The reply:
++++++++++++++++++++++++++++++++++++++++++++++++++++
Thank you very much for your interest in Kiva.org!

Kiva provides the funds that it raises on its website to its field
partners interest-free; however, Kiva’s field partners do charge the
businesses that they disburse the loans to interest in order to cover
their own operational expenses. You can find more information about
the interest rates that Kiva’s field partners charge on Kiva’s partner
pages: http://www.kiva.org/about/partners/.

The average interest rate that a Kiva field partner charges is 18%,
and Kiva.org only partners with microfinance institutions that have a
social mission of lending to the poor. To obtain more information
about how Kiva.org evaluates and selects its field partners, please
see Kiva.org’s due diligence pages:
http://www.kiva.org/app.php?page=about&action=risk__overview.

Also, the nature of microcredit – small loans – is such that interest
rates need to be high to return the cost of the loan. To quote (CGAP)
(Consultative Group to Assist the Poor):

“There are three kinds of costs the MFI has to cover when it makes
microloans. The first two, the cost of the money that it lends and the
cost of loan defaults, are proportional to the amount lent. For
instance, if the cost paid by the MFI for the money it lends is 10%,
and it experiences defaults of 1% of the amount lent, then these two
costs will total $11 for a loan of $100, and $55 for a loan of $500.
An interest rate of 11% of the loan amount thus covers both these
costs for either loan.
The third type of cost, transaction costs, is not proportional to the
amount lent. The transaction cost of the $500 loan is not much
different from the transaction cost of the $100 loan. Both loans
require roughly the same amount of staff time for meeting with the
borrower to appraise the loan, processing the loan disbursement and
repayments, and follow-up monitoring. Suppose that the transaction
cost is $25 per loan and that the loans are for one year. To break
even on the $500 loan, the MFI would need to collect interest of $50 +
5 + $25 = $80, which represents an annual interest rate of 16%. To
break even on the $100 loan, the MFI would need to collect interest of
$10 + 1 + $25 = $36, which is an interest rate of 36%. At first
glance, a rate this high looks abusive to many people, especially when
the clients are poor. But in fact, this interest rate simply reflects
the basic reality that when loan sizes get very small, transaction
costs loom larger because these costs can’t be cut below certain
minimums.” (CGAP)

Best wishes,

Liz Harmon
++++++++++++++++++++++++++++++++++++++++++++++++++++

I’m not sure about what to think of it just yet… feel a bit mislead as the nature of kiva itself (non profit) lends me to think that the entire system is non-profit… also noted on kiva’s website that the only reason they don’t give you back your money with interest yet is that they have not figured out the tax laws!!! pretty disappointing really!
(as you can probably judge, i’m feeling a little disillusioned with kiva at the moment… not completely as i don’t necessarily think that charging interest is a bad thing if it lets the receiving take it with dignity… but hhmm… i just dunno!!!! – there must be a better way… i’m sure there is a better way!!!!)

(alex, sorry to use this as a chat channel… you can delete this comment after tim has responsed :-)

tim, can you please send me an email at ringlerun at gmail.com and let me know the bank account details… i can’t seem to find them anywhere…

mage.

Great to hear from you so soon…

You can communicate directly with the entrepreneurs on MyC4 via their respective blog – if they do not have a computer, are illiterate or do not speak English, there are Providers (you will get to know their role as soon as you are on board) that will help them receive and send their communication! It is actually very transparent…

In the presentation of each of the entrepreneurs, they are saying how much they maximum can pay in interest rate… then it is up to you to bid how much or little you want in interest rate (you could e.g. choose to bid only 2% and yes that will definitely benefit the entrepreneur) – our dutch auction can drive the interest rate down down down – we have had cases where the interest rate went below 10%!!!

I look very much forward to be “working” with you on MyC4!

i had no idea that some of kiva’s recipients were getting charged up to 37%… if that is the case, that is absolutely appalling!

You’ve convinced me that c4 is worth a go anyway… :-) so will be transferring a thousand bucks or so today :-) and in the course of time, i’m sure feedback from the entreprenuer’s will show what they thought of the loan with interest… perhaps as you have said, it might indeed promote harder work and dignity… ???

perhaps there could be a site where the entreprenuer could say what interest they are willing to pay? 0%, 20% or whatever … and the lender could choose… ???

You must understand that I really like Kiva (we are talking to the Founder now and then) – I just think it is important that you know of this if you are so observant on interest rates.

We are in direct contact with the entrepreneurs on MyC4 and they are very happy with the interest rate they are receiving, but on top of this and even more important (in my eyes), the entrepreneurs feel very confident in being treated as an entrepreneur and not a poor person!! I believe this feeling can not be weighted in gold…. it is called dignity!!!

what is an important distinction though is that if you don’t charge interest.. you are helping “break the cycle” for people in poverty… if you charge interest – depending on the amount and individual circumstance and luck of course, the person is being tied further and further into the debt cycle and in poverty.

i think there are “ways” that charging interest can work… the grameen bank charges 20% in the year, but they have a system of weekly repayments and going to people to their doors etc… without a very very systematic approach and an enormous amount of other help provided to people trying to “get a break” i think the interest does indeed become a business transaction… but unfortunately, it does become a “what’s in it for me” business transaction… and given that most of the poverty in the world is as a result of (indirectly, or perhaps even directly) “our” (yes, i mean “our”, anyone reading this blog will have had enough resources and been part of the “world ‘free’ trade agreements” that keep the poor in the 3rd world poor) actions… so the least we can do is give a lending hand without additional strings attached…

mage.

I just wanted to add, that I really appreciate that fact that C4 lenders get interests.

Not because I can make money that way, but because it once and for all removes this project from the realm of “charity” and places it squarely in the realm of “business”.

I remain convinced, that in may cases charity simply keeps people in a victim mindset – whereas doing business with them empowers them.

the mage :-)

agree that there is probably no one single simple answer… but to me, loaning but charging interest is almost akin to loaning the money and giving hope… but making it hard to break out of the poverty cycle!

yes, if you get back more, you can loan more… but if you help create a successful on location… that business will help the others around it too – and it can do that sooner if they don’t have to give the money back to you but can reinvest it in the community directly…

i don’t want to loan because “it makes me feel good” (although that is certainly a side effect)… i want to loan because i want to help remove world poverty and “i” feel, it is better done without charging interest…

i really do think there is no “simple” answer… but i am personally wavering towards giving via methods that do not give me an interest back… others might feel differently…