When we first open a lending program in a new country, a local volunteer or visiting international intern typically finds an initial group of borrowers by making presentations at NGOs, pitching Zidisha to local cybercafe owners, etc. After that, growth happens almost exclusively by word of mouth.
Most in-country volunteers (we call them "Volunteer Mentors") are also Zidisha borrowers. They learn about the mentoring program via a note in the borrower account interface of our website, and apply via email.
We don't at the moment, because our programming resources are limited and we have been prioritizing development of our lending platform. We will likely be able to make our data available in an API within a year.
I haven't followed Zidisha too closely, but just from this post, you mention "cost of lending" at the beginning but then the returns are before operating expenses. Without revealing anything too proprietary, how much cost savings do you have versus other microlending operations, and what does make up your costs (administrative or other site/engineering costs)?
Traditional microlending operations are expensive. For example, the average microfinance organization needs to charge borrowers 35% interest for capital borrowed at zero interest from Kiva.org, to cover its overhead costs. (Source: https://en.wikipedia.org/wiki/Kiva_(organization)#Current_in...)
Zidisha's overhead costs average about 10% of the value of the loans we facilitate. The costs are fully covered by borrower fees and optional lender tips. Borrower fees include a lifetime membership fee of $12 paid when the first loan is disbursed, and a flat fee of 5% of each loan funded per year the loan is held.
> It sounds to me like additional 5% interest, isn't it?
Interest accrues as a function of time. Yes, one could model this fee as an interest rate by taking into account the loan's expected term. But the 5% is not compensation for the time value of money or risk of lending–it is a facilitation payment. As such, calling it a fee seems acceptable.
Since the 5% doesn't change with the amount lent, or other factors, "flat" seems an appropriate adjective (though it is more commonly used to refer to a fixed dollar, versus percentage, amount).
EDIT: since the "fee" does appear to vary with a loan's term, yes, I think this would be correctly characterizable as interest.
that is the definition of a '%' sign, isn't it? :)
Using '%' with "per year" is a definition of interest, isn't?
Edit: wow, i just now recognized another possibility - charging 5% x [expected years] upfront - that would be "fee", yes. One fr!cking large fee. Who in sane mind is going to pay it? That sounds like preying on people who have no other choice.
> "per year the loan is held" sounds exactly this.
I was not aware of this. You are correct - this looks more like interest than a facilitation fee.
> that is the definition of a '%' sign, isn't it? :)
Transaction fees are usually assessed as a fraction of the value transacted. A flat fee, within this context, is a non-varying percentage of the transaction value, e.g. 5%. A non-flat fee has moving parts, e.g. 5% for the first $100, 4% for the next, etc. (or 5% if the interest rate is less than 15%, 10% if above, etc.).
It is an ambiguous term. I try to avoid it. Instead of calling a fee "flat" to emphasise its simplicity, make it simple.
This is intended as a service fee, not interest. It is set at a level that, along with registration fees and lender tips, just covers our operating costs. (For example, in the first quarter of 2014 our average operating costs were $8,225 per month. Our average monthly revenues were $8,507.)
It might be more precise to structure the service fee as a fixed percentage of the loan amount regardless of the term. We opted to structure it as an annual rate mainly for simplicity: it can be added to lender interest so that loan applicants can see the full cost of the loan in a single rate, without any other unexpected fees.
Have you considered adding bitcoin support to your product? Assuming the receiver has a way to convert bitcoin to/from their local currency, this may remove some friction in transfering value between individuals. btcjam.com is doing something like this with bitcoin.
What use would that be? Far more people in the world have not used bitcoin than the percentage that has, it looks like it might be a cheap PR win but in actual usage it will amount to a small fraction of nearly nothing. And then you still have to convert them with associated costs and repay the lender in some ridiculously volatile currency.
Supporting bitcoin (unless you are a bitcoin start-up) seems like a silly thing to do for a company that needs to prioritize due to resource constraints.
How will they sell them for cash without using an exchange and/or a bank account?
I can't just convert a bitcoin sitting in my wallet to something I can give to someone else to exchange for cash without a whole pile of guarantees.
The only people I can trade bitcoin with for cash is other bitcoin users, which - as I noted above - are few and far between.
