Comment by qwrusz | Hacker News Reader

Comment by qwrusz | Hacker News Reader

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Hi Julia,

Congrats on the success so far! Wishing your team and the entrepreneurs you are helping even greater success to come.

I don't know all that much about microlending, but I do know quite a bit about investment funds, so I clicked the link hoping to learn more and maybe help offer some feedback if relevant.

After reading your blog post I still didn't fully understand it so I went to your main site to try to learn more. I read through the FAQs too, but still have a couple questions:

For example: while exploring some of the projects on your site I came across Ms. Mwangi from Kenya asking for a loan to buy shoes and clothes for her clothing line. https://www.zidisha.org/loan/shoes-clothes-for-my-clothline-...

Ms. Mwangi is asking to borrow $509.00

The cost of the loan details show:

-Service Fee: 5% of $509.00 = $25.47

-Lifetime membership fee: $50.95

-Optional Pay into Zidisha Members Loan Fund in return for a higher starting credit limit: $428.02

The costs total: $504.44

To me this looks like costs and fees totalling $504 in order for her to borrow $5?

So my sincere apologies for any misunderstanding on my part. I realize microlending has unique risks and challenges compared to other types of lending. And of course a practical amount of money needs to got to Zidisha to help cover costs and expenses of the good work you guys are doing.

But how can costs and fees be $504 for a $5 loan? Is that correct? The costs to loan value seem very high to say the least. If you see this, I'd really appreciate a bit of clarity and info on these details. Thanks

Thanks for taking a look and for your feedback. The default starting loan for first-time borrowers without a track record is very small (around $10). If a first-time borrower opts to start with the small default amount, there is no Members Loan Fund deposit required. But if a first-time borrower is confident they can repay larger amounts, we offer the option of depositing the difference between the ~$10 default first-time loan amount and the desired starting credit limit into the Members Loan Fund upon joining Zidisha. The net amount received for the first loan is still $10, but after successful repayment of the first loan, the borrower may take out larger loans commensurate with the starting loan they have repaid.

The Members Loan Fund deposit may be withdrawn at any time the borrower does not have an outstanding loan. It may also be used to pay off the remaining balance of an outstanding loan, if the borrower requests it. If the loan goes into arrears, it is used to reimburse lenders for the amount they had lent.

The lifetime membership fee is currently zero, but at the time this borrower joined, it was 10% of the starting credit limit chosen by the applicant. (So someone choosing the default starting credit limit of $10 would pay a lifetime membership fee of $1.)

The above costs are only paid once, at the time a borrower first joins Zidisha, and entitle the borrower to lifetime access to raise loans. You can learn more about why we developed a lending model that front-loads costs here: http://www.huffingtonpost.com/julia-kurnia/the-story-of-zidi...

The 5% service fee is a flat percentage of each loan amount, and is independent of the loan term. If Ms. Mwangi opts to hold the loan for two years, she would still pay only $25.47.

We'll aim to make this clearer in the cost breakdown explanation. Thanks again!

Thank you for the reply.

1. Part of the reason I found the Members Loan Fund confusing was the terminology in the FAQ wasn’t clear it’s a deposit which could be withdrawn if the borrower no longer has an outstanding loan.

2. I understand depositing the difference of first loan into the MLF helps facilitate future larger loans at a higher credit limit. Though how it works seems to involve a borrower receiving a ~$10 loan, but then being asked to “repay” the lender a very different loan amount in some cases hundreds of dollars – over the course of only a few weeks...These entrepreneurs able to turn $10 into $100s in profits so quickly would be very impressive. Maybe repayments come from another source.

3. There may be more behind this part but it looks like when good borrowers pay back their loans in full and they eventually move on from Zidisha they would take their MLF deposit with them as they leave. At the same time there are the borrowers who take out loans and default on repayment and don’t come back; they end up creating a loss as their MLF deposit doesn’t cover the full loan value.

Basically this sounds like a system exposed to some moral hazard and adverse selection but without a mechanism for good actors to help offset any losses from bad actors. ie people leaving Zidisha are either ~neutral to the fund or they created a loss, no one ever moves through leaving a net positive. It's comparable to insurance company model and doesn't sound sustainable if this is what's happening - and made more difficult if the biz model involves spending the principal and keeping the interest instead of spending interest and keeping the principal.

With that said, I do want to mention I read the huffpo link. It’s awesome the way you guys are iterating based on observations and innovating as you build this - making it more efficient. It's really exciting to see this happening on this level in the non-profit space.

I realize you have a challenging two sided market to grow that requires balancing info and experience for many people across many countries. It seems really complicated too how to handle the different messaging that lenders and borrowers need here respectively and then also keeping things consistent as one platform. And it's P2P lending which brings with it all kinds of hurdles and biases. And it's also non-profit work! Which nobody seems to get is real work and too many crazy people love to complain about (PS I hope you are not underpaying yourself for this role, I see way too many underpaid non-profit workers). Basically what you are building looks darn hard to do, and it's super impressive what's been built so far, a ton of respect from me. Best of luck.

After depositing the $428 she can borrow often and without interest in the future. Bankrolling Zidisha / the fund. And on this transaction only to her disadvantage. She's leveraging her shops supplies while she had the money!

However she still pays a 5% fee (in this case, for a 3 month loan, 21.5% annual). Obviously the fee is interest as well.

The lender gets no return, but a tax deductibility.

It's a clever way of building a massive fund.

My problem with most P2P (micro-)lending is that its risk management is often lacking and that interest rates do not adequately reflect risks. A zero percent nominal rate is bogus for a Nairobi shop owner. And 20+% fees excessive, especially when someone has to pay $400+ to get in.

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