Microfinance was a term that I heard bandied about in social situations but was generally unfamiliar with until a few years ago, when a friend gave me a Kiva gift certificate as a birthday present. I found Kiva’s model of change captivating and exciting: I would browse through profiles of people, co-ops, and businesses from around the world and choose whom to lend money to. Once enough people like me had funded a loan, the borrower would receive the money and pay us back, interest free. With my money back in pocket, I could re-loan the principal to another worthy cause.

I became an advocate for Kiva and encouraged my friends to try it out. And since I strive to provide well-informed recommendations, I discovered some details about Kiva that somewhat diminish its illustrious glow. First, a Kiva lender’s loan does not actually go to the person that the user chooses during the selection process. Rather, the loan goes to the microfinance institution that has already funded the business that the lender selects. Second, though Kiva lenders’ loans appear to carry a zero interest rate, the microfinance institutions that interact with borrowers charge a hefty rate. Kiva’s defense of these rates is thorough and passionate.

With that information in hand, I still recommended Kiva, though perhaps not as enthusiastically as I might have. Recently, however, a few of my friends (who also love researching random things) have come down on the anti-Kiva side of the fence — and a friendly debate ensued. My anti-Kiva friends cited Givewell’s negative findings on Kiva, as well as evidence from recent randomly controlled experiments (RCEs).

Givewell’s findings are mainly based on the recipient and interest rate issues that I already knew. More interesting to me are the results of the RCEs. I’m impressed with the level of work it takes to set up large microfinance institutions that purposely skips over (on a random basis) either a set of individuals or communities. And, on top of that structure, these researchers had to conduct large-scale and wide-ranging survey to measure outcomes.

These experiments show that microfinance’s impact on overall well-being is minimal or non-existent (at least one year after the program begins, which is often when these surveys are taken). At first blush, that appears to be a harsh blow. The context, however, softens this judgment. Improving well-being in these communities is very very difficult; my favorite economics book, The Elusive Quest For Growth: Economists’ Adventures and Misadventures in the Tropics is an excellent primer on the history of attempts on increasing well-being in disadvantaged countries. The book’s conclusion is that systematic and institutional issues block nearly all paths to growth and that economists’ ideas, which also come across as fads, have not met their lofty expectations.

Perhaps, microfinance and Kiva is one of those fads. But I’m not looking to Kiva to solve the world’s ills. My hope is that by donating to Kiva, I’m helping. According to the RCEs, microfinance helps grow businesses and use of institutions. Specifically (study number from this list is in parentheses):

• Entrepreneurship, hiring (3), number of business (5 but not 2), and profits increased (1,2,3,4,5) especially among low-education recipients (4)
• Consumption on luxury goods, such as festivals, cigarettes, and alcohol declines (1,4,5)
• Increase in buying assets, such as livestock (3), or household appliances (4)
• Household members spend more time in education, less in wage labor (2 but not 5 [for 16-19 yr olds])
• Savings decline — presumably to help pay back the loan (5)
• In case of a financial shock (e.g., health issue), recipients are more likely to borrow from institutions rather than friends (1)
• Increased stress and worry (1,2) — again presumably because they have to pay back the loan.

It’s not a panacea (well, what is?), but microfinance helps. I’ll keep my Kiva money circulating, even as I donate to other non-profits.