How Good is Kiva for Microfinance Institutions?
By Edwin Au-Yeung, KF12 Cambodia
To carry out its mission of connecting people through lending to alleviate poverty, Kiva allows microfinance institutions (MFIs) to raise 0% interest capital on the Kiva website. MFIs use this capital to lend to entrepreneurs and collect (and keep) the interest on these loans. For MFIs, being able to raise interest-free capital is arguably the greatest benefit of joining Kiva. While this funding is interest-free, there is a still a cost associated with raising the capital. MFIs must expend resources to post loans, repayment figures, and journal updates on the Kiva website. Do these costs outweigh the benefits? Financially speaking, how good is Kiva for their field partner microfinance institutions? Let’s look at a real life example of a large Asian for-profit microfinance institution, considering only at the incremental benefits and costs associated with partnering up with Kiva (all figures in US Dollars).
Financial benefits for Asian for-profit field partner
According to the notes from the 2009 annual audited financial statements, this MFI had outstanding borrowings from Kiva of $459,205 at Dec 31/09 and $304,367 at Dec 31/08. That’s an average outstanding loan balance of $381,786. Also from the notes of the financial statements, the average cost of borrowing was 8.75%. By borrowing from Kiva, the MFI saved itself just over $33,400 in interest costs in 2009.
From the Kiva partner page, the average loan size for this MFI was $476, which means that the MFI posted about 800 loans in 2009. That’s 800 borrower pictures taken, 800 loan profiles uploaded, and about 128 journals uploaded (unfortunately, this partner has a low journalling rate of 16%). Here’s where I’ll need to make a couple of assumptions: The first assumption is that three full-time staff (or the equivalent to, if the work is done by more than three people) are required to do all of the Kiva work. Let’s also assume that the full-time staff are paid salaries of $350 a month and that associated overhead costs (training, travel, depreciation of equipment, utilities) for the MFI are 50% of salaries. In total, that comes out to $6,300/year per person, or $18,900. Add in $800 for a typical Kiva incentive of $1/loan paid to the loan officers for the additional work that they do (take a digital picture, get a client waiver signed, interview the client for the borrower profile) and the total annual cost comes out to $19,600. This specific field partner issues most loans in USD, so foreign exchange risk is not a big issue. For field partners that issue significant amounts of non-US Dollar loans, the cost of taking on foreign exchange risk must also be considered. However, this risk is very difficult to quantify, and the majority of it can be postponed until the end of the Kiva-field partner relationship due to Kiva’s net billing system.
Net financial benefit
With savings of $33,400 and costs of $19,600, this MFI ended up with a net financial benefit of $13,800 for 2009. This is just a rough estimate, because of the many assumptions made. The financial benefit of Kiva to MFIs will vary with their cost of funding, cost of staff and overhead, and any extreme local currency depreciation that the MFI is not able to compensate for by posting more loans.
While MFIs "make money" from being on Kiva, it is not as if the shareholders of all MFIs on Kiva are getting rich off of Kiva funding. In fact, 80% of Kiva’s partners are not-for-profit/non-governmental organizations that do not have shareholders, and a lot of the MFIs on Kiva are not turning a profit, relying on donor funding to survive. Some MFIs, like the ones in Cambodia, are structured as for-profit companies only because they have to incorporate to carry out microfinance operations.
MFIs should benefit too!
I would have posited that MFIs that partnered up with Kiva receive a net financial benefit; otherwise, why would they have signed up for the partnership in the first place? Field partner MFIs play a vital role in the Kiva system, administering loans and reporting back to Kiva’s lenders on the status of the loans. By lending on Kiva, you not only support entrepreneurs around the world, but you also support the field partner MFIs, enabling them provide microfinance services where they are very much needed. In return, you get to connect with entrepreneurs around the world through reading their loan profiles and receiving journal updates. It’s a win-win situation.
Edwin Au-Yeung is a Kiva Fellow currently serving at Tanaoba Lais Manekat in Kupang, West Timor, Indonesia. He has also served as a roaming Kiva Fellow in Phnom Penh, Cambodia, and likes to run quick calculations in his head. Want to support the provision of microfinance services around the world? Make a loan on Kiva today!