Q: How much does Kiva charge Field Partners for access to its lenders’ capital?
A: Kiva and its lenders do not charge any interest to Field Partners.
Q: How much in loan fees and interest payments do Kiva’s Field Partners charge borrowers, on average?
A: The overall average portfolio yield for Kiva’s Field Partners is currently 34.8%. And due to the expense involved in making small loans
, on average our Field Partners do not cover their costs without grants and other subsidies. (The average return on assets, or ROA, is -0.68% for our active Field Partners.)
In the past several years, Kiva has also added 80 Field Partners that are either experimental partners or non-MFIs. The average interest rate for these new partners is just 10.4%, and over 30 of them don’t charge any interest at all. (It’s worth noting that most of these interest rates are unaudited and self-reported, since they aren’t MFIs and thus aren’t on MIX Market
Additionally, Kiva has developed Kiva Zip, which currently operates in Kenya and the U.S., providing borrowers with 0% interest and no fee loans.
We plan to continue working with both MFIs and other partner organizations to help lower the cost of capital for borrowers.
Q: What process does Kiva have to ensure its Field Partners are offering a fair and appropriate interest rate?
A: Kiva chooses to only partner with organizations that have a social mission to serve the poor, unbanked, and underserved
. We also require that all of our Field Partners endorse the Smart Campaign’s Client Protection Principles
, an industry-wide initiative to establish a baseline for responsible microfinance (or explain why they’re not). So far, the vast majority of our partners have endorsed the principles, helping safeguard borrowers against over-indebtedness and ensure transparent pricing for borrowers.
So how do we ensure that our partners are adhering to the "responsible pricing" principle? Each year, we review our Field Partners’ financials and calculate the return on assets (ROA) and portfolio yield, adjusted for inflation. We then evaluate our partnerships to ensure that there is a sound justification for each relationship. Our Field Partners with the highest portfolio yields and return on assets, in addition to those with a real ROA above 5% and a Field Partner Premium* above 30%, are subject to additional scrutiny, such as collecting compensation information for executive staff, reviewing loan schedules and calculating APR on all loan products.
* Field Partner Premium = portfolio yield adjusted for inflation - financial expense
Based on this information, Kiva has chosen to exit relationships with partners where the justification for their pricing could not be established.
Q: Why aren’t interest rates in microfinance always as low as you can get from a bank in the developed world?
A: Microfinance interest rates are usually higher than a bank in the developed world, because microfinance lending tends to be more expensive.
All lending institutions have three main costs associated with lending:
Cost of funds (like most banks, MFIs need to borrow money from sources that charge their own interest rates)
Loss from defaulted loans
The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent -- just as they are in more developed countries. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of $100, and $55 for a loan of $500. An interest rate of 11% of the loan amount would thus cover both these costs for either loan.
The third type of cost, transaction costs, is not proportional to the amount lent. A loan for $500 and a loan for $100 require roughly the same amount of work to administer:
Staff time for meeting with the borrower to appraise the loan
Time to process the loan disbursement and repayments
Cost of follow-up monitoring
Transaction costs can substantially drive up the effective interest rate to microfinance borrowers. Suppose that the transaction cost for a loan is $25 per loan and the loans are for one year. Given the formula:
(cost of funds) + (overall defaults) + (fixed transaction costs)
cost of administering loan
The MFI would need to charge 16% on a $500 loan to break even:
($50) + ($5) + ($25) = $80 cost of administering loan
$80 total costs / $500 loan = 16% interest rate
Or 36% on a $100 loan to break even:
($10) + ($1) + ($25) = $36 cost of administering loan
$36 total costs / $100 loan = 36% interest rate
To compound matters, less-developed countries typically have higher inflation rates, which need to be factored into the interest rates that financial institutions charge. For example, an interest rate of 20% per annum in a country where inflation is 22% per annum would not cover costs. The interest rate charged by the institution would need to be greater than 22% in order to simply cover the cost of inflation, let alone the other operational costs.
At first glance, all these rates may look extreme, especially when the clients are financially poor. But when loan sizes get very small, transaction costs loom larger
because these costs can't be cut below certain minimums. And since many of our Field Partners serve communities in rural areas, the labor of distributing and collecting loan payments adds to the organization’s operational costs. For additional info on this subject, we recommend these blogs written by Kiva Fellows: “Bad Roads, Interest Rates, and MFI Sustainability
,” and “The Last Mile
Despite these factors driving up interest rates, the average portfolio yield for Kiva’s Field Partners has held at roughly 35%. And as mentioned earlier, due to the expense involved in making small loans
, on average our Field Partners do not cover their costs without grants and other subsidies. The average return on assets (ROA) for our active Field Partners is currently -0.68%.
We firmly believe that sustainability is critical for solutions to alleviate poverty, and socially-driven organizations that charge interest to make ends meet are a part of that picture. Otherwise people are left with fewer options or opportunistic lenders that charge interest to maximize profit.
Q: Where do interest rates tend to be the highest?
A: Our partners with the highest portfolio yields are typically operating in difficult markets -- often in post-conflict regions. One of the reasons why Kiva chooses to work in post-conflict areas is because there’s typically a lack of affordable capital in these regions.
In a post-conflict environment, communications and transportation infrastructure are often severely compromised, making it more expensive to contact and visit borrowers and manage an MFI. Furthermore, the risk of default is higher in post-conflict environments. This is partly due to continued instability, which can make it difficult for borrowers to operate successful businesses.
To manage this enhanced risk of default, MFIs in post-conflict areas must put aside a larger portion of their available capital as a provision against loan losses; a costly but necessary means of ensuring that they have sufficient funds to continue to operate when faced with defaults. Due in part to these realities on the ground, and in part to funders' reticence in investing in unstable countries, the cost of funds is higher for MFIs in post-conflict areas.
When partnering with organizations in post-conflict regions, Kiva is especially diligent in evaluating the social impact of the partner and how a lending program will help the people in the region rebuild after often devastating circumstances.
Q: What is Kiva doing to drive down the effective interest rate paid by borrowers?
A: The Economist recently reported
that microfinance interest rates have climbed from 30% in 2004 to 35% in 2011. This increase was partly driven, as the article states, by the “cost of funds going up by 70% for low-end MFIs.” This means that MFIs focused on borrowers with an average loan balance of less than $150 USD are themselves being charged more by banks for the capital they lend to their clients. (Source: “Microcredit interest rates and their determinants: 2004–2011”, by R. Rosenberg, S. Gaul, W. Ford and O. Tomilova
.) By offering MFIs a 0% cost of funds, Kiva has been able to help lower the average cost of capital in microfinance.
We’re also working with our Field Partners as part of the Microcredit + Low Interest Rate initiative
to develop new loan products at a lower interest rate than their standard counterparts. For example, our partner Caja Rural Senor de Luren developed a water and sanitation loan product at a reduced rate that Kiva lenders are now funding for homes across Peru. And in Cambodia, we worked with our partner Hattha Kaksekar Limited (HKL) to develop new loan products for biogas digesters that serve farmers at a lower interest rate.
Additionally, Kiva has launched an innovative program called Kiva Zip
to offer 0% interest loans directly to borrowers in Kenya and U.S. These loans are offered in close cooperation with local “trustees” who vet and endorse each borrower. The funds are then delivered over mobile phones. The combination of local trustees and mobile phone delivery have enabled us to help drive down the high fixed transaction costs usually associated with microloans.
As a result, Kiva Zip has been able to offer the first 0% loans available directly to borrowers. Our hope is that innovations like Kiva Zip (which use trust networks and technology to lower interest rates) will drive down costs to borrowers in the years to come.