Microfinance Practice: Re: [MFP] interesting side note on Kiva defaults

Luckily, I was pro Argentina, Anuj :)

I am sure I would've continued to invest in the micro entrepreneurs if Kiva's protocol were that my investment went to the specified individual vs. the MFI lumping it in with their capital to be allocated to any random borrower. (I felt duped.)

So, if the model were modified in that manner, and I got regular reports on how the micro entrepreneur was progressing with the business, I am sure I would still be an active donor/investor. And, to me, it is nothing like the lottery in my opinion (for me) because I didn't expect to perhaps get a windfall -- I did not expect a 17% default rate though, given the high repayment rates MFIs seem to always tout.

At present, however, I have my own fledgling non profit the Global Alliance for Legal Aid which supports access to legal services for the poor in developing countries on human rights issues and we need every dollar. In fact, we are aggressively investigating a case now against fraudsters who pretended to be a MFI and stole millions of USD from the Ugandan poor.

Thousands of people were told by the fake MFI that the good Dutch people were backing this MFI that wanted to help the poor; so they should invest their money in the MFI and they would get a high return (10% and sometimes more promised).

Many victims thus went to get loans from commercial banks to invest (I believe the commercial banks must have known it was a scam too). We still interviewing victims, and one I talked to earlier in the year told me that there were suicides as a result of this scam. People felt so ashamed of the fact that they had convinced relatives and friends to invest, when all lost their money, they could not live with the guilt.

This is such a sad story, and I believe that 1) the markets need to be better policed (as my husband would say -- master of the obvious), but 2) Real MFIs need to be very concerned about the plethora of financial scams, and act on that concern -- if only for the reason that this is money potentially lost to their institutions too (if not for the human rights issues present).

If anyone wants to support the prosecution of this case and is in the US, we are selling Ugandan fair trade coffee to fund the legal costs and just launched the online store. Unfortunately, at present only available in the US.

Here's the link: http://bit.ly/1rqlKEs

All the best and Forza Argentina!

Jami

On Thu, Jul 10, 2014 at 5:06 AM, Anuj Jain ajain@stfx.ca [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Hi Jami,

Human stories always make much better reading than cold facts and figures. Thanks for sharing this. So in theory, might you have continued your investment if there was greater / more regular communication about progress of ultimate borrowers' businesses? and even if the default and business failure rates were to remain as high as what you experienced? Does this get influenced by the fact that such an investment mimics buying lottery tickets and one is well prepared to lose the money? I am intrigued by the motivating factors of investors to put their money in micro-businesses 1000s of miles away.

On the other side, with a disclaimer that I don't know enough about such models to say anything with certainly; I have often wondered if, at the core of such a model is essentially the idea that lenders like you/ us are providing 'no cost' capital to MFI partners; who otherwise continue to follow their respective business models and use this no cost capital to augment their lendable funds? In other words, this investment helps MFIs subsidize their own capital; with the assumption that it would help them lower the price for their respective borrowers (?). would you know if 98%+ repayment rate is that of MFIs or of particular borrowers that individual investors support?

if you were supporting the Dutch, my sympathies.

anuj

From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com]
Sent: Wednesday, July 09, 2014 5:49 PM
To: MicrofinancePractice@yahoogroups.com
Subject: Re: [MFP] interesting side note on Kiva defaults

Hi Anuj;

I was working in the sector from 2005 with an intergovernmental organization that focused on the rule of law & the role of law in development.

I'm a business lawyer by training and had worked with SME clients for years, so I was fascinated by Kiva's model, and very much attracted to the idea of supporting individuals micro entrepreneurs (I made loans only to women, and considered their business ideas and potential in countries that I had visited as to whether or not I thought they could succeed. There was no way to deeply analyze the businesses however due to the small amount of info provided but I did not mind the risk of losing money.

I made the investments to learn first hand about the model and convinced colleagues too to invest. (After about one year of lending, we withdrew our 'group capital' and sent it all to a Sri Lankan colleague who was downsized, but I continued on with Kiva with separate funds--though I have not added any capital since my initial investment).

I think at about year 2 or 3 my enthusiasm wore off. I was initially discouraged that my funding was not going to the featured borrower; but someone 'like' her and thought that was deceitful on the part of Kiva. Then, I guess I just got bored. I suppose, had I met the real borrower in my travels or even the MFIs I was supporting, maybe my enthusiasm would have remained.

Kiva works because it draws people in to the human element and makes a connection. For me, it failed to maintain that connection. But, clearly it has been a mega success, so some components of the business model may be worth emulating. For example, they get hundreds of free laborers annually as Kiva fellows.

Hope that helps someone somewhere :) Now, back to the match.

best,
jami

On Wed, Jul 9, 2014 at 3:52 PM, Anuj Jain ajain@stfx.ca [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Hi Jami,

Like this post of yours, you don't just have an opinion on this, you have actually experienced this first hand with Kiva.

I have a bit of a pre-layer question for you though. What made you motivated to invest in remotely located businesses through an intermediary like KIVA? What are the psychological and practical motivations that work to make such an investment decision? How is that different from sponsoring a child or a family located remotely? Does the idea that this investment is creating profitable businesses is more (or differently) appealing than sponsoring a child/ family? Is it more appealing because this idea is built on more business principles rather than charity principles? when you write-off, who really gains (I think you are asking this question as well) and who gets that charity?

will look forward to hear your thoughts, and how, at a system level, we understand and analyze the model such as KIVA.

anuj

From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com]
Sent: Wednesday, July 09, 2014 4:08 PM
To: MicrofinancePractice@yahoogroups.com
Subject: [MFP] interesting side note on Kiva defaults

Hi All,

Thought you'd find this interesting: about seven years ago I invested in 17 Kiva micro entrepreneurs from different countries.

My success rate in selecting winning micro entrepreneurs over the years has been less than stellar -- with 17% of my loans defaulting. (The average default rate across the board on Kiva is about 1%! per Kiva's own stats).

Just looking at the stats now in retrospect is quite interesting because amongst 'my borrowers,' who defaulted, one was an American client of Accion East who needed about $5,000 for a restaurant venture (I should have known better bc so many restaurants fail, but alas I was drawn in).

Defaulting clients 2 & 3 were Peruvian with EDPYME Alternativa and Manuela Ramos/CrediMujer; and 2 other defaulters were Kenyan borrowers both with Ebony (I think these women defaulted during the political crisis so in my mind are excused).

I'd love to know if Kiva inquires with their partners about the MFI default/collection policies and when if ever debts can be forgiven.

My concern is that if I as the point of origin of the loan am obliged to 'write off,' and no longer collect on these debts, then the MFIs should be doing the same, right?

Any practitioner thoughts on this?

Best,
Jami Solli