I’ve been looking for alternative investment opportunities for years. I am not a fan of the stock market, and my timing does not seem to ever line up with real estate possibilities for me. This morning I remembered watching a thing years ago about microloans. It sounded like a great idea: support small businesses, help people in developing countries, and make a small profit in the process. When I searched online, the only opportunity I found (easily) was Kiva.org. On the surface, Kiva fits the bill perfectly: they connect lenders to borrowers all over the world to help them with business, school, or social change. They emphasize that “it’s a loan, not a donation.”
But as you can probably guess, there’s a problem. Surprisingly, it’s not any of the “controversies” published on their wikipedia page. Here’s how it works:
- A small business or individual takes out a loan from a “Field Partner” (which is just a local lender) at a standard interest rate for the area.
- The Field Partner sends the information on the load to Kiva
- Kiva posts the loan for its users to invest in.
- Once the loan is funded it sends the money to the Field Partner to underwrite the loan.
- The Field Partner collects payments including interest from the borrower
- Money is returned to the Kiva lenders according to a repayment schedule.
- If at any time the loan is defaulted, the Kiva lender loses out any further repayments
Notice what is missing here: the Kiva lenders never get any interest from these transactions. So what you actually have is some lender getting paid healthy interest rates for loans that he gets underwritten for free by chumps in the US, essentially giving him free money with no risk. You’re not supporting small businesses buying a few more chickens to improve their small egg farm, or a woman trying to buy another sewing machine to improve her clothing manufacturing business. You’re actually helping the equivalent of the 1% improve their lot with those small businesses potentially as a side effect.
“Not a donation” my eye. Not a donation to the borrowers, at least.