Recap on Interest Rates
If you're new to Kiva, let us break it down for you like this:
1. When you make a loan to a Kiva entrepreneur, 100% of your loan funds are received by Kiva.
2. Kiva then passes 100% of your loan funds to the Field Partner (microfinance institution on the ground that Kiva has partnered with)
3. The Field Partner passes 100% of your loan funds on to the entrepreneur
4. When the entrepreneur repays the loan, the repay the principal loan amount (this is the amount listed on the Kiva website) plus interest to the Field Partner
5. The Field Partner passes the principal loan amount to Kiva
6. Kiva passes the principal loan amount back to all lenders who contributed to the loan.
Why do Kiva's Field Partners charge interest to the entrepreneurs?
Each Field Partner is an organization with staff and operational expenses, including the cost of processing each loan application, collecting loan repayments, and generally running a microfinance institution. In the same way that you or I would pay interest to a local bank that we loaned from, Kiva entrepreneurs pay interest to the microfinance institution that facilitated their loan. (Note: Kiva Field Partners don't pay any interest to on the debt capital they receive from Kiva Lenders which does reduce their cost of capital; however it doesn't reduce their many other costs associated with lending and posting loan requests to Kiva's website.)
The interest rate charged to Kiva entrepreneurs is very important to everyone involved in Kiva:
- Kiva will not partner with microfinance institutions whose interest rates, we believe, conflict with our social mission. Before partnering with any microfinance institution, we examine their interest rate as part of our due diligence, to ensure it is fair for the services provided given the region they are operating (for example some microfinance institutions couple business training with loans, which inflates their interest rate, or operate in areas where significant taxes are imposed, which also inflates their interest rate.)
- Many Kiva Lenders want to ensure that they are making their Kiva Loans through microfinance institutions that charge an interest rate that they feel comfortable with.
- Kiva Entrepreneurs need to be sure that the interest rate they are being charged is something they can afford.
- Kiva Field Partners need to charge an interest rate that will ensure their long-term sustainability and cover their operating costs, and not leave them operating at a loss.
OK, so what's new about Interest Rates?
We're currently working on better reporting of the actual costs that Kiva entrepreneurs pay to Kiva Field Partners.
While reporting the costs to Kiva entrepreneurs might seem simple - just by listing the interest rate - it is actually more complicated than that. In the same way that loans you or I access from a bank have fees associated with them, loans through microfinance institutions often have a fee in addition to the interest rate. Also, an interest rate on a loan might differ according to the length of the loan - so a 6 month loan might have a higher interest rate than a 9 month loan. This can make it difficult to list an interest rate on the Kiva website which is truly representative of the actual cost to the Kiva entrepreneur.
Commitment to transparency is a fundamental philosophy at Kiva, and it is very important to us that Kiva Lenders can easily discover the cost of each loan to Kiva entrepreneurs.
How will the Interest Rate change?
We are going to replace reporting the Interest Rate, with reporting the Portfolio Yield. This is much more than a name change - it's a different number altogether.
The Portfolio Yield is defined as all interest and fees paid by entrepreneurs to the Field Partner divided by the average portfolio outstanding during any given year. That would give a more accurate representation of the cost to each borrower of a loan from that portfolio of loans through that microfinance institution, both by including fees paid (not just interest paid), and by annualizing the interest rate.
Is that the only change?
No. Until now we have offered the local money lender interest rate as a comparison for each Field Partner's interest rate, so that Kiva Lenders can compare costs of different lending options available to Kiva entrepreneurs.
We will be replacing the local money lender interest rate with the average interest rate and fees charged by MFI peers in the country. We believe this will give Kiva Lenders a much more accurate comparison when considering the costs associated with loans through any Kiva Field Partner.
When will these changes take place?
These changes are live on Kiva right now. You can see the Portfolio Yield for any Field Partner here.
Where can I learn more?
To learn about this change, click on our Help Center, selet "Our Field Partners" and then "Interest Rates".
Kiva's commitment to transparency is one of our highest priorities, and we hope these changes both demonstrate this commitment, as well as provide informative and useful information to the Kiva community.
Gerard manages Kiva's Partner Product Team, working on tools for Kiva's Field Partners, staff and volunteers. His passion for social enterprise led him to Kiva in 2008 after a stint in Washington, DC working for First Book, a nonprofit organization that distributes new books to programs serving children from low-income households. Gerard graduated with a B.A. in History from St. Thomas Aquinas College in Sparkill, NY and now lives in Oakland, CA.