Yes, sending BTC internationally is simpler, but that does not mean the recipient can do the same things with them as they can do with fiat, and as such it just shifts the problem to the recipient. When you send cash (using for instance western union) it is almost instantly available as well, without all the downsides of having to find someone that will trade your bitcoins at something approaching their market value.
Western union will often take over 5% of a transfer through fees and extremely greedy exchange rates. A BitCoin transfer on the other hand is virtually free.
IMHO there will be a high overlap between people using a lending startup and Bitcoin users, as both are modern bank alternatives.
In my humble experience exchanging Bitcoins for cash was hard a couple of years ago, but not today. All my geek friends and colleagues use it.
We did consider adding bitcoin support, but opted to refrain for now because:
- we did not identify a straightforward way to convert bitcoins to cash in borrower currencies
- it seemed from our informal research that supporting bitcoin has not resulted in many new supporters for most nonprofits that have tried it
- supporting another payment method would add overhead weight to our organization
- so few of our lenders use bitcoin that we estimated the savings in transfer fees wouldn't be worth introducing more complication in our payment options
We're keeping an eye on bitcoin and may begin supporting it if these conditions change.
Hi Julia, Zidisha seems to be serving a valuable need.
I had designed and developed a credit exposure and credit risk management for large corporate and commercial banking for a large Canadian bank and I am curious to know how credit exposure and risk is managed by Zidisha.
a) what collateral do you accept and how do you value the collateral?
b) do you consider country risk ? and how do you quantify individual's risk profile ? have you developed a credit risk model ?
c) would you consider offloading credit risk by partially securitizing your loans?
d) Countries where you operate in have a serious risk of document fraud. can you share stories of fraud mitigation ?
f) finally, what kind of lenders do you seek ? Are you looking for altruistic people or people seeking to spread their investment risk ?
e) Also, do you realize that you have the opportunity to become the Equifax of third-world countries ?
a) what collateral do you accept and how do you value the collateral?
We don't accept any collateral, because 1) most of our borrowers are low-income individuals just entering the working population, and don't have any substantial assets, and 2) a collateral-based credit risk mitigation system would be too expensive relative to the size of the loans (the starting loan amount is $50 - $150).
b) do you consider country risk ? and how do you quantify individual's risk profile ? have you developed a credit risk model ?
Currently, once a borrower is admitted to Zidisha, lenders alone judge country and credit risk. However, we're currently working on a data-driven credit risk model to complement our other risk mitigation measures.
c) would you consider offloading credit risk by partially securitizing your loans?
Not in the near term, because our lending model is too new and changes too rapidly for credit risk to be easily quantifiable. In addition, we'd be concerned about moral hazard.
d) Countries where you operate in have a serious risk of document fraud. can you share stories of fraud mitigation ?
One of the major shifts in our lending approach has been a move away from document-based vetting. For example, we used to require local community leaders (religious officials, school principals etc.) to sign recommendation forms for loan applicants. We found that fraudulent applicants would forge these, even having false organizational stamps manufactured for this purpose. It was possible to mitigate this by telephoning the officials who signed the forms and asking them to verify their institutions' addresses or other hard-to-remember information, but it proved too difficult for our all-volunteer staff to cope with the erratic phone networks and linguistic barriers once we started processing thousands of applications.
We never did figure out a way to mitigate document fraud at scale. Instead, we developed other verification methods that were more difficult to falsify, and reduced the initial loan amount, until the costs of getting a fraudulent application through our vetting system outweighed the expected gains.
f) finally, what kind of lenders do you seek ? Are you looking for altruistic people or people seeking to spread their investment risk ?
We are looking for altruistic people, who want to help people in the world's poorest places without dependency-creating handouts or exorbitant interest rates. Zidisha at present is not viable as a purely commercial investment.
e) Also, do you realize that you have the opportunity to become the Equifax of third-world countries ?
Yes, that's an interesting possibility, though I've not yet heard of Zidisha being used in this way. Most people who can borrow with Zidisha do not seek credit elsewhere.
Can this be approached as a (low or high risk?) investment, from the borrower's perspective, or is it mostly about helping third world inhabitants without any substantial ROI for borrower?
Oh great. Payday loan sharks meet Wall-street meet the developing world. The whole concept of microlending is based on the free market fantasy that poor people can build their own businesses and be self reliant, as if market entry barriers don't exist. As if a weaver investing in a manual loom does not face the competition of textiles industrially produced in China for pennies.
