Photo by: Tharum Bun

Riphin San, who oversees Kiva loans at CREDIT microfinance institution, enters information about CREDIT’s borrowers onto Kiva’s website.

The Players

Microfinance institutions

The first MFI in the world was called Grameen Bank. Its founder, Muhammad Yunus, was given the 2006 Nobel Peace Prize. Created as an alternative to “loan sharks,” traditional lenders to low-income populations who charge exorbitantly high interest rates to their clients in desperate need of money. In the past decade Cambodia has seen a major rise in MFIs. There are currently 23 MFIs registered with the National Bank of Cambodia and countless others that operate as informal lenders to Cambodia’s poor. Interest rates charged by MFIs tend to be significantly higher than market rates due to the high operating costs and risks of lending to poor, remote populations. In recent years some MFIs, particularly in Africa and South America, have been criticised for charging unnecessarily high interest rates and generally behaving like the “loan sharks” that they were meant to replace.

kiva.org

Founded by Matt and Jessica Flannery as the world’s first online lending website in 2006 as a person-to-person lending platform. 456,489 users have made over $139 million worth of loans to 355,291 entrepeneurs in developing countries. Claims to have a 98.15 percent repayment rate on its loans; however, MFIs were given the option of covering their clients’ loans if they default, inflating the actual performance of loans funded by Kiva. In October 2009, Kiva came under scrutiny for its failure to explain that loans were being approved before they were posted on Kiva’s website, meaning that the idea that the lender was making the loan possible was not altogether true. The website has since stopped calling itself a “person-to-person” lending site and now says “Kiva connects people through lending to alleviate poverty.”

Photo by: Tharum Bun

Women work the sewing machines in one of AMK’s “working groups”, which are partially funded by Kiva loans.

Cambodia has a very competitive microfinance environment, so organisations are continually looking ... to get ahead."

IN their 2008 annual report, Maxima Mikroheranhvatho Co Ltd, a relatively small microfinance institution (MFI) operating in Cambodia, reported that its return on equity (ROE) – the percentage of profit returned to their shareholders that year – had risen by 1.6 percent, up to 14.2 percent , after a five-year slide.

Achieving such a high ROE while lending in Cambodia – rated 137 out of 183 countries in the UN’s 2009 Human Development Index – is no small feat, and it seemed to be another success story in Cambodia’s much-celebrated and hypercompetitive MFI sector.

That year Maxima, which is funded in part by financial services firms, also reported an 81 percent increase in its total assets. What wasn’t highlighted in the report was that this growth was largely fuelled by its new partnership with the website Kiva.org, whose lenders provided more than 50 percent of Maxima’s proceeds from borrowing that year – US$681,158 out of $1,331,158.

It also neglected to state that the thousands of people who had made loans on the website, from computers in the developing world, assumed that the financial benefits of Kiva’s zero percent-interest loans were being handed down to micro-business entrepreneurs in the developing world, not their investment partners.

Uong Kimseng, general manager of Maxima said that the money coming from Kiva allowed his institution to lower his company’s interest rate, but added that the partnership also benefited Maxima’s shareholders. “Kiva loans can help us get a higher return on equity,” he told the Post in an interview Thursday.

Kiva.org was launched by Matt and Jessica Flannery in 2006 as a person-to-person (P2P) lending site. The idea was to allow altruistically motivated people living in the developing world to make small loans to poor, hard-working entrepreneurs in poverty-stricken countries such as Cambodia. Or, as it is explained on Kiva’s website, “by connecting people we can create relationships beyond financial transactions, and build a global community expressing support and encouragement of one another”.

The site has facilitated over $139 million in loans, and reports a repayment rate of 98.15 percent. Though the site has received international plaudit for its social impact, it has also faced criticism for a lack of transparency.

In October last year, David Roodsman, a researcher for the Centre for Global Development, wrote a blog titled “Kiva Is Not Quite What It Seems”, which shed light on the fact that “field partners” – local MFIs – were approving loans to Kiva borrowers days, and sometimes months, before they were posted on Kiva’s website. This meant many Kiva loans would have been approved regardless of whether Kiva lenders were sending their money through PayPal. “In short, the person-to-person donor-to-borrower connections created by Kiva are partly fictional,” wrote Roodsman.

Flannery responded as a guest writer on Roodsman’s blog, admitting that more could be done to ensure his website’s transparency, but explained that the loan process allowed borrowers to get their money immediately instead of waiting for the loans to be posted and funded through Kiva’s site.

Although Kiva has “fellows” who volunteer to travel to work with field partners for 12 weeks at a time, acting as both a technical assistants and liaisons for Kiva.org, the MFIs themselves are charged with deciding whose loan gets posted and how that loan is financed.

There are now 115 field partners in 52 countries around the world, and partners in Cambodia have been some of the most active. Two of the top three slots on Kiva’s ranking by total lending are filled by Cambodian MFIs Angkor Microfinance Kampuchea (AMK) and CREDIT.

