David Roodman, whom we previously interviewed, has a very interesting post up about a specific microfinance vehicle, Kiva.org.

Our existing report argues that donations through this sort of vehicle are likely “fungible,” and therefore better thought of (for impact purposes) as general support of organizations rather than as support of specific projects or people. Mr. Roodman demonstrates this issue in a very concrete way:

Less [than] 5% of Kiva loans are disbursed after they are listed and funded on Kiva’s site. Just today, for example, Kiva listed a loan for Phong Mut in Cambodia and at this writing only $25 of the needed $800 has been raised. But you needn’t worry about whether Phong Mut will get the loan because it was disbursed last month. And if she defaults, you might not hear about it: the intermediating microlender MAXIMA may cover for her in order to keep its Kiva-listed repayment rate high.

Mr. Roodman goes on to argue that the way sites like Kiva are generally imagined to work would make little to no sense.

Imagine if Kiva actually worked the way people think it does. Phong Mut approaches a MAXIMA loan officer and clears all the approval hurdles, making the case that she has a good plan for the loan, has good references, etc. The MAXIMA officer says, “I think you deserve a loan, and MAXIMA has the capital to make it. But instead of giving you one, I’m going to take your picture, write down your story, get it translated and posted on an American web site, and then we’ll see over the next month whether the Americans think you should get a loan. Check back with me from time to time.” That would be inefficient, which is to say, immorally wasteful of charitable dollars. And it would be demeaning for Phong Mut. So instead MAXIMA took her picture and story, gave her the loan, and then uploaded the information to Kiva. MAXIMA will lend the money it gets from Kiva to someone else, who may never appear on kiva.org.

We agree. We don’t believe fungibility is a bad thing – but we believe that impact-focused donors should recognize it, and aim for the reasonable goal of supporting strong organizations rather than the unreasonable goal of tracing their dollars to a specific individual.