Yesterday, I received an email from a friend and fellow Kiva fan with a link to a blog posting called Kiva Is Not Quite What It Seems.  The author of the blog is Center for Global Development research fellow David Roodman, who calls Kiva out (directly, but dispassionately) for hiding truths about its lending scheme.  Kiva’s site and many of its members would have summed Kiva up as I did in an email I sent to my family and friends, telling them about why Kiva is so great:

Let’s say you log on to Kiva’s website: you click on the link that says “View All Entrepreneurs”, and you begin to read about Lann, a woman in Cambodia who seeks a loan of $1000 to expand her family’s vehicle-washing business.  Other Kiva lenders have already disbursed $900 to Lann, and you decide that you would like to lend $25.  You create a lending profile on Kiva, put $25 on your credit card, and watch Lann flourish!  Lann pays interest on the loan to her MFI in Cambodia, but Kiva lends at a 0% interest rate.  When Lann repays your $25 you will get that money back – “in your pocket”, or to re-issue to a Kiva borrower!

The beauty of this system is that, with the creation of a PayPal account and a few clicks of your mouse, you can feel directly connected to Lann in Cambodia, and to the success of her business.  However, as David Roodman reveals, this appeal is an illusion.  The truth is that Lann has probably already gotten the full $1000 loan, and the $25 put on your credit card will likely be issued to another entrepreneur by the MFI in Cambodia.  Roodman speculates that most of Kiva’s lenders are attracted to Kiva’s model because of its ‘real-time’ link between themselves and individuals in the developing world.  Indeed, as is made evident by responses to Roodman’s article, some Kiva lenders feel misled by Kiva.

In a rebuttal to Roodman’s article, Kiva co-founder Matt Flannery concedes that in facing the “… challenge of communicating to our user base regarding the mechanics of how Kiva functions”, Kiva may ‘gloss-over’ the intricacies of its process in order to connect to lenders.  He admits that the basic flow-chart explanation of the lending process on Kiva’s website was misleading, and has been updated.  Still, however, he maintains that it’s necessary to engage the online community with a simplified explanation of Kiva-style microfinance, and then introduce the complexities further in to the process.  I think that because it encourages Kiva supporters to do further research, this gradual transparency is a good thing.

Admittedly, this dialogue elicited a few worries within me.  Upon reflection, I worry about having spent months poring over Kiva’s model, and not once questioning the disparity between how Kiva claims to connect its borrowers and lenders, and how those parties are actually connected.  When I loaned $25 to the Siempre Amigas group in Ecuador, I knew full-well that their MFI (Fundación ESPOIR) probably already distributed their requested loan.  But I liked to imagine what the borrowers would be doing with my contribution to their loan.  And in preparing for my work as a Kiva Fellow, I have been highly motivated by the thought that I can directly connect lenders and entrepreneurs.  So if I cannot operate under this illusion, where does that leave me, and other lenders, and Kiva as an organization?

Excited about what this means for Kiva, and for the role of microfinance in international development.  Here’s why:

Part of the required pre-departure reading for Kiva Fellows is Matt Flannery’s contribution to the 2009 Skoll Foundation’s Innovations Report (read “Kiva At Four” ) which talks about Kiva’s evolution since it was founded in 2005.  Matt prides the organization on its ability to clear even large hurdles, and on having made some pretty monumental progress.  Continuing on this track, Kiva would like to continue growing exponentially, expanding its user-and-outreach base into the tens of millions, and turning out products beyond microfinance, like insurance and savings programs.  This may seem far-fetched, because Kiva’s presence (and that of the microfinance industry in general) is very small on the world financial stage.  But with statistics like 97.88% loan repayment success and annual loan-disbursal growth rates of 300% (see Cumulative Volume of Loans), Kiva is poised to take a leading role.  Criticism like Roodman’s and the big-time buzz that follows are the sorts of catalysts Kiva needs.

When I reassess why I am a supporter of the organization and realize that I am supporting a business – well, multiple layers of business, actually – and not just a charity, I become motivated to look past the first page of Kiva’s website at the more complete story.  I realize that in terms of social activism I want a lot of BANG (seeing the face of the entrepreneur and reading their borrower profile) for my BUCK ($25, which I am over 98% sure to get back); but I also realize the impact I have as a lender, rather than as a donor.  I realize that even if the women of Siempre Amigas do not receive my money, other entrepreneurs in their community will receive that money through Fundación ESPOIR, and that the accumulation of increased capital flowing through Cuenca, Ecuador can support all of their businesses.  Beyond the expansion of their businesses, borrowers are building legitimate credit history through the Fundación ESPOIR, and are benefiting from the “health and financial education” programs supported by the MFI.  Digging deeper into the I realize the true impact of Kiva as an investment opportunity.  As Roodman’s article implores us, I agree that every Kiva member should dig deeper, and this is how the Kiva community can begin to bridge the mind gap between ‘doing good’ and ‘doing well’.