At one point 18 percent of Kiva’s total portfolio was invested in the Kingdom, according to AMK CEO Paul Luchtenburg. To diversify their investments, Kiva has since enacted a policy that prevents any one country from accounting for more than 10 percent of Kiva’s portfolio.

There are four MFI field partners in Cambodia, all of which are licenced with the National Bank of Cambodia to operate as lenders; AMK, CREDIT, Maxima and Hattha Kaksekar Limited (HKL).

According to Luchtenburg, whose MFI has raised $4,690,175 from Kiva to date, the success of Cambodian MFIs in attracting Kiva loans has been extraordinary. “Cambodia has a very competitive microfinance environment, so organisations are continually looking for ways to get ahead,” he said. “Other countries don’t require as much international funds, so they are less excited about Kiva.”

Although Luchtenburg says that the zero percent interest on Kiva loans has given AMK “breathing room” to reach out to more remote populations, other MFIs in the country say that Kiva loans have ultimately benefited their bottom line.

When asked about the benefits of HKL’s partnership with Kiva, Hout Ieng Tong, general manager of HKL, responded, “it helps us improve our ratios”. The executive clarified “ratios” as “return on assets and return on equity”.

The financial advantage of Kiva loans is obvious: zero percent interest as opposed to 8 percent to 12 percent interest being charged by other lenders; however, Kiva loans also carry a higher operating cost. MFI executives estimated a 2 to 3 percent cost of financing Kiva loans. This beneficial interest rate can be handed down to the borrowers, as the MFI’s profits allow it to spend more money to reach remote populations, or to the shareholder, by expanding the MFI’s profit margin.

Many of Kiva lenders give money with expectation that the borrower, whose photo is posted on the website along with a description of his or her financial need, will be the beneficiary of the lower financing cost; however, in Cambodia the direct social impact of Kiva loans is being stunted as profits flow to shareholders.

Compared to Lift Above Poverty Organization (LAPO) in Nigeria, which was recently found to be charging clients 74 percent interest and fees on their loans and whose account on

Kiva.org has since been frozen, Cambodia’s MFIs have maintained fairly low interest rates for their clients. According to their general managers and CEOs, CREDIT and Maxima charge 27 percent, HKL charges 25 percent, and AMK charges 35 percent on average.

According to Luchtenburg, his organisation’s comparatively high rates in the Kingdom are because of its small loan size and extensive efforts to reach “rural remote” borrowers. Both factors raise the cost of financing and processing loans throughout the company’s portfolio. In the 2009 MIX Global 100 Composite rating AMK was the top-ranked MFI in Cambodia in terms of outreach, efficiency and transparency, and number 16 in the world.

Many of the shareholders in these MFIs are nonprofits – an 82 percent stake in CREDIT is held by World Relief US – who will likely reinvest the money in other social causes; however, Kiva often touts its transparency and it is not made clear on Kiva’s site that these groups stand to benefit along with the entrepreneurs being lent to.

Although lenders to Kiva may not know exactly where the benefits derived from the zero percent financing is going, or even who the shareholders are, MFIs are not breaking any of the conditions in their contract with Kiva.

A copy of CREDIT’s hosting agreement with Kiva that was signed on September 14, 2006, states that “it is understood that the mission of Kiva and the Local Lender is to alleviate poverty by making debt capital more available”.

However, it fails to place any demands on the use of the interest returned on Kiva loans, stating that interest paid “may be used by the Local Lender at its sole discretion”. The contract does not place a cap on the field partner’s interest rates but does say that exorbitant rates will not be tolerated. Recent action taken by Kiva towards LAPO seems to support this claim.

Luchtenburg said that organisations like the LAPO that raise suspicion regarding the social value of Kiva loans pose a significant threat to Kiva’s future success “because people are like, wait a minute, I’m giving my money and I’m making someone rich in Nigeria”. He added that he thinks Kiva should be more active in demanding accountability on social returns in order to maintain its users’ trust.

According to Sanjaya Punyasena, who began working with AMK, his current employer, as a Kiva fellow in July 2008, there is a rationale behind Kiva’s hesitation to demand that MFIs take additional measures, such as social impact surveys, to partner with Kiva.

Kiva doesn’t “want to burden the MFIs because any burden on the MFIs becomes a cost for the MFI, which ultimately the borrower pays for”, he said.

According to Kiva officials, changes, funded by Kiva, are being put in place. The organisation is working on a baseline survey to begin tracking the social impact of its field partners. Kiva fellows are being trained to use an analytic tool developed by a French organisation called CERISE in 1998 that is accepted as the industry standard for measuring social impact.

“Kiva Fellows are being trained in the use of the CERISE tool and are using it in the field with Kiva’s Field Partners,” explained Timothy C. Hassett, vice president of Kiva in charge of microfinance.

By the end of 2010 Kiva will have a “baseline measurement for social performance with all Partners who have been posting on the website for at least one year”.

Although Kiva did not explain how this measurement would impact MFIs shown to have relatively poor social performance, it is clear that, after five years of operations, it is presently moving towards higher social accountability.