on poverty alleviation immediately and much more dramatically? Wouldn’t we want to concentrate our efforts in that area, at least until we could definitively show positive impacts of microcredit? In fact, there is. Microsavings, the provision of savings accounts to the poor, has been shown to increase average daily food expenditure, mitigate health shocks, and increase productive investment. Many microfinance institutions have responded to these positive results by requiring their clients to open savings accounts linked to their microloans. In some cases, MFIs match the savings to provide the depositor with an even greater incentive to save. As the client pays back the loan, a portion of the payment is deposited into the savings account, so that by the time the loan is paid off, the client has a balance in his/her savings account. In this way, microsavings and microcredit go hand in hand. So why has microcredit grown so much faster than microsavings?

There are two main structural hurdles preventing microsavings from scaling up the way microcredit has. The first hurdle is regulatory. Central banks regulate deposit taking institutions much more stringently than pure microcredit institutions. The second hurdle is cost. Whereas MFIs charge interest on microloans to cover transaction costs, the costs of maintaining a microsavings are difficult to recover through fees without driving away depositors.

A modest proposal

Were Kiva to ask my advice on how to address the negative publicity of recent weeks, I would tell them to get about the business of revolutionizing microfinance. For that is what they are all about. Specifically, Kiva should become the first microfinance funding vehicle to require that all borrowers have a savings account. Kiva is uniquely positioned to undertake this necessary next step in microfinance. They have a vast network of partner microfinance institutions, a donor/lender base motivated by a desire to do good (as opposed to getting a return on investment), and an outstanding website to channel the funds needed for a microsavings program.

The role of the Kiva lender/donor would be to fund a matched savings program. In study after study, matched savings programs grow assets at a much quicker pace than simple savings programs. Here’s how Kiva could use its existing microcredit platform to leverage the growth of microsavings:

• Kiva announces that by 2015 it will limit its partnerships to microfinance institutions that require microsavings accounts for all microcredit borrowers.
• Concurrently, Kiva implements a parallel channel to its lending platform. As Kiva lenders select loans to fund, they would be asked to choose a matching percentage. For instance, I might make a $25 loan and choose to match savings up to 10%, meaning my total repayment at the end of the loan would be $22.50 ($25 minus the $2.50 that was deposited into the saver’s account to match their $2.50 deposit). This mechanism would be similar to the current system for making donations to Kiva’s operating costs. After Kiva users select loans to fund, they are asked to make a donation to Kiva just prior to completing the checkout process.

This approach uses both a carrot and a stick to compel microfinance institutions to make microsavings a default offering to their clients. The carrot is the increasing capital base provided by savers’ deposits and the matched funds from Kiva donors. The stick is the prospect of losing Kiva as a source of capital for microcredit.

For those microfinance institutions that can not currently take deposits, the prospect of becoming a savings institution is daunting. There is help. The Bill and Melinda Gates Foundation Financial Services for the Poor initiative has as its stated mission:

“to help make microfinance—particularly savings accounts—widely accessible to poor people throughout the developing world.” (link)

Imagine the impact if Kiva Fellows–with financial support from the Gates Foundation–fanned out across the globe to implement savings programs at every microfinance institution in the Kiva network? I suspect that a goal of 2015 would be achievable.

If microsavings do not become an integral part of microfinance, the disenchantment over the failure of microcredit to alleviate poverty will sap the support it receives from donors and governments. Kiva can lead on this, and if it does, it will succeed in revolutionizing microfinance, again.

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