The financial sector jumped all over microlending: it's a virgin market for financial services ("the unbanked"), the default rate is low because the existing social structure is leveraged (like MLMs, Amway etc.), and the profit potentials are huge. Meanwhile, they can claim they are helping people and the nasty effects of this type of loan sharking take place in a far away country to people who can barely understand they are victimized.
Poor people need jobs and education, not high interest loans that will just finance survival. The developing world will increase it's standard of living the same way the West did: large scale efficient production, ran by educated and productive workers earning wages and creating demand. It will not be via a bunch of banana cart pushers.
When you post things like this, my downvote ends up nullifying my initial upvote on your OP. If you value the precious magic internet points, with a complaint about downvotes you're just giving people twice the opportunity to downvote you.
I agree it looks stupid, but when I posted that there were three negative votes and not a single reply. I really don't care about the downvotes, I want arguments.
The lending industry is like a drug store: you care cure some diseases with the right drugs, but you can't run it like an "all you can eat" buffet. People will kill themselves, literally.
If I want to encourage people to respond because I'm honestly interested or confused, I edit my downvoted reply and double-down on the explanation of my point-of-view. It's important to me that people downvote me for something that is expressed unambiguously and that I truly believe. Then, it's a point of pride to be downvoted.
Also, for anti-authoritarian/anti-libertarian stuff that gets downvoted: I notice that I generally get most of the votes back later in the day and overnight after Europe gets into the office. The US middle class is generally very angry, and believes that money is the condensation of divine grace. Just saying.
The short response is: Payday loans have APR up to 1000%. These ones are comparable with bad rating, but still reasonable, long-term bank loans. Payday loans capture people who need food or pay the late bills now, discussed loans are (usually) for pretty well-defined business purpose.
> Poor people need jobs and education
Good, microlending helps them create a job, or sustain it themselves rather than looking for one. Or do you think someone should come in from outside and do it for them?
> large scale efficient production
So... China's mass production model then? How do you propose jump-starting that?
- got successful, tries to expand to another location
- creates job for another
- money helps him get the education
Isn't that exactly what you wanted him to achieve? (job*2, education, person capable of creating your large scale production environment in the future, wouldn't call him victimised)
> China's mass production model then? How do you propose jump-starting that?
By loans made by the private or public sectors for the purpose of developing large scale productive capacities ? Craftsmen can't compete with industrial production, there is a minimal scale problem.
> microlending helps them create a job, or sustain it themselves rather than looking for one.
A $50 loan can't do that. You will not get an education and you will not build a business with $50, not even in the poorest village on Earth. You might help a small business owner solve a crisis situation and find some stability.
The source of poverty is lack of investment, micro-loans will drain resources out of the community (principal + interest) and leave very little actual productive capital behind.
While the idea as initially conceived by Yunus was well intentioned, the focus on lending (as opposed to developing and building) has transformed it into a form of loan sharking. Many of the newer Microlending networks that operate in India have focused so tightly on performance and profit and so little on the welfare of the clients that it has resulted in a slew of suicides and assorted tragedies:
http://www.bloomberg.com/news/2010-12-28/suicides-among-borr...
Edit: the example you provide is just that, an anecdote. It's certainly possible, but is the dominant story or the exception ? At 20% interest rate in US dollars, plus any volatility the local currency will induce, we are talking about credit card level rates, and not business loans. The introductory loan in 50 to 150$, if you need more you need to build credit, just like credit cards. How well are the borrowers and their scheme selected ? What's to prevent it from becoming a way for poor families to finance interest bearing consumption, just like a credit card ?
On a case by case basis, there are opportunities for development that can withstand 20% interest because the local need for that service is so great, thus the amortization is very rapid. There is a massive risk in this internet driven model that borrowers are selected solely for their ability to repay, and that scale and growth becomes the driving factors.
You will NOT spur development by simply lending money to the poor, quite the contrary you will lock them into a high debt, high interest form of consumption that is all too familiar to poor families in the West.
> You will not get an education and you will not build a business with $50
It's not $50 on the borrower's side. It's about that amount on the lender's side - which makes up a small part of a ~hundreds/thousands dollar loan. That can achieve a lot. Have a look at the actual list of requests - most of them are around $500 total.
