Adventures of an African Microfinancier

The road to Kihihi, in western Uganda, is like a curvy woman playing the risky game of simultaneously toying with two very bad and dangerous men, thrusting her bottom into one man and flashing her bosom at the other man. As the rough, dirt track wavers back and forth, it flirts a little too boldly with the Congo border in one direction and way too precariously with several precipitous cliffs in the other one. Sure it may be exciting, but crossing the line with one of the men is likely to get you raped and if you take it a step too far with the other one you’ll be smashed to pieces.

Whenever the road took me west, I found myself fixating on a story from a book about Dian Fossey. A friend of hers in Rwanda was expecting a visit from her sons, who were driving from Nairobi, but the boys never arrived. She learned later they had taken the wrong road out of Kisoro, in the far southwest corner of Uganda, and without knowing it until it was too late, ended up in Congo. The boys were never seen again, and to this day no one knows exactly what happened to them. More than once I checked my handheld GPS unit to confirm I was still in Uganda.

On the eastern brink of my razor’s edge I got trapped between two lorries, one ascending and the other descending. I inched forward past the truck that was blocking my way, my outer tires riding the roots of the trees growing horizontally from the face of the cliff. I had to pull the sideview mirror inside the car after it hit the front bumper of the stationary truck. Anyone watching from across the ravine must have seen a cascade of dirt and pebbles tumble down the cliff and probably wondered if I would follow.

I was doing this dangerous dance because I had to check on an investment. I had recently lent $25 – through the internet – to a man named Henry Twinomugabe. I had found Henry through Kiva, a non-profit organization that markets itself as a platform for connecting “developing world entrepreneurs” with “social investors worldwide.” But Kiva had recently been caught in a small scandal for falsifying the way that it operates in order to attract more lenders and their capital. It was no longer clear that my money had actually gone to Henry, as Kiva had very explicitly encouraged me to believe.

The original controversy began on October 2, 2009 when David Roodman posted an article he called “Kiva Is Not Quite What It Seems” on his microfinance blog at the Center for Global Development. Kiva, he explained, does not actually take the money that you lend and distribute it to the borrower you select. In fact, most loans are disbursed long before the borrower’s profile is even posted on Kiva’s website, shattering the illusion of person-to-person philanthropy that so many lenders value and that Kiva itself worked so hard to conjure. Kiva had become immensely popular in recent years – lauded by Oprah Winfrey and tweeted about by Nicholas Kristof – so the allegation that it had been deceiving its users attracted attention. The blogosphere, like the photosphere, was alight.

The volume of the chatter continued to rise as more and more disgruntled lenders posted angry comments of disillusionment. Eventually the clamor reached the ears of The New York Times, which ran a short article on November 9, 2009. I was reading along from Uganda, and by now I had made my small loan – it was time to pay Henry a visit and learn what had become of it.

***

I began by locating the offices of Pearl Microfinance in Kihihi, but it was late Saturday afternoon and the doors were locked. I called each of the three phone numbers on the impressively clean sign that was staked into the uneven, dusty lot, and finally I reached a man in the Kampala office who quickly and amicably gave me the number of the manager in Kihihi, a man named Reme. He was not at the office but would be happy to meet me there in two hours.

Pearl is a microfinance institution, one of Kiva’s local partners in Uganda and, as I learned from Kiva’s website, the one administering Henry Twinomugabe’s loan. Kiva got itself in trouble by misrepresenting the way it and local MFIs, like Pearl, interact to fund borrowers. On its webpage titled “How Kiva Works,” the organization used to outline a very simple process in which: 1) Lenders “browse profiles of entrepreneurs in need, and choose someone to lend to;” 2) “Kiva’s microfinance partners distribute the loan funds to the selected entrepreneur;” and 3) “Over time, the entrepreneur repays” the amount of the loan to the original lenders. The page has been updated since it was revealed as a gross oversimplification, and now it is a longer description of a more complicated process, including accounting terms like “net billing.” Damningly, the current version existed all along, but prior to the scandal Kiva only used it when marketing itself to new MFI partners, as Tim Ogden revealed on his website Philanthropy Action.

In reality, Pearl had disbursed Henry’s loan a month before his profile was uploaded to Kiva’s website. The closest my loan came to contributing directly to Henry Twinomugabe was in backfilling the accounts of the MFI that had actually lent him money. My loan may have helped to assure the continued solvency of an MFI that Henry can return to for future loans, but it would be a stretch if not an outright fabrication to claim that I lent money directly to Henry, as Kiva’s marketing clearly suggested. And continues to suggest: after making my loan on December 10, 2009 – more than two months after the controversy began – I received an email confirmation from Kiva which stated, “100% of every dollar you have loaned will be used by your entrepreneurs to build their businesses.”

