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Oct212009

For transparency...in government and p2p micro-lending at Kiva

 

Lawrence Lessig's article "Against Transparency" in The New Republic has sparked a lot of debate about the perils of going down the road of "naked transparency".  Lessig fears open data for government may end in citizen cynicism and withdrawal from the political process. Rather than being actually against transparency, he makes clear in his follow-on article and this interview that his real concern is that people will see transparency as the sole answer rather than the necessary combination of transparency + meaningful campaign finance reform.

I agree that transparency is not a panacea, but I believe he overstates the "perils" of open data. Take a look at the Sunlight Foundation's display of health care lobbyist contributions to Senator Max Baucus, author of the current main health care reform bill being debated in Congress. Will citizens reach "unwarranted conclusions" upon seeing the nearly half a million dollars Senator Baucus received from these lobbyists while he was shaping health care reform? It's a scandal that such a revelation does not lead his career to "be destroyed".

Of course, Prof. Lessig is in support of such thoughtful analyses and he is right to bring up the broader reform issues.  I believe we need more of the kind of transparency and analysis that the Sunlight Foundation has fostered, but the cynicism question raises an important point. One can imagine a scenario in which people are participating in a process that is ultimately good while ignorant of some of its messier internal mechanics. Should that process be made transparent at the risk of alienating the participants or is ignorance really bliss?

Take the case of Kiva. Yesterday the Harvard Businesss Review pointed out that the peer-to-peer lending platform tells a story that is not entirely true. A large part of Kiva's appeal for lenders is the implicit promise that your money goes directly to the needy entrepreneur of your choosing. In reality, the $25 that you donate on Kiva to Ndidi Bienose, for example, is routed through his sponsoring NGO, Lift Above Poverty Organization (LAPO). LAPO collects all lender money and in turn distributes it to their entrepreneurs. This is one reason for the unexpectedly high repayment rates of Kiva (~98%) -- individual losses can be easily disguised within a group under an NGO. Microplace uses the same model, but has always been straightforward about it.  Kiva, however, has been vastly more successful because of their more appealing, albeit untrue, story.

This unplanned transparency could turn into an example of what Lessig fears: that the exposing of the behind the scenes action will turn previously happy do-good Kiva lenders into cynics who now see P2P micro-lending as just as corrupt/misleading as the more traditional forms of aid that it hoped to supplant. Due to the attention problem that Lessig identifies, lenders will not take the time to learn that the end result of Kiva's and Microplace's approach is actually more effective and more efficient than direct peer-to-peer lending.

It's too soon to tell whether some Kiva lenders will be turned off enough by the revelation to stop participating, but I'm optimistic that the real Kiva story can be told effectively.  There is a powerful fact that Kiva can stand behind : Lending through a field partner is more reliable than direct lending and smooths the process for the benefit of the entrepreneur that the lender is hoping to help. The bottom line of Kiva remains the same -- to alleviate poverty through microloans -- and in the end, your money still goes to Ndidi Bienose. In Seth Godin's parlance, the P2P story is still authentic, even if it is not entirely true.

So is the new transparency in Kiva a good thing? A few lenders may be lost, yes, but the ones who remain will have full knowledge of the process and will no longer be duped. The strongest and most engaged communities are built on honesty. The same is true of government.

Flickr credit: bgblogging via Creative Commons, where I get all my photos and a concept for which I thank Lawrence Lessig for pioneeering

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Reader Comments (3)

On the topic of transparency, Kiva, LAPO and best practice, do consider the fact that MicroPlace has recently removed LAPO from its website in light of investigations by the New York Times. The front page of the NYT heavily criticized this institution (http://www.nytimes.com/2010/04/14/world/14microfinance.html?pagewanted=1) and discovered that it is in fact charging the poor rates up to 126% per year. Calvert Foundation, who originally selected the investment in LAPO for sale to the US general public, also removed LAPO from their website. Kiva continues offering the US public the option to make these loans, but had to delicately increase the apparent interest rate charged to LAPO clients from 57% to 83% according to their own website. This is while US investors on Kiva earn precisely 0%.

The NYT also mentioned that Deutsche Bank invested in LAPO, but more interesting is the investors they failed to mention. Grameen founder Muhammed Yunus is a vocal critic of high interest rates, and yet Grameen Foundation USA is a key investor in LAPO. Oxfam has donated extensive sums to this highly profitable bank. ASN Bank, an "ethical" bank in Holland, and Triple Jump, are investors. Citibank and Standard Chartered also invested, under a guarantee from Grameen Foundation. Microfinance fund managers Blue Orchard (Switzerland) and Incofin (Belgium) also invested. Most do so under some tax-favourable ethical framework and assure their investors that poverty reduction is imminent. At these rates it is questionable. Meanwhile Planet Rating (an independent rating agency comparable to Moody's or Fitch, specialized in microfinance) downgraded LAPO recently from a B+ to a C+, one of the most profound downgrades on record.

The bottom line is that there is a problem in the microfinance sector, but it reaches not only to a few unscrupulous banks in developing countries, but also to the institutions that provide the capital from offices in Europe and the USA. Until this sector if formally regulated, like the rest of the financial sector, the poor will continue to be exploited and the generous investors in developed countries risk being deceived by intermediaries intent on generating high returns while "saving the world".

April 20, 2010 | Unregistered CommenterStreetCred

@StreetCred You're right to bring up the recent news regarding LAPO and its removal from key microfinance websites. I agree with you that consumers participating in the sector need adequate protections, which in many cases are often lacking because this is an emerging field where the regulation hasn't quite caught up yet. Still, even with scrupulous companies, high interest rates are okay and to be expected. This is a high risk group and their rates should reflect that. Of course, as you point out, that doesn't mean that they should be exploited.

April 22, 2010 | Registered CommenterMelody

recently became clear that the rates are high because of greed

April 25, 2010 | Unregistered Commentergerovital
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