>micro-loans will drain resources out of the community
That is so not how capitalism works. Money is a means to induce labor. Right now there is a lot of human capital in developing countries that is wasted because there is no financial capital to fuel it. Imagine a young person willing to labor 18 hours a day building widgets. Instead he just sits around because he can't find a job building widgets (or afford the materials to buy the raw materials.)
The key phrase you leave out is "and leave very little actual productive capital behind". People does not equal human capital, you need educated and experienced people.
The only way the borrowers can repay the USD principal + interest back to the external financiers is to participate in world trade, to export or at least substitute the import of widgets from industrialized nations. Will a micro-loan create the conditions for such competitive production ? Hard to imagine.
I like the concept of P2P microlending, especially enabled by technology, so the loan sharks can be kept out of the system.
But to really be sustainable and have a high-impact (as a tool for economic growth in the 3rd worlds, not as a business per se), it should be more localized. Think at something like localbitcoins.com - as a working system - ignore the bitcoin part of it. This way you can get rid of the most of the taxes and decrease the level of fraud.
I think domestic P2P platforms are a big untapped opportunity in developing countries, especially large ones. They are still rare; Fairplace in Brazil is a notable exception.
An international platform like Zidisha can offer a different value proposition, in that 1) we enable arbitrage in purchasing power parity between wealthy and developing countries (the price of dinner at an upscale restaurant in America could finance the startup of an entire restaurant in Kenya), and 2) our users value the chance to connect with an ordinary person on the other side of the world, learning about their culture, socioeconomic realities, etc.
37 comments
[ 3.6 ms ] story [ 92.7 ms ] threadMost in-country volunteers (we call them "Volunteer Mentors") are also Zidisha borrowers. They learn about the mentoring program via a note in the borrower account interface of our website, and apply via email.
You can view the data used to generate the repayment graph here: https://www.zidisha.org/index.php?p=114
Zidisha's overhead costs average about 10% of the value of the loans we facilitate. The costs are fully covered by borrower fees and optional lender tips. Borrower fees include a lifetime membership fee of $12 paid when the first loan is disbursed, and a flat fee of 5% of each loan funded per year the loan is held.
interesting definition of flat fee. It sounds to me like additional 5% interest, isn't it?
Interest accrues as a function of time. Yes, one could model this fee as an interest rate by taking into account the loan's expected term. But the 5% is not compensation for the time value of money or risk of lending–it is a facilitation payment. As such, calling it a fee seems acceptable.
Since the 5% doesn't change with the amount lent, or other factors, "flat" seems an appropriate adjective (though it is more commonly used to refer to a fixed dollar, versus percentage, amount).
EDIT: since the "fee" does appear to vary with a loan's term, yes, I think this would be correctly characterizable as interest.
"per year the loan is held" sounds exactly this.
>Since the 5% doesn't change with the amount lent
that is the definition of a '%' sign, isn't it? :)
Using '%' with "per year" is a definition of interest, isn't?
Edit: wow, i just now recognized another possibility - charging 5% x [expected years] upfront - that would be "fee", yes. One fr!cking large fee. Who in sane mind is going to pay it? That sounds like preying on people who have no other choice.
I was not aware of this. You are correct - this looks more like interest than a facilitation fee.
> that is the definition of a '%' sign, isn't it? :)
Transaction fees are usually assessed as a fraction of the value transacted. A flat fee, within this context, is a non-varying percentage of the transaction value, e.g. 5%. A non-flat fee has moving parts, e.g. 5% for the first $100, 4% for the next, etc. (or 5% if the interest rate is less than 15%, 10% if above, etc.).
It is an ambiguous term. I try to avoid it. Instead of calling a fee "flat" to emphasise its simplicity, make it simple.
It might be more precise to structure the service fee as a fixed percentage of the loan amount regardless of the term. We opted to structure it as an annual rate mainly for simplicity: it can be added to lender interest so that loan applicants can see the full cost of the loan in a single rate, without any other unexpected fees.
Supporting bitcoin (unless you are a bitcoin start-up) seems like a silly thing to do for a company that needs to prioritize due to resource constraints.