My email also explained, “When the loan needs of each entrepreneur you have sponsored are met, you will receive a confirmation that the loan has been disbursed to the entrepreneur. This may take a while after your individual loan transaction was made, as we may need to wait for other lenders to contribute before the total requested loan funding is raised.” A disgruntled commenter in the blogsphere succinctly summarized the deception, venting a little frustration in the process. “Kiva gives the impression that if lenders do not fund a project, that project will not happen. Right now there’s a project with $250 left to go, and it ‘expires’ in 8 hours, 15 minutes. That gives me a sense of urgency. I might even give the whole amount. But if the loan has already been made, then the ‘expiration’ isn’t true.” It is true that if Kiva lenders do not pledge the full loan amount then the MFI that predisbursed it will not be reimbursed, but that is very different than Henry not getting his loan because I opted not to lend my $25.

Reme, at Pearl, was friendly and welcoming. He gave the impression it was totally ordinary for a lender to want meet the person he had lent to yet at the same time so wonderfully extraordinary of me to take the time and spend the money to come all the way to Uganda to meet Henry, whom he recognized immediately from the photograph and profile I had printed from Kiva’s website. He certainly knew of Kiva, since he manages the field staff who take the photos and write the profiles, but he did not seem to be aware of the recent controversy.

For all his warmth, Reme had his suspicions about me. After we had spoken for a few minutes he telephoned a woman in Kampala he called “my CEO.” They spoke about me in a way that made it clear they had already spoken about me before I arrived. After their phone call Reme and I continued our conversation freely, and Reme said that Sunday morning would be the perfect time to try to find Henry, since everybody stays close to home on Sundays.

***

I picked up Reme at Pearl’s offices, where he and the accountant live in two of the outrooms on the back lot. Though it was early on Sunday, the small building was impressively active. A few of the field staff had returned late on Saturday; one of them had been in a small accident on the way back, and he was inspecting the dented motorcycle to determine what repairs might be needed. The accountant, George, was up too, because, he said, he never gets the chance “to go to the field,” and he thought it would be a good opportunity to go with Reme and me. He was eager to meet the people he knew so well on paper, and his enthusiasm was endearing. Similarly, Reme said he likes his job because “I get to see people improve their lives.”

They gave me a running tour as we drove to Kanoni, the tiny mountain hamlet where Henry lives, about an hour from Kihihi near the Bwindi Impenetrable Forest. Pearl has clients in nearly every village we passed, and the men knew them all by name. Reme would describe the borrower’s business, and George would comment on his or her repayment rate, invariably perfect. More than once a villager recognized one of the men and waved as we drove past. In between their presentation on the countryside and all their clients, Reme and George asked a few questions about me. When I told them I was from “a small state called Kentucky,” Reme said, “Oh, the Tennessee Valley Authority,” and George said, “…and Davey Crockett.” I wondered where they had learned their history, and if they were still stuck in it.

For the most part, Reme and George were refreshingly frank, but the one question they dodged was about the interest rate that Pearl charges its clients. They vacillated, Reme said I would have to ask “my CEO,” and finally George explained something about 2% that made little sense and seemed highly unrealistic. According to Kiva’s website, an excellent source of information about all of its MFI partners, Pearl charges its borrowers an average interest rate of 47%, a little less than the national mean of 51%. It is an astoundingly high, seemingly usurious interest rate, but Roodman justifies it by saying that it is normal for the poor “to have to make do with lower quality services,” which may be better than no services at all. Prior to MFIs, the poor had to borrow from often cutthroat informal money lenders who were able to get away with charging whatever they wished. Sasha Dichter, in his eponymous blog, affirms that “one of the many important things microfinance is doing is treating poor people as customers who deserve a certain level of service and respect.” Henry may have to pay 47% interest, but relative to the local market it’s a good deal.

While Kiva is a non-profit organization, Pearl and many other MFIs are decidedly in favor of profits, which does not necessarily make them profitable. Roodman called it “the big economic challenge” of microfinance: “keeping costs reasonable relative to the small loan sizes.” High overhead for the MFI becomes high interest rates for the end borrower. According to its website, Kiva helps by providing interest free capital to MFIs at an administrative cost of “less than 1% as a factor of capital raised.” Kiva’s “main role besides operating a website,” then, “is to screen, rate, and monitor” each of its MFI partners.

