Kiran Jonnalagadda’s Blog

Akshay Mahajan tells a story of microfinance in Rajasthan, with pictures:

The group of women from the Mevat District in neighboring Haryana have driven all the way to Akbarpur to learn how to form a self help group of their own from the women at Akbarpura. For the next hour or so they had a long discussion on the mechanics of microfinancing, on how money should be saved, how loans should be dispensed, how to deal with defaulters etc. I felt I might has well have been in an office conference room in Bombay listening to suit clad MBAs rather than in village in rural rajastan in the company of very smart women in their colourful salwars.

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Microcredit—lending small sums to poor people to set up or expand small businesses—is an effective way to alleviate poverty. The poor cannot usually borrow from commercial banks, because they lack collateral. Loan sharks lend without security, but often at interest rates of 10-20% a day. Small time retailers who borrow from money lenders to buy a day’s stock often have to hand over most of their profits. Failure to repay can result in broken legs.

In March 2006, I visited the Mann Deshi Mahila Sahakari Bank in the village of Mhaswad, Satara district, Maharashtra. I spent two and a half days there learning about microfinance, rural deployment of technology, Mann Deshi’s operations, and of Chetna Gala Sinha, the bank’s founder.

Read Discovering Microfinance » (4000 words)

I made my second loan at Kiva today. I’ve been lax. Despite having promised to loan once each month, I missed January. I can attribute this in part to having been far too busy, but there’s something to be said about the Kiva experience too.

First, Kiva’s US non-profit status means nothing here in India. I don’t get tax breaks for the money I send them. While this isn’t such a deterrent given these are fairly small sums, it does add to the overall costs.

Second, money loaned via Kiva stays within the system. I don’t get anything back. Even if Kiva had (has?) a means to pull out money, the pain of getting PayPal funds converted into Indian rupees is not worth the bother. The way it effectively works, therefore, is that I donate the entire loan amount to Kiva and they in turn loan it to whoever I nominate. No tax breaks on this donation either.

Third, when I visited the site today, I was pleasantly surprised to learn that my previous beneficiary was already repaying his loan. I wish I had better insight into his progress. The only entry in his journal was when he received the money. If anything, it would have encouraged me to come back earlier.

When looking for another business to loan to, I found I couldn’t tell them apart. Row after row of picture, description and loan status. Who do I loan to? How do I tell who is more deserving? I might as well have rolled dice and picked the corresponding row. I can’t imagine what Kiva could do to make this better apart from signing up with partners in geographic areas I’m more familiar with, like India or Southeast Asia. Places where I could visit the businesses in person to learn more.

Maybe one way is to help the businesses or at least their funding partners have a better web presence? The current picture plus description plus stats page is rather limited. Having had some exposure to microfinance in India, I’m aware that what appears to be a small amount can have a significant impact on the beneficiary’s business. I’m also aware that conveying this story to an external benefactor on a per-case basis is not always feasible, and yet, being presented these stories would greatly increase their propensity to continue participating despite the limited returns.

I’m going to keep with the loaning for another few months to see how this goes.

At Barcamp Bangalore yesterday, Siva Prasad presented on applying the Web 2.0 model to microfinance. The discussion rambled a fair bit as everyone who knew anything about microfinance tried to get their voice heard, with topics ranging from how microfinance is overrun by scam funds to how mainstream finance institutions are elbowing their way into the scene (I did my bit of hollering too).

To Siva’s credit, he managed to stay on track, describing the parallels in social structures in microfinance and Web 2.0 and how they may be potentially merged. This didn’t go down well with the crowd, who couldn’t accept that a borrower so poor as to be satiated with a Rs 3000 loan would get onto a website and “network” with potential lenders. Siva presented examples, but I came away feeling this was yet another frothy idea that wouldn’t survive reality.

So much for dismissal.

This morning my randomised podcast queue turned up an interview with Kiva cofounder Premal Shah on Venture Voice. Kiva was one of Siva’s examples.

Turns out Kiva is a front-end to several microfinance intiatives (MFIs) around the world. You can go to the site, look up profiles of borrowers along with the MFI representing them, and loan money. Lenders do not earn interest and return of the loaned money is not guaranteed, though Kiva has had 100% returns so far. There are no transaction charges. Kiva has a special deal with PayPal to this effect, and itself takes no cut, instead surviving on the interest earned and on explicit donations by lenders. (US taxpaying donors get a deduction as Kiva is a 501(c)(3) status charity.)

Does this work? Kiva keeps lenders updated on progress made by borrowers, but is this a sufficiently strong incentive to bring lenders to the site, given they earn no interest? I’m curious. I registered on the site and loaned $25 to a farmer in Uganda, thereby upping his request fulfillment to 90%. I’m going to follow up with a similar amount for the next few months and see how it works out.

In the interview, Premal Shah says that they’d like to offer a floating interest rate in future. If this happens, it’ll be very cool.