I was bumming around on the net a couple of days ago, probably browsing another money-making blog, when I came across a post about charity. Being a young, educated, idealistic student, I’m also naturally slightly socially-conscious – although nowhere near the level of some of my peers (many of whom I have great respect for). However, also being a young, educated, idealistic student, I’m also naturally slightly broke. I’ve participated and volunteered good chunks of time for several local non-profits over the years, but I can’t say that I’ve ever purposefully set aside REAL TANGIBLE MONEY for charity.

However, this blog post that I stumbled upon (I don’t remember where it was from, or even if it actually was a blog post) mentioned something about charity that struck a chord. It went something like:

‘If you decide to donate to charity only once you’ve accumulated wealth, at what point will you have accumulated enough wealth?’

When indeed? It’s foolish to think that we’d all eventually reach a point in our lives where we literally have SO MUCH MONEY that we have excess to give away. To be financially charitable, perhaps one needs to budget for it. I’m a young, educated, idealistic, and slightly broke student, but I have a four-month job lined up for me starting in half a week. It doesn’t pay much, and I’m still technically in school so I still need to cover tuition, but I’m determined to set aside a very humble $25/month for charity during the length of the term. That’s $100, enough for an over-priced textbook, and peanuts in the Real World(tm), where poverty-eradication requires a trillion-dollar solution. Still, it’s a start.

Of course, setting aside money is just that – a start. A dilemma quickly presented itself – where should the money go? I decided to arbitrarily focus my giving on international aid for now, since I already focus my volunteering at the local level. Now how should I donate so my measly $25/month will go the furthest it can possibly go? I’m sure this is a question seriously pondered by the charitable worldwide, it’s always nice to feel that your contribution actually does make a difference in the Real World(tm). But let’s not delude ourselves – such small amounts will hardly make a difference, and it’s difficult to not get caught in a trap where a seeming lack of return makes your giving appear completely meaningless. But the power of a collective is a wonderful thing, and a mere $25 can certainly add up if, for instance, 100 people are each giving $25.

If you haven’t figured where I sent my first $25 yet, it’s Kiva.org, a non-profit which funds microloans for entrepreneurs worldwide who need cash to improve their business. It seemed like a brilliant and beautiful idea – a dozen people can pool together enough money to help a fisherman repair his boat, allowing him to catch and sell products at his market stall. I love the idea of nurturing self-sufficiency, instead of giving people a handout you’re helping them build a job, an income, a way of life, and become empowered. Once they pay back their loan, you can reinvest your donation to another entrepreneur, or withdraw it out of Kiva.

Sounds too good to be true, right? Like any good techie who grew up with the internet, I immediately googled ‘Kiva criticism, Kiva scam, etc.’ hoping to find anything that could be negative about the non-profit before making an investment. I quickly found that it is very, very difficult to find someone with a bad word to say about Kiva. However no non-profit is perfect, and there is no single technique that will eradicate poverty. With a bit of digging and research into what exactly ‘microfinance’ is, I have come across a couple of areas of concern regarding microfinancing organizations in general (so these problems may not specifically only affect Kiva).

High Interest Rates
Kiva is fairly open on its policy on interest rates. While Kiva does not charge interest on money received from Lenders (you and me), the money that Lenders invest go towards providing capital for local microfinancing institutions, who then distribute the loans to the specific people Lenders have chosen to invest in. These microfinancing institutions DO charge interest – Kiva says the average is 21%, though I have seen some up to 60%, which must be paid back by entrepreneurs in addition to their initial loan.

This obviously looks pretty outrageous on the surface, until you realize that the very nature of a microloan means that high interest rates is a necessity. There is overhead associated with distributing and collecting the loans which the microfinancing institution has to cough up – if a staff member has to meet with each Borrower numerous times (first to evaluate their business plan and see if a loan would be a viable option in the first place, a second time to distribute the loan after receiving funds from the Lenders, and several time after that to collect loan repayments) there is going to be a minimum transaction cost, especially since Borrowers may live in rural areas. If this transaction cost is say, $30, that’s already a 30% necessary interest on a $100 microloan. Additionally, due to the high risk involved, for the microfinancing institution to be sustain able and operate in a way that actually brings in money, they need to add additional interest on to their transaction rate. Kiva explains this quite eloquently in their FAQs, and mentions that they will only with with microfinancing institutions charging reasonable interest rates, though they do not elaborate on what exactly this means.

Ineffective Alleviation of Poverty?
Microfinance cannot, by itself, effectively alleviate poverty. There is no ifs buts or ands about it – microfinance must work in conjunction with other strategies to truly make a difference. People are usually not born entrepreneurs, they need to be taught business skills. Fishermen may not give a second thought about their fishing practices, opting to use destructive fishing methods which will eventually backfire resulting in an unsustainable business. People cannot run a business if they are mostly nomadic, or live in an area with an alarming rate of fatal illnesses (such as HIV/AIDS). The most that Kiva does to address this is screen Borrowers, evaluating business models and attempting to allow investment in those likely to remain viable. This is also explained on their FAQ page.

High Risk Investment
And finally, for the Lenders themselves, although based in charity your microloans are treated as an investment. Not just any investment, but a high risk one. There is a chance that your loan will never be repaid – the entrepreneur may not have been able to profit from their business, the microfinance institution may have gone bankrupt, even Kiva may one day be forced to shut down.

So where does this leave a Lender? If you can get around the fact that you’re foremost supporting a microfinancing institution more than you’re supporting the entrepreneur, that your donation won’t be going towards the ‘poorest of the poor’ but those who have already made a bit of headway, that it’s unlikely the bit of money you’re parting with with completely lift an individual out of poverty, and that there is a possibility you won’t see your investment again, then Kiva may be right for you. Don’t romanticize the organization, but weigh the pros and cons with a critical eye. Because despite these shortcomings, I sincerely think it’s one of the best ways to support someone when you can only spare a bit of money – the Borrower may never know about you (it’s likely they will only be in contact with the microfinancing institution and not Kiva) but you know that, together with others who have spared $25, you’ve made a specific, tangible difference in an individual’s life. That loan is going towards building a roof so that someone can make coal bricks in the rain; the purchase of hog feed to help out a pig farmer; or, as my first investment, remodeling an internet cafe in the jungles of Peru.

What do you think of Kiva, or of microfinance in general? Do you think it’s a viable strategy that could possibly help someone become self-sustainable, or would it leave them worse off in the long run? Is there a better way to stretch the donations of small amounts? Leave your comments and let me know what you think!