2) Sending BTC internationally is simpler than sending fiat
I can't just convert a bitcoin sitting in my wallet to something I can give to someone else to exchange for cash without a whole pile of guarantees.
The only people I can trade bitcoin with for cash is other bitcoin users, which - as I noted above - are few and far between.
Yes, sending BTC internationally is simpler, but that does not mean the recipient can do the same things with them as they can do with fiat, and as such it just shifts the problem to the recipient. When you send cash (using for instance western union) it is almost instantly available as well, without all the downsides of having to find someone that will trade your bitcoins at something approaching their market value.
IMHO there will be a high overlap between people using a lending startup and Bitcoin users, as both are modern bank alternatives.
In my humble experience exchanging Bitcoins for cash was hard a couple of years ago, but not today. All my geek friends and colleagues use it.
- we did not identify a straightforward way to convert bitcoins to cash in borrower currencies
- it seemed from our informal research that supporting bitcoin has not resulted in many new supporters for most nonprofits that have tried it
- supporting another payment method would add overhead weight to our organization
- so few of our lenders use bitcoin that we estimated the savings in transfer fees wouldn't be worth introducing more complication in our payment options
We're keeping an eye on bitcoin and may begin supporting it if these conditions change.
I had designed and developed a credit exposure and credit risk management for large corporate and commercial banking for a large Canadian bank and I am curious to know how credit exposure and risk is managed by Zidisha.
a) what collateral do you accept and how do you value the collateral?
b) do you consider country risk ? and how do you quantify individual's risk profile ? have you developed a credit risk model ?
c) would you consider offloading credit risk by partially securitizing your loans?
d) Countries where you operate in have a serious risk of document fraud. can you share stories of fraud mitigation ?
f) finally, what kind of lenders do you seek ? Are you looking for altruistic people or people seeking to spread their investment risk ?
e) Also, do you realize that you have the opportunity to become the Equifax of third-world countries ?
We don't accept any collateral, because 1) most of our borrowers are low-income individuals just entering the working population, and don't have any substantial assets, and 2) a collateral-based credit risk mitigation system would be too expensive relative to the size of the loans (the starting loan amount is $50 - $150).
b) do you consider country risk ? and how do you quantify individual's risk profile ? have you developed a credit risk model ?
Currently, once a borrower is admitted to Zidisha, lenders alone judge country and credit risk. However, we're currently working on a data-driven credit risk model to complement our other risk mitigation measures.
c) would you consider offloading credit risk by partially securitizing your loans?
Not in the near term, because our lending model is too new and changes too rapidly for credit risk to be easily quantifiable. In addition, we'd be concerned about moral hazard.
d) Countries where you operate in have a serious risk of document fraud. can you share stories of fraud mitigation ?
One of the major shifts in our lending approach has been a move away from document-based vetting. For example, we used to require local community leaders (religious officials, school principals etc.) to sign recommendation forms for loan applicants. We found that fraudulent applicants would forge these, even having false organizational stamps manufactured for this purpose. It was possible to mitigate this by telephoning the officials who signed the forms and asking them to verify their institutions' addresses or other hard-to-remember information, but it proved too difficult for our all-volunteer staff to cope with the erratic phone networks and linguistic barriers once we started processing thousands of applications.
We never did figure out a way to mitigate document fraud at scale. Instead, we developed other verification methods that were more difficult to falsify, and reduced the initial loan amount, until the costs of getting a fraudulent application through our vetting system outweighed the expected gains.
f) finally, what kind of lenders do you seek ? Are you looking for altruistic people or people seeking to spread their investment risk ?
We are looking for altruistic people, who want to help people in the world's poorest places without dependency-creating handouts or exorbitant interest rates. Zidisha at present is not viable as a purely commercial investment.
e) Also, do you realize that you have the opportunity to become the Equifax of third-world countries ?
Yes, that's an interesting possibility, though I've not yet heard of Zidisha being used in this way. Most people who can borrow with Zidisha do not seek credit elsewhere.
The financial sector jumped all over microlending: it's a virgin market for financial services ("the unbanked"), the default rate is low because the existing social structure is leveraged (like MLMs, Amway etc.), and the profit potentials are huge. Meanwhile, they can claim they are helping people and the nasty effects of this type of loan sharking take place in a far away country to people who can barely understand they are victimized.
