Microfinance in the U.S: Kiva Enters at its Own Risk

July 15, 2009

This post also appears on the official blog for the book In the River They Swim, a collection of essays about fighting poverty in the developing world.  The book “tells the story of change in the microcosms of emerging businesses, industries and governments.”

A healthy fraction of Kiva’s vibrant community of micro-lenders is up in arms about the organization’s decision to begin facilitating loans to low-income borrowers in the U.S. The language these lenders are tossing around is angry and personal. They feel betrayed on behalf of entrepreneurs in developing countries, whose dreams may now be threatened by a diversion of capital to Miami, New York and San Francisco.

Kiva should be encouraged by the outrage. It speaks to the success of its model, which connects the rich and the poor with a mix of intimacy, dignity and scale that few other models have been able to achieve.

Kiva’s lenders are invested, literally and emotionally. Poverty is not a theoretical, if regrettable condition when you’re helping Busena buy a motorbike to expand her charcoal business in rural Sudan. Busena is not a lost cause or looking for a hand-out or not your problem once Kiva invites her into your living room with a humble request to borrow a few hundred dollars – a few hundred dollars she’ll give back to you, by the way, to lend to someone who’ll need it more once she grows her customer base.

At this point in your relationship, you’d do a lot for Busena. You’re in deep. The trust you’re building is high and rising, and you’ll let nothing get in her way, certainly not a homeowner in the Bay Area who wants 10k to upgrade the toys in her daycare center. How many motorbikes could that buy in Sudan? How many other Sudanese lives could be touched by broadly distributing US $10,000 of working capital? How are we even talking about these people in the same paragraph?

These are fair questions. Even if we accept the reality of poverty in America, the scale is different, often radically different. Income per capita in the United States today is more than 100 times larger than in Liberia, Burundi or the Democratic Republic of Congo. There is little room in those differentials for much of a debate. The planet has become a high-stakes economic lottery for its inhabitants, and the winning ticket is U.S citizenship.

But here’s the thing — Kiva’s success is tightly linked to the freedom it gives both lenders and borrowers. The model’s most important byproducts (that intimacy, dignity and scale) are all driven by the fact that both borrowers and lenders get to make their own choices. All stakeholders get to be powerful and sovereign and create value for each other based on very personal definitions of increased wellbeing.

Busena’s betting on a motorbike, and I’m betting on Busena. I think her success will have a disproportionate impact on women and girls in rural Sudan, a population that is among the poorest and most disenfranchised in the world, and I believe deeply in the transformative power of role models for marginalized groups. Those are my investment criteria, but it doesn’t compel me to design a system that others have to follow, even if I think my strategy for social change is better. And believe me, I do.

Too much would be lost by imposing those limits, including an erosion of the core value of self-determination that makes Kiva work. The decision to enter the U.S. market is an extension of that value. Kiva introduces the privileged to the not-so-privileged, and then gets out of their way. That’s the point. The organization is blowing up a model where I have to trust someone else in a large opaque bureaucracy to invest my philanthropic dollars wisely – and where Busena has to subject herself to someone presuming he knows better than she does how to improve her own life.

This debate touches on other, less personal issues, like whether the emphasis of microfinance is on helping people to manage poverty or escape it. I think it’s the former, which doesn’t mean it’s less important. A hard truth is that only a tiny minority of new businesses – what are sometimes called dynamic enterprises – scale to the point where they have a meaningful impact on economic growth and its ability to create widespread prosperity.

I would argue that enterprise-based solutions to poverty should focus disproportionately on finding and supporting these dynamic businesses, but there is a whole range of enterprise-based responses to poverty that are vital complements to these initiatives. They help the poor and the very poor to meet basic needs and raise their incomes in sustainable ways, without undermining their dignity and humanity along the way.

Kiva is among the most influential players in this arena because of its commitment to empowering individuals on both sides of the microloan. Capping that power by limiting lenders’ ability to decide who is worthy will not advance Kiva’s mission. In fact, it’s precisely the type of top-down, paternalistic approach to philanthropy that Busena and I are both trying to avoid.