Essentially, Kiva claims that it adds value to microfinance by increasing trust, a bold claim from an organization that uses a deception, however slight, to raise funds. To be fair, Kiva is lauded for its usual transparency. It tabulates extensive statistics on all of its MFI partners, and it reacts quickly to any allegations of corruption. It has admitted its missteps publicly, and for that it has been rewarded by lenders who appreciate its candor. A number of commentators have suggested that the world would be a better place if the United Nations and other agencies were as transparent as Kiva. If lending were truly person-to-person, lenders could decide for themselves whether to trust borrowers. But there are at least two intermediaries between the lender and the actual borrower, Kiva and the MFI. Believing that Kiva is regulating the MFIs, which theoretically ensures that they in turn are monitoring the borrowers, lenders do not need to trust borrowers. They only need to trust that Kiva and its MFI partners are policing the system faithfully.

In Kanoni we were given a festive reception. When I stepped from the car, a very old and hobbled woman with white buzz cut hair giggled, hugged me, and tried to get me to dance along with her to the music that must have been playing in her head. The “community chairman” introduced himself and explained that the village was replacing its robusta beans with arabica because there was less and less rainfall in the region. And I met Henry, which, when I had set out on my weekend journey, was more than I expected would happen. Given the scandal surrounding Kiva and my skepticism of any African moneylender charging nearly 50% interest, I had wondered if Henry existed at all. Twin o’ Mugabe? – surely that’s the alias of a cheeky crook, I had thought.

But Henry existed, and he was not alone. I knew that I had selected a group of borrowers to lend to, but I had not understood what this meant. I had assumed, incorrectly, that they were business partners, all engaged in the same endeavor and all intending to put my money to use in their shared business. True, Henry’s profile page on Kiva’s website has a very clear disclaimer which explains that “in a group loan, each member of the group receives an individual loan but is part of a group of individuals bound by a group guarantee.” But this is another example of how the person-to-person connection Kiva tries to portray does not actually exist in any meaningful way. I chose Henry because I wanted to support his particular business: tea farming.

Certain other businesses I did not wish to support: retail, for instance, because Africa already has too many small shops selling the same goods, and charcoal production, because Africa also has enough deforestation. When I met Henry’s group, I asked each of them to tell me how they had used the money they had received. Onasmus had bought goats. Richard opened a butcher shop, perhaps eyeing Onasmus’s goats. Peace and Thomas each bought tea leaves from remote farmers to sell to the local factory at a profit. Esther and Tindyebwa each bought two acres of already planted tea. Henry, whose profile on Kiva said he intended to use his loan “to renovate his tea plantation for increased income,” bought new stock for the small shop he had in the village: retail. And Annette, who had replaced Henry as the group’s leader sometime since I had made my loan, paid her children’s school fees, which she was plainly a little ashamed to admit. And she made charcoal. Kiva had encouraged me to shop for a business that I wished to finance, but in the end very little of the group’s borrowed money actually went to tea farming. Some of it went to the very activities I sought to avoid supporting.

Annette’s group was young and growing fast. When they were still Henry’s group, they were only nine members. When I met them a month later, they were 22 borrowers. Kiva has had nothing to do with the group’s growth, which Pearl has financed from other sources of capital. Another ten or so prospective members joined our discussion under the tea shed, almost certainly convinced by the presence of a foreign funder that Pearl really could work miracles. None of the group members understood where their money had come from though one said to me, “We knew you would be checking in us.” She said it so confidingly I could not help but feel she had been waiting literally for me. Most of them assumed their loan had come ultimately from the government. It is unfortunate borrowers do not know their loans come from foreign lenders because it is one more way in the person-to-person potential is being wasted. Perhaps the world would be a friendlier place if borrowers knew that strangers across the globe cared enough to fund their loans. As it is, the people I met did not know that their photo and story had been on the internet for all to see and read.

The group in Kanoni had formed as a community-based organization in August of 2009, satisfying a legal requirement for accessing group microfinance loans in Uganda, and the same month they applied for their loan with Pearl. They attended four training sessions with Pearl field staff during the next few months, and the loan finally was disbursed on November 17, 2009. It appeared on Kiva’s website on December 10, 2009, and it was fully funded on December 11, 2009, meaning Pearl would be reimbursed for the funds it had already given to the group.

The process of funding the loan through Kiva was lightning fast, and the time that it took to get the already disbursed loan posted on Kiva was a little less than a month. By far the slowest part in the process – three months – was the time it took for the local MFI to approve and disburse the cash, which raises questions about Kiva’s primary defense of the false person-to-person connection it markets.

Matt Flannery, the founder and CEO of Kiva, wrote a response to David Roodman’s initial blog post, the one that sparked the controversy. In it, he argues that it would be bad business to make borrowers wait the extra amount of time it takes for their loans to be funded through Kiva. “Good MFIs are client-drive. To make their clients wait unnecessarily would [be] bad customer service.” The pundits have all agreed. Sean Stannard-Stockton, writing on his blog Tactical Philanthropy, maintains that the “prefunding approach is better for the entrepreneurs that Kiva’s users are trying to help.” Ogden says plainly, “The way that…Kiva actually operate[s] is the way [it] should operate.”

