Kiva: A Cautionary Tale for Social Entrepreneurs?

For the past few years, Kiva, the person-to-person microlending site, has been held up as something of a poster child for social entrepreneurship. The site lets users choose an entrepreneur in a developing country and make a loan to them. This ability to personally help someone escape poverty has obvious appeal. The site has caught the eye of celebrities like Oprah Winfrey and New York Times columnist Nicholas D. Kristof with predictable results: explosive growth for Kiva. The organization has also drawn praise for being a model of Web 2.0 thinking. Kiva has built APIs so that anyone can create a mashup with its data. And it has cultivated user interaction through such sites as kivafriends.org.

Recently, though, a bit of the shine has come off. This summer the organization announced that it would allow users to make loans to borrowers in the United States. This policy change led to the formation of “Unhappy Kiva Lenders”, a group of users who claimed that adding U.S. borrowers to a platform that was launched to focus on alleviating poverty in the developing world “undermined the very core” of what made Kiva special. (Of course, all lending is voluntary, so someone who doesn’t want to loan to a U.S. borrower doesn’t have to.)

And in just the past few weeks, the nonprofit and social entrepreneurship blogosphere has lit up with debate over what some have called Kiva’s misleading marketing. In short, a Kiva user does not make a loan to a specific borrower but to a microfinance institution, which actually makes and administers the loan. In general, the borrowers posted on Kiva’s site have already received their loans before their profiles are even featured. And repayments to Kiva users are not tied directly to repayments made by specific borrowers.

The twin controversies have served to illuminate several issues that all social entrepreneurs must wrestle with:

1. Truth in advertising: Kiva’s practice of advertising a chance to help specific borrowers while sending funds into a general microfinance pool mirrors the standard practice among child sponsorship, alternative gift (“Give a cow”), and disaster-relief charities. They create what is essentially an illusion of person-to-person connection. Some are more transparent about it than others — and Kiva has now taken steps to make its processes more clear — but they do it for an obvious reason: people are more likely to give. This isn’t just a supposition; it’s been proven by psychologists and behavioral economists. Why not just make the person-to-person connection real? Because it would limit an organization’s ability to be effective, and in some cases could do actual harm. So, as a social entrepreneur, where will you draw the line between a marketing campaign that is likely to appeal to donors or customers versus one that accurately explains your product, service, or operating model?
2. Truth in impact: The questions surrounding Kiva’s and many other social entrepreneurs’ advertising goes beyond the illusion of a donor connection. Kiva, for instance, persistently refers to the borrowers on its site as “entrepreneurs” and uses the tag line, “Loans that change lives.” The reason that Kiva’s inclusion of U.S. borrowers has struck a nerve with some is the feeling that neither tag applies when you’re talking about U.S. recipients. But it’s not just a question for and about the US: relatively few microfinance borrowers in developing countries invest long term in a business, and the impact of loans is typically positive but quite small — certainly not “life-changing.” The same marketing-versus-reality question applies when we’re talking about any number of socially conscious products: hybrid-vehicle gas mileage, carbon offsets, dolphin-safe tuna, and so on. In most cases, the actual positive social impact of any of them is relatively unknown. How will you manage the tension between what you hope is true about your product and what is actually proven?
3. Transparency and social media: One of the remarkable things about both Kiva controversies is that they occurred only because of Kiva’s openness. Its support for kivafriends.org has helped build a platform for unhappy Kiva lenders. The proof points that shattered the person-to-person illusion were possible only because of Kiva’s largely unique sharing of raw data. It remains to be seen whether the goodwill Kiva accumulated via these strategies will help it weather a storm of bad PR, or if this transparent approach ultimately hurts Kiva because the perceived gap between what users thought of Kiva and actual practice is all the greater. Any organization that pledges itself to transparency and user conversations without full commitment is likely to find those tools turned against it.

How committed are you to transparency and user engagement, and are you prepared to have public conversations about fundamental flaws in your organization?

Timothy Ogden is an executive partner at Sona Partners, and the editor in chief of Philanthropy Action, an online journal for high net worth donors.