AN ALTERNATIVE TAKE ON KIVA VS. GIVEDIRECTLY

Who wins, Microfinance or Basic Income?

Happy Sunday!

I hesitate to write on this topic because I recognize how polarized opinions on microfinance and direct cash transfer can be. However, I am fascinated by the models these two well-known organizations run, and I am interested if I can make a nuanced case for why one wins over the other.

I am not going to run through well-discussed arguments for microfinance and basic income; instead, I am going to analyze separate factors that are organization-specific:

1. Donors Throughput

2. Financial Sustainability

3. Transaction Costs

Also, if you are unfamiliar with the premise of microfinance or basic income, I’ve linked on those words a quick minute guide for each.

Donor Throughput

General donors to Kiva are faced with a decision: in what region or cause should I fund a loan? When you lend on Kiva’s website you’re faced with twenty decisions:

Here’s how I imagine what a first-time donor might run through when faced with these decisions:

I didn’t include the process trees for every sub-area/cause, but even if a donor was to navigate support for Women on Kiva, there exist many opportunities to opt-out. In scaling areas of impact, Kiva has unintentionally created a paradox of choice.

A general donor may find it difficult to decide due to greater optionality. And with that emerges a tension between ethics and effectiveness: “should I support those causes that are most salient to me, or should I put money towards the issues that will have the greatest expected social return?”

GiveDirectly (and any nonprofit or social enterprise) does not avoid the same question. However, it does simplify the donor throughput. If you decide to support GiveDirectly, you have to fundamentally believe in direct cash transfers as an effective social impact strategy. This narrows the decision flow for donors.

GiveDirectly donors are directly thrust into GD’s general fund unless they want to specify support for GD’s basic income or refugee support programs. This is strategic for two reasons:

1. It concentrates the fundraising efforts of GiveDirectly to directly study the effect of cash transfers for a specific hypothesis

2. It removes the paradox of choice

Here I think on an average donor basis (not accounting for philanthropic or high-wealth donations) GiveDirectly wins on Donor Throughput.

Financial Sustainability

In a volume comparison, Kiva deployed $160 million in 2018 to serve a little over 400,000 borrowers across 11 areas of impact. This averages a loan size to be $400. Kiva sits on roughly $43 million in assets and is able to execute this work with over 100 employees and 450 volunteers worldwide.

GiveDirectly sits on double the assets at ~ $87 million, which is attributed to their direct cash collection and transfer model. However, in most of GiveDirecty’s study’s they distribute $1,000  households over the course of 4 months. To sustainably promise a regular, expected basic income to those households a year would require $3,000 per household. Based on the average cash GD carried between 2017-18, that would cap the number of households served at 18,000. In other words, this work is expensive.

Financially, providing micro-loans is more sustainable given the principal can be continuously recycled to fund more loans. This explains why Kiva is able to reach the volume of individuals that it did in 2018. However, Kiva also has to perform diligence on a wide application of loans from across the world, ensuring that investments to borrowers will have the potential to be re-paid. This requires a lot of localized expertise which explains why Kiva’s workforce almost doubles GiveDirectly’s even though they operate with a similar level of assets.

Per $1,000, GiveDirectly reports a $270 increase in earnings, a $430 increase in assets, and a $330 increase in nutrition spend. At what point do these benefits become self-sustaining? Or will areas studies are being conducted consistently require external funding to provide an ongoing basic income to sustain these benefits?

Here I think Kiva wins on financial sustainability - though this does not speak to the dollar return of impact for each organization.

Transaction Costs

Both Kiva and GiveDirectly partner with M-Pesa, a mobile payment processor to facilitate transactions from lenders/donors to borrowers/recipients. M-Pesa is a very efficient platform to facilitate money transfers, especially in regions where physical cash can be both cumbersome and dangerous to carry.

The transaction fee on money transfers for M-Pesa is also fairly low at 1.4% compared to 2.9% + $0.30 for transactions facilitated by Stripe and Square in the U.S.

With an identical payment platform partnership, I do wonder why Kiva automatically opts donors into a 15% donation charge (which you can opt-out off) for every transaction. Kiva states the donation of $3.75 for a $25 loan helps cover the cost of facilitating the loan. Yet, if we scale our lending amount to $500, Kiva would collect $75 on that transaction. In absolute dollar terms, I question how reasonable it is to claim that $75 is required to facilitate a $500 transaction.

For GiveDirectly, the stated donation amount of $50 is what is charged on your card. I contributed to GiveDirectly’s recent campaign called “Project 100” and was not charged a processing fee or cited for a donation. It was a clean $50 fee.

With the amount of volume Kiva processes, and with a crowdfunded loan model, there needs to be more transparency for the transaction costs to donors that Kiva automatically opts donors in to.

Here I believe GiveDirectly wins on transaction costs for donors due to their radical transparency.

Closing Thoughts

Overall, I am an advocate for basic income over microfinance as a means to lift low-income populations out of poverty. In the above piece, I tried to avoid theories and focus solely on the organizations themselves, but if you want to read further about microfinance and basic income theories please check out my quick minute guides to each.

Note: I have donated to both Kiva and GiveDirectly campaigns this past year. If you had any strong thoughts on the above, I encourage you to share in the comments and I will directly respond from there.

🔎 This Week’s Finds

1. Escape From the Lab - Mr. Loh

My friend sent me this brilliant classroom activity he constructed for his students. I loved how he took a novel activity, an escape room, and used it as a gamified learning tool.

Check it out and try to escape!

2. Bridges and Tunnels - Seth Godin

“Robert Moses, the road builder, understood that that building tunnels takes just a little longer and costs just a little bit more.

And it turns out that bridges are monuments and create glory for those that find the resources to build them, there in the sky, for all to see.

Those are the two reasons why we end up with more bridges than tunnels. (Same is true with work culture and society at large).

But tunnels allow all sorts of productivity without calling attention to themselves or those that build them. A tunnel creates progress without changing the landscape. Many times, it’s an elegant solution to the problem for someone with the guts and fortitude to build one.

Less glory, more upside.”

3. The Invisible Boy by Shel Silverstein

Closing Thoughts

Thanks for making it this far. Did any thoughts come up? Any wishes for what you would like to see next week? Feel free to comment below.

Melted Cheese,

Daniel

P.S. if you enjoyed the newsletter and want to support me, feel free to buy me a coffee (or three). :)