But it is hardly Kiva – with its nearly instantaneous funding – that is the drag on the system. It is the local MFI that takes three months to disburse the loan and then nearly another month to post it on Kiva. If the borrowers can wait all this time for the MFI to do its part, surely they can wait the additional blink of an eye that it takes Kiva lenders to do theirs. To suggest otherwise is to play the part of the crazed entrepreneurial hitchhiker in the film There’s Something Mary who says that “seven minute abs” is brilliant but that “six minutes abs” is just preposterous. If borrowers can wait three months for their funds, why can’t they wait one more? Especially if it allows Kiva to provide a true person-to-person connection between lender and borrower? Thereby attracting even more lenders? And funding even more borrowers?

A person-to-person connection, in which donors interact directly with the recipients of their largesse, is the wet dream of most philanthropists. Donors are people, after all, and people want to feel like their money is making an immediate and personal impact. We want “to make a difference” or, to borrow one of Kiva’s slogans, we want to make “loans that change lives.”

Unrealistically, the urge for person-to-person philanthropy places no value on the organization that acts as the intermediary between donor and recipient. “It seems that donors simply see non-profits as bureaucratic intermediaries who play a necessary role of linking the donor to the recipient, but who otherwise should get out of the way,” says Stannard-Stockton. Unwittingly, donors encourage non-profits to commit little deceptions in order to appeal to the desire for person-to-person contact, like Kiva did. But “the best way for [Kiva] to operate does not fit donors’ preconceived notions about what is best. Therefore promoting the fact that they use the best process will almost certainly lead to less social impact.” According to Ogden, “Where we get into trouble is the donor’s demand for illusion – and even more so, the donor’s anger when the illusion they demanded that the non-profit provide is exposed.”

Roodman calls it the “the larger theme” of the Kiva controversy: “how our behavior as donors rewards charities for distorting and contorting themselves.” The philanthropic system, in essence, incentivizes fraud.

There is one way in which Kiva lenders have a true person-to-person connection to borrowers. If you back a loan that doesn’t get repaid, you don’t get repaid. But even this basic tenet of bookkeeping has been skewed by the largesse of Kiva’s lenders. For most MFIs, the repayment rate for the loans they post on Kiva is considerably higher than the overall repayment rate for all of their loans. Analysts think MFIs may be covering unpaid loans in order to inflate their Kiva repayment rate, securing a steady flow of cash from Kiva’s generous lenders.

In the end, the extent of the person-to-person connection provided by Kiva is from lender to microfinance institution, which is not the sort of relationship that makes a “social investor” feel much warmth. Tim Ogden asks the big question suggested by the debate about Kiva: “Do Kiva’s users want to be connected to a microfinance organization or do they want to be connected to a specific borrower?…If a user wants a connection to a specific borrower, then it is now clear that Kiva does not do that. If [a user] wants a connection to a microfinance organization, why do they need Kiva?”

***

But an even bigger question remains. Does microfinance work? The evidence, currently, seems to be no, though some researchers are saying more time is needed to know for sure.

Roodman points out that “not all Kiva borrowers are entrepreneurs, for example, nor empowered by microcredit, nor lifted out of poverty,” all of which are claims that Kiva makes in its pitch to lenders. In reality, “the poor,” according to Roodman, “often use loans to pay for food” or school fees. For many, microfinance is not about “people climbing out of poverty through microenterprise, but people doing what they need…to get by.”

In its regular column “Small Change,” the Boston Globe cites a study in which “neither household income nor spending” – the former “a key indicator of financial well-being” – increased for the recipients of microfinance loans. Researchers believe borrowers are so excited about microfinance because they are using the funds to pay off higher interest debts from informal moneylenders. They are using one credit card to pay off another.

Only one aspect of microfinance is known to work: microsavings, small savings accounts for the poor, which, according to the Seattle Microfinance Organization, “has been shown to increase average daily food expenditure, mitigate health shocks, and increase productive investment.”

In Kanoni, however, Annette, Henry, and their associates do not seem interested in saving a little money; they want to borrow a lot. No one in the group complained about the high interest rate they had to accept to access credit. On the contrary, nearly every one of them pleaded with Reme and George – and me too – to be allowed to borrow more money with their next loan. Clients taking their first loan with Pearl Microfinance are limited to a maximum of 300,000 shillings, about $150. Assuming successful repayment of their first loan, they can borrow as much as one million shillings the next time. All of the borrower’s in Kanoni are already dreaming of the day they can tap into the more voluminous fountain of cash, portending a frightening dependency on a cycle of very high interest debt.

Tags: Kiva