Do microfinance Web sites like Kiva really help alleviate poverty?

Advice on how to make the world better.
Oct. 21 2009 7:01 AM

Brother, Can You Lend a Dime?

Do Web sites like Kiva really help alleviate poverty?

Kiva.
Grover Almanza, who has raised funds on Kiva.org

Do you have a real-life do-gooding dilemma? Please send it to ask.my.goodness@gmail.com and Sandy will try to answer it.

Dear Sandy,

What do you think about investment sites like Kiva? Everyone says putting your money there is more efficient than giving to charity. But I don't like that the site arranges loans for the poor that can charge around 30 percent interest. Am I actually helping alleviate poverty this way?

—Christina

Sandy:

These days it seems that my answer will inevitably be: It depends. But, for trying's sake, let me start by unpacking your question a bit.

First, Kiva isn't really an investment site. There's no chance you'll earn a return on your money—the best you can get is your original investment back. (Nor is it a donation site, unless you choose to donate your repayment to Kiva.) Let's just agree to call it a microlending site.

Despite the linguistics, the model is actually quite simple. Anyone with a computer and a credit card can log on to the site and make loans to entrepreneurs all over the world. These microloans make credit available to people who wouldn't normally have access to traditional financial services and allow them to start businesses or do other things they need capital for. For a simple overview of the whos, whats, hows and whys of microfinance, check out Kiva's About Microfinance section.

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To your second point, is using Kiva actually more efficient than giving to charity? Well, efficiency is a tough thing to determine in this sphere. And if you replace efficiency with efficacy, you're in even dicier territory. Correlation and causality are hard to parse, and even though Muhammad Yunus and the Grameen Bank won the Nobel Peace Prize in 2006 for their role in pioneering microfinance, there remains little hard evidence to show the macroeconomic benefits of microfinance. We can see that it helps some individuals, but does it actually reduce poverty at the societal level?

Experts say: Not really. But they also say there's a need for more research (particularly longer-term randomized control studies), and that even if we don't find a societal benefit, that that's not necessarily a good reason to cast it aside. Microfinance expert David Roodman points out that the authors of Portfolios of the Poor: How the World's Poor Live on $2 a Day suggest that the biggest challenge of poverty isn't necessarily how small your income is but rather how variable and unpredictable it can be. (Disclosure: Roodman is a fellow at the Center for Global Development, where I also work—and he recently kicked up a debate around Kiva's model that can be followed here.) Roodman also cites the work of Amartya Sen in discussing whether microfinance leads to development, stating that giving people the ability to smooth out these bumps gives them more freedom and can lead to greater economic empowerment—even if it doesn't change their net income.

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