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Comment by rdl | Hacker News Reader

I love the idea, but I have one concern, which may or may not be real.

I think 5% is below market rate for what you are doing. By establishing 5% as the rate, you crowd out any local investment options which would need to charge above 5% (but not 60%). By making the subsidy non explicit, you make it even harder for local lenders to compete.

I don't know what a market rate for this kind of loan would be, but in the US, it would be more like 10%. Some kind of explicit discount due to social benefit or something like that, or marketing to launch a new business, or whatever, could make sense, but I really don't want to see the same situation where USAIS dumps free or subsidized goods and services and crowds out the local producer.

At the same time, sacrificing the (not yet extant) p2p lending sector in Kenya might be ok if it helps enough other businesses -- similarly communication and security being subsidized might be a net good.

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Hi rdl, the question of which interest rate will result in the best social impact is one of the most frequently debated topics among Zidisha users.

We allow borrowers to offer any interest rate they wish, up to a maximum of 25%. Lenders are then free to fund the loans at any rate up to the maximum offered by the borrower. Many lenders opt to fund loan applications at well below the offered rate, resulting in an overall average of around 5%.

We have not taken a position on the "optimal" interest rate, other than limiting it to no more than 25%. It will be interesting to see whether the average interest rate changes over time and as we continue to grow.

That sounds reasonable. I suspect in time the market will probably head more toward the market rate.

In fact, that seems to have been the trend so far. A year ago, the average rate paid to lenders was only 3% annually.

25% is still pretty usurious.

I think many people would feel the same way. We usually see 25% rates offered for small loans for new members, which are only held for a short time. For example, a new borrower may request $50 at 25% interest and hold it for one month, and total interest payments would be $1.04. Even then many lenders normally opt to fund the loan at less than the rate offered.

I don't think the percentage rate is that big a deal, even at 25% (although I'd probably go for ~15-20%, assuming 10% default rate and 5% cost of capital) -- the area where I'd try to subsidize or otherwise avoid passing through cost/profit is fees.

I'm fine with short term loans at 25%. As you say, $50 at 25% for a month is $1.04. The problem is when a $1-5 fee is applied on top of that, giving interest rates >100% annualized. That's the kind of usury which has been common in the US payday advance industry (although better now in most states after regulatory action), rent-to-own, etc.

25% is close to a U.S. angel investor's cost of capital. Capping rates across a market does not lower the cost of capital, it depresses capital availability.

For a lending charity, rate caps reduce interest income. This, in the long run, depletes the charity's capital base. An interest rate (>5%) lower than the expected default rate (~10%), as it appears to be here, amplifies the effect. That said, the decision could make sense. If "non-usurious lending" increases donor interest enough, it could offset the capital depletion effect.

Have you thought about establishing a minimum interest rate lenders can set to avoid indirectly contributing to the traditional trap of foreign aid?

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