Monday, December 7, 2009 and the Pre-disbursement Problem: Bait-and-Switch or Necessary Evil?

Matthew and Jessica Flannery founded with a groundbreaking idea: combining microfinance and social networking to open up a vast new capital market by allowing individuals to connect and make loans to one another. The human connection was the selling point of Kiva, and the idea was wildly successful. Problems arose recently when Kiva revealed that lenders are not necessarily making loans directly to the profiled individual on the site. Loans are actually pre-disbursed to the applicant long before information is uploaded to Kiva. The capital provided by lenders serves to back the loan, but most probably goes to a different applicant. This issue brings up a fundamental question that all public institutions must answer: is it ethical to mislead people if you are accomplishing a greater good?

Other nonprofits have experienced painful lessons after choosing to deceive the public for the greater good. In 1980, Save The Children, a 90-year-old international organization, was involved in a scandal[1] when funding designated for specific children was reallocated to other development projects. The Red Cross came under fire in 2001, when auditors discovered that a majority of the Liberty fund raised for 9/11 victims was reserved for other general Red Cross needs[2]. The public was not forgiving: after an investigation by then NY Attorney General Elliott Spitzer, Red Cross President Bernadine Healy was forced to resign.

On 2 October 2009, David Roodman posted an article[3] on his microfinance blog about Kiva’s pre-disbursement policy, accusing the organization of misleading lenders by overstating the potential for personal connections on the site. “In short, the person-to-person donor-to-borrower connections created by Kiva are partly fictional. I suspect that most Kiva users do not realize this. Yet Kiva prides itself on transparency.” He follows by explaining that pre-disbursement is a necessary and beneficial policy, allowing Kiva to serve a large volume of customers while bypassing the lengthy waiting period normally required for peer lending.

Despite the logical rationale for pre-disbursement, Roodman’s article caused a large backlash in the internet community against Kiva: many people felt that they had been misled when they visited the site, connected emotionally to a specific applicant, and then made a loan that they believed would benefit that individual. While Kiva claims that they value transparency, site visitors will not discover the pre-disbursement policy unless they do some significant investigation. Visitors who briefly skim the text on the site before proceeding directly to the profiles will view statements like this:

“we are using the power of the internet to facilitate one-to-one connections that were previously prohibitively expensive.”[4]

“Kiva is the world's first person-to-person micro-lending website, empowering individuals to lend to unique entrepreneurs around the globe.”

These claims give the impression that Kiva is attempting to minimize the likelihood of site visitors discovering the pre-disbursement policy. Many argue that Kiva should continue to maintain what they term a minor deception in order to function smoothly and deliver as much social value as it can. These comments overlook a glaring problem: Kiva has eliminated a significant portion of its core selling point, and widespread awareness of this issue may have significant negative ramifications. A New York Times article[5] stated it bluntly: “the direct person-to-person connection Kiva offered was in fact an illusion.”

Many now fear that this problem will eventually spell the end of Kiva, despite the near-universal support that Kiva has experienced. Without the personal connection, donors are better off using services like Microplace, where they can at least make a return on their investments. Many hope that Kiva will find a way to be both transparent and successful, but this may require drastic changes. While Kiva may experience a short-term decrease in capital volume by being completely upfront about the practice, they could avert a systemic failure by reinventing themselves.

A worst-case scenario is most likely if Kiva continues to promote the illusion of peer-to-peer lending. Innovations in the last four years have created a clear public demand for a social-media solution to humanitarian aid, and if Kiva is not able to revive itself with a new model, other organizations most likely will. We can only hope that Kiva will continue to utilize its market position in new ways[6].