After grudgingly settling on the interest-free approach for the first two years, Flannery wrote that “we would still like to realize our original vision of having interest rates on the site. The fact that we had to remove them is a sore spot with me […​] Kiva thus continues its effort to allow our partners to post businesses to the site with interest rates attached.”

In that article, Flannery described how even in the early days of Kiva there was a fundamental tension about “whether it was better to be seen as a charity or as a business.” Neither Kiva nor its users have ever earned interest on the loans facilitated by the website, but that charitable nature is more an accident of history (encouraged by the bureaucratic hurdles erected by the SEC) than the design of its founders.

Kiva was founded in 2005 by Matt Flannery and Jessica Jackley, a husband-and-wife team working out of San Francisco. They developed the first version of the Kiva.org website while Flannery was employed as a programmer at TiVo and Jackley was employed at the Stanford Business School (where she attended a lecture by Muhammad Yunus which ignited the initial spark of inspiration). Two years after launching, Flannery published a retrospective about Kiva’s origins and development called “Kiva and the Birth of Person-to-Person Microfinance.”

3.2. Charity for whom?

Kiva’s founding tension was resolved by keeping Kiva itself purely charitable, supported exclusively by donations and grants, but partnering it with remote field partners who charge interest. That way the SEC was satisfied and the dirty business of collecting interest from people with no money was pushed to a more comfortable distance from the users of Kiva’s website.

But the impedance-matching function of Kiva, which converts interest-free loans made by Kiva’s users into interest-bearing loans collected by microfinance institutions, understandably produces a cognitive dissonance in its users. That double nature of loans given through Kiva, which are simultaneously charitable credit for MFIs and expensive debt for poor borrowers, is the source of the misconceptions I outlined in the first section of this essay, and it raises a question at the heart of the matter: who benefits from the free credit raised by Kiva? Does the incidence of Kiva users' charity fall mostly on the borrowers they intend to help? or does it fall more on the MFIs who accept the free credit and then turn around and loan it for gain to those borrowers?

Profitability among Kiva’s field partners tends to be rather modest (suggesting that Kiva prefers partners on the charitable/non-profit as opposed to self-sufficient/commercial side of the spectrum): over three-quarters of currently active field partners have a Profitability at or less than 4.3%. By comparison, one report that looked at interest rate data from hundreds of MFIs (not limited to, or necessarily including any, Kiva field partners) over seven years found that three-quarters of MFIs in 2011 had a rate of profit up to 20%. That same report noted that if every MFI set their interest rates to their break-even point (so that profits = 0), then the average interest rate would fall by only 2.6 percentage points (in other words, even if every MFI were non-profit, interest rates would still be quite high in many cases). That finding underscores the fact that microcredit is simply expensive.

The efficacy of microfinance at alleviating poverty has been a matter of research and debate since Muhammad Yunus founded the Grameen Bank in Bangladesh in 1983 (Yunus and the Grameen bank were jointly awarded the Nobel Peace Prize in 2006). The early anecdotal reports of success and the prospect of a business-friendly cure to poverty created an increasing excitement around microfinance for over two decades. But in recent years expectations have sobered.

In the past five years or so several rigorous studies which use a randomized method to compare the effects of microfinance on borrowers have appeared in the academic literature. The result of one recent survey of six such studies found that “The studies do not find clear evidence, or even much in the way of suggestive evidence, of reductions in poverty or substantial improvements in living standards. Nor is there robust evidence of improvements in social indicators.” But the same survey also found “little evidence of harmful effects, even with individual lending […​] and even at a high real interest rate.”

Kiva performs a degree of due diligence and monitoring of the MFIs it chooses to partner with which provides some protection against abuse. The measures Kiva uses to evaluate field partners developed out of some hard-learned lessons. In their first four years of operations they discovered six “situations involving severe fraud,” including one involving their very first partner, a Ugandan man named Moses Onyango, who was so instrumental in getting Kiva started that he is sometimes referred to as the third co-founder.

Among the MFIs Onyango signed up as partners in Kiva’s early days was one he founded himself, the Women’s Initiative to Eradicate Poverty (WITEP). It turns out that not all of the WITEP borrowers were real: some loans were being disbursed in the names of fictional people and pocketed by Onyango. Due to Uganda’s unresponsive legal system, Kiva never recovered the stolen money (but they did pay back Kiva.org users out of their own expense account, as well as maintain a policy of transparency about the fraud when it was discovered).

The kind of fraud Onyango perpetuated is not particularly worrying. He used the stolen money to buy a house for his family (and he was so grateful to Kiva for its influence on his life that he named his new son Matthew Flannery Onyango). What Onyango did was to cut out the interest-charging middleman and transform Kiva into the version of itself that users imagine it is: they lent money, helped out a Ugandan family, and got repaid.

Far more worrisome are legitimate MFIs who might use Kiva’s website as a place to sell feel-good stories to naive Americans for free capital with which they can go about their business of robbing the poor. It strikes me as much less likely that Kiva would discover and terminate its partnership with MFIs who overcharge borrowers, and in fact Kiva’s entire structure of funneling interest-free credit to interest-charging lenders almost encourages it.