7.6.2016 Nguyen Minh Quang

Transparency into Microfinance

HCP-osakestrategiat ja ESG-asiat
B Corporation

We started on Kiva the 12th February 2014 with 10.000 USD to finance entrepreneurs in developing countries.

Below is the summary of what we have done so far:

While analysts characterize KIVA as well-meaning, a lot of questions have been raised about Microfinance Institutions (field partners), or MFIs, in between KIVA and borrowers.

There are two problems with KIVA that analysts have identified: the lack of transparency (how the platform claims to be and how it really works) and efficiency (high interest rate charged by Kiva’s field partners).

Evidence are plentiful, but we also did our own investigation on KIVA:

“In the spring of 2015 we had one of our summer trainees do due diligence work on KIVA. It was time to look more into detail as we were planning to substantially increase the amount of money we lend out. We found out that everything else than one thing was as we expected. What we could not do, is to ourselves select randomly 3 persons and contact them from the 400 persons who had got the loan partially from us.  This was for us a major setback, as we appreciate transparency in all we do. If there is no way to get in contact with the persons themselves, there is no way to be sure how everything has worked out in the end. Since summer 2015 we have not been lending out that much more over KIVA. We still appreciate KIVA and the service it provides, and also for us it has been the first contact to be able to do micro-lending to developing countries. We still have money with KIVA and we do recommend that people new with the whole topic can easily start to familiarize themselves through the service of KIVA.” – Tommi Kemppainen

Also, these MFIs who stay between the platform and borrowers often charge very high interest rate to their customers. It’s in fact not a problem that Kiva have created, but rather it has been a reality for MFIs all over the world.

MFIs in developing countries

Traditional microfinance in developing countries has been proven to be ineffective to empower the poorest community of entrepreneurs around the world.

MFIs are supposed to work as a reliable source of financial services for entrepreneurs lacking access to banking service. The practice of lending small loans to basket weavers was pioneered by Nobel Peace price winner economist Muhammad Yunus, who founded the Grameen Bank in 1976, then developed spontaneously in poor countries, especially in South Asia and Africa.

The main problem we have up to this point is, that the interest rate provided by microfinance services is still too high for the poor. The range is wide, 30 to 50 % is typical. In 2010, several organizations have cited the rate to be 37 % in average. Some banks even charged their clients at the rate of 100 % or more.  Te Creemos, for instance, has some of the highest interest rates and fees in the world of microfinance, analysts say, 125 % average annual rate.

MFIs often argue that it is necessary to charge high interest rate to cover costs of their operations, but when drawing a line between what is acceptable and what is exploitative, more than 75% of MFIs are in the “red zone”.

According to a recent survey, 18 % of borrowers cut their food intake in order to repay debts, and 5 % decided to take their kids out of school in order to repay loans. These statistics illustrate the reality that while overpriced microfinance loans help some people, they may actually harm others.

That is to say, many MFIs are exploitative and they are getting richer on the expense of the poor. That’s why at Helsinki Capital Partners we are looking for new innovations that bring microlending to a new frontier of transparency and efficiency.

Technologies and Microfinance

Technologies have direct impact on both lenders and borrowers of these platforms, and we can rely on technology to make the system even more transparent and efficient that ever before.

In Kenya, loan disbursement and repayment transactions are conducted via M-PESA, a revolutionary money transfer service that allows Kenyans to receive and send cash via mobile phone messaging. In Ghana and Zambia, funds are transferred via a similar mobile phone payment service called MTN Mobile Money. In Indonesia, funds are transferred through the Indosat Dompetku mobile payment service.

These electronic payment platforms have a very important role in microfinancing in developing countries. It saves a huge amount of money and at the same time, creating new incentives for the microfinancing industry.

ZIDISHA – an alternative to MFIs

So as lender, we are a bit troubled with KIVA and its criticism. We want to find out what are the alternatives out there.

As we have discussed, it is at the MFIs level that things get really complicated. These complications have driven us to find a solution. One of the lending platform that we found quite new and interesting is Zidisha, founded by Julia Kurnia in 2009 (you can read her story here).

So, what is different about Zidisha?

  • Direct communication between borrowers and lenders
  • No MFIs in between lenders and borrowers
  • Low interest rate (5-8%)

Table 1. Basic Statistics & Performance (source: kivazidisha)

Founder Permal Shah Julia Kurnia
Location US US
Founded 2005 2009
Field Partners 298 0 *
Total amount lent USD 857,114,675 USD 5,933,223
Total members 2,482,656 55,967
Lenders 1,448,748 18,149
Borrowers 2,010,556 37,818

* Zidisha uses local volunteer mentors


This is how we perform on Zidisha at the moment:

We are at the phase when we have already started with Zidisha from May 2016. So far we have lent out $1,853 worth of loans for 64 projects include countries such as Kenya, Indonesia, Senegal and Burkina Faso. Next step is to see if we can establish reliable communication directly with the borrowers and hopefully in the future, we will have an opportunity to meet with these entrepreneurs face to face and discuss about life & business.

A Push for More Transparency

Tommi Kemppainen, our company’s CEO, has proposed a way to improve transparency into the system:

“To keep all incentives sound through publicity and transparency all persons who get of the money lent are encouraged to publish on any platform on internet in who ewer’s account name or publishing name. To assure that there is no window dressing or other editing of the original voices, the only structure to use is to add the string #HCPSPIRIT in the text or picture or video that the person publishes. Works as long as the person can find any kind of an internet access at least for once. Access to free facebook over internet.org, publishing could happen writing on https://www.facebook.com/hcpspirit or a tweet on someone’s twitter account visiting an internet café or in the end access to any internet and any publishing platform would do as long as adding the string #HCPSPIRIT. Naturally, depending of where the microfinance company is active, many of the people in the developing countries would absolutely have much bigger things to take care of than communicating on internet, but perhaps in some developing countries this could start to work, as least as pictures with #-strings on instagram.

The system becoming more transparent and public would be a good steering structure to make sure that there is as little wrong doing in the whole process as possible, and especially it makes wrong doings visible fast so that they can be solved.

In the best case the concept could work as well as a positive incentive for any person or company to get involved to lend money, as the string used can be the same string the person or company uses in its communications. In the best situation this could become valuable visibility to persons and companies involved, enabling them to channel more money to be lent out instead of having that money going into TV-advertisement or such. A sound incentive in the best case (naturally not without risk, as not all stories are probably that happy and projects probably not all been that successful).

=> Starting with us and #HCPSPIRIT string and perhaps one day the microfinance company can have a tranche to be lent out with #GENERALELECTRIC (#GESPIRIT) or #TOYOTAMOTOR (#TOYOTASPIRIT).”

Hopefully this would set a new way for microfinancing in the future, where borrowers and lenders interact directly with each other through social media, such as Facebook or Twitter. In case there is need for intermediaries in between they would be transparent. We are looking forward to increase our commitment in this project, to give more equal chance of success.

HCP-osakestrategiat ja ESG-asiat
B Corporation


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