Poor people need jobs and education, not high interest loans that will just finance survival. The developing world will increase it's standard of living the same way the West did: large scale efficient production, ran by educated and productive workers earning wages and creating demand. It will not be via a bunch of banana cart pushers.
The lending industry is like a drug store: you care cure some diseases with the right drugs, but you can't run it like an "all you can eat" buffet. People will kill themselves, literally.
Also, for anti-authoritarian/anti-libertarian stuff that gets downvoted: I notice that I generally get most of the votes back later in the day and overnight after Europe gets into the office. The US middle class is generally very angry, and believes that money is the condensation of divine grace. Just saying.
> Poor people need jobs and education
Good, microlending helps them create a job, or sustain it themselves rather than looking for one. Or do you think someone should come in from outside and do it for them?
> large scale efficient production
So... China's mass production model then? How do you propose jump-starting that?
Edit: On a specific example:
https://www.zidisha.org/microfinance/loan/MwangiGituathi/791... (first non-trivial-shop entry from front page)
- started business using the first loan
- got successful, tries to expand to another location
- creates job for another
- money helps him get the education
Isn't that exactly what you wanted him to achieve? (job*2, education, person capable of creating your large scale production environment in the future, wouldn't call him victimised)
By loans made by the private or public sectors for the purpose of developing large scale productive capacities ? Craftsmen can't compete with industrial production, there is a minimal scale problem.
> microlending helps them create a job, or sustain it themselves rather than looking for one.
A $50 loan can't do that. You will not get an education and you will not build a business with $50, not even in the poorest village on Earth. You might help a small business owner solve a crisis situation and find some stability.
The source of poverty is lack of investment, micro-loans will drain resources out of the community (principal + interest) and leave very little actual productive capital behind.
While the idea as initially conceived by Yunus was well intentioned, the focus on lending (as opposed to developing and building) has transformed it into a form of loan sharking. Many of the newer Microlending networks that operate in India have focused so tightly on performance and profit and so little on the welfare of the clients that it has resulted in a slew of suicides and assorted tragedies: http://www.bloomberg.com/news/2010-12-28/suicides-among-borr...
Edit: the example you provide is just that, an anecdote. It's certainly possible, but is the dominant story or the exception ? At 20% interest rate in US dollars, plus any volatility the local currency will induce, we are talking about credit card level rates, and not business loans. The introductory loan in 50 to 150$, if you need more you need to build credit, just like credit cards. How well are the borrowers and their scheme selected ? What's to prevent it from becoming a way for poor families to finance interest bearing consumption, just like a credit card ?
On a case by case basis, there are opportunities for development that can withstand 20% interest because the local need for that service is so great, thus the amortization is very rapid. There is a massive risk in this internet driven model that borrowers are selected solely for their ability to repay, and that scale and growth becomes the driving factors.
You will NOT spur development by simply lending money to the poor, quite the contrary you will lock them into a high debt, high interest form of consumption that is all too familiar to poor families in the West.
It's not $50 on the borrower's side. It's about that amount on the lender's side - which makes up a small part of a ~hundreds/thousands dollar loan. That can achieve a lot. Have a look at the actual list of requests - most of them are around $500 total.
That is so not how capitalism works. Money is a means to induce labor. Right now there is a lot of human capital in developing countries that is wasted because there is no financial capital to fuel it. Imagine a young person willing to labor 18 hours a day building widgets. Instead he just sits around because he can't find a job building widgets (or afford the materials to buy the raw materials.)
The only way the borrowers can repay the USD principal + interest back to the external financiers is to participate in world trade, to export or at least substitute the import of widgets from industrialized nations. Will a micro-loan create the conditions for such competitive production ? Hard to imagine.
But to really be sustainable and have a high-impact (as a tool for economic growth in the 3rd worlds, not as a business per se), it should be more localized. Think at something like localbitcoins.com - as a working system - ignore the bitcoin part of it. This way you can get rid of the most of the taxes and decrease the level of fraud.
An international platform like Zidisha can offer a different value proposition, in that 1) we enable arbitrage in purchasing power parity between wealthy and developing countries (the price of dinner at an upscale restaurant in America could finance the startup of an entire restaurant in Kenya), and 2) our users value the chance to connect with an ordinary person on the other side of the world, learning about their culture, socioeconomic realities, etc.