Monday, January 23, 2012

Ending Poverty

Recently, a friend of mine posted a link on Facebook. He was looking for a charitable way to help out the less fortunate, and came across a website called Kiva provides microloans to third world nations, and in turn provides you with their stories and updates about how the money is being used. His post, and my response is as follows:

"This seems like a pretty good idea. Has anyone done it?"
Kiva - Loans that change lives
Make a loan to an entrepreneur across the globe for as little as $25. Kiva is the world's first online lending platform connecting online lenders to entrepreneurs across the globe.

I took 15 minutes or so, and poked around their website for more information. Does the loan pay interest? Who are we helping? What are the terms? On the surface, it seemed like a really cool idea for people to help other people who didn't have much. Upon investigating, it seems that you don't loan the money to those who need it--they already got a loan from a bank. You're loaning the money to the bank that lent to them. I posted my response:

"I just read up on it, and I'm not sure I get it. Basically, it sounds like you assume the real lender's risk with no reward other than feeling good about helping the less fortunate. Instead, I recommend digging a hole, throwing fistfuls of cash into it, and burying it. There is less risk (although I suppose you *could* forget where you bury it), and similar reward."

"Um...or maybe donate that rotting money to something? I think that "feeling good about helping the less fortunate" is the whole thing."

Now, I'm all for helping the less fortunate, but I don't consider bankers to be "less fortunate" in general. Allowing them to get a reward while good people assume the risk seems, well, I'll just let the story tell itself.

"I would argue there are better charities to give to than assuming lender risk, which is flat out financially incompetent."

"It's 25 bucks. That's not a lot of risk. If you give to any charity, you expect physical return on your "investment.". Seems to me, with this there is a shot the money comes back so you can help someone else. I've got no stake in the thing, least of all return on investment."

My point was you aren't really giving the money to them. They've already received the money from real lenders. You're lending the money to the lenders, thereby assuming their risk. THEY ARE CHARGING INTEREST. Why would you assume someone's risk while letting them reap all the profits?

Now, if they offer reduced interest rates to the organizations BECAUSE of generous souls who assume most of the risk in the loan, that's another matter entirely. Somehow, I doubt this is the case, but I only spent about 15 minutes reading on their website. IF that were the case, then it's a pretty cool organization. If it's a third party that just finds suckers to assume risk on debts for nothing, well, I would encourage you to spread your good will elsewhere.

J seemed disinterested in talking about the matter further. Maybe it was something he found that he thought was cool, and didn't feel like debating it. Hopefully I didn't piss him off somehow. (If he still reads my blog, I guess we'll find out).

I decided to test my theory about lower interest rates being provided since they were essentially providing risk free loans. Here's what the website offered me:

"As of September 2011, the average interest rate and fees charged by Kiva's Field Partners is about 37%."

37-FUCKING-PERCENT?! They can do this because the areas they are "servicing" don't have access to banks. Predatory lenders offer better rates.

I suggested that if he really want to help these people, donate $25 to an organization that will just GIVE impoverished people the money, with no requirements to pay it back. Much less pay it back at an insane interest rate that will help to keep them impoverished.

I found one more little tidbit from their website. It confirmed my speculation that they did indeed offer lower interest rates because of the interest-free pool of wealth they were collecting from Kiva donors.

"Kiva lenders allow microfinance institutions to access capital at 0% interest; this can help our Field Partners offset their operational expenses and keep their interest rates low."

Given they are charging 37% interest on the average, I find this hard to believe, but then again, I'm not exactly an "expert" in microloans to 3rd world countries. Maybe that's a pretty sweet deal there. I'd hate to see what rates the predatory lenders charge over there.

In case it is, my argument remains that we need to find a better way.


Erica Hildebrand said...

Hi Ben!

This makes me sad; I didn't realize Kiva used such practices. My only experience with them was from a few years back--I made a donation in a relative's name as a Xmas present for said relative. This was back when a microloan financier won the Nobel Peace Prize and it all seemed rosy.


my daddy always said if it sounds to good to be usually is..

Dr Pepper crushed and put Dublin Dr Pepper out of business..bastids.

Ben said...

Sadly, I must report that Kiva is probably the best of the bunch that I've found so far. And don't get me wrong, it helps, PROFOUNDLY. I just think we can do better.

@Yellowdog Granny, I had never heard of Dublin Dr. Pepper before. After some quick research, it sounded like good stuff. I'm always in favor of cane sugar over corn syrup.