Zidisha (YC W14) reduces interest rates for P2P lending to developing countries
p2p-microlending-blog.zidisha.org
p2p-microlending-blog.zidisha.org
Zidisha is registered as a 501(c)(3) nonprofit only, and does not have a securities license. For this reason, our terms of use do not offer lenders any guarantee they will be able to withdraw repaid loan funds. Legally, Zidisha lending accounts are not financial assets, and any payouts to lenders are treated as voluntary promotional payments offered at Zidisha's sole discretion. That is one more reason we try to keep the emphasis on philanthropic impact, rather than the financial aspect of the loans.
As someone who donates money to 501(c)3s that are focused on the developing world and who also dabbles in P2P lending, I see a disconnect. There's nothing magical about a 10% APR figure. Maybe it feels better to some folks, but for me personally at least, if I'm looking for "humanitarian appeal", I would far prefer to donate money than lend.
The blog states "higher interest rates do not seem to have resulted in higher levels of loan funding overall." This is an interesting statement. It could mean one of two things: Zidisha lenders are not actually interested in lending and are going to allocate capital regardless of risk, or the higher interest rates aren't high enough to attract capital to the theoretically riskiest borrowers. Without more data answering the question "Why?", it's premature to use this as justification for capping interest rates.
It is true that the conclusion that higher interest has not led to more lending is not based on rigorous data. It is rather based on the general observation that during the past year or so, loan funding volume has not noticeably increased at times when the highest interest rates offered at Zidisha increased.
The generalization that Zidisha lenders are not primarily attracted by financial returns is likewise not based on data, but rather a subjective assessment resulting from many years of survey responses, comments posted on our website and conversations with lenders.
(An important caveat is that many of our lenders do care about preserving the value of their lending funds over time, and often try to lend at interest rates that they believe will help them achieve this goal. But this is a very different motivation than profit maximization.)
I agree with you that offering dramatically higher interest may well attract more capital, from lenders who are motivated by profit rather than philanthropy. This would not necessarily be a bad thing, but it is not our mission or core area of expertise.
It will be interesting to see if a profit-based variation of Zidisha emerges, and whether it ultimately has a greater impact on the opportunities available to entrepreneurs in developing countries than our philanthropic platform.
Regarding your comment that "It will be interesting to see if a profit-based variation of Zidisha emerges...": it seems to me that you have a positioning dilemma. The minute you invite someone to lend for interest, you are profit-based. The fact that you cap interest rates, perhaps requiring that lenders charge far less than risk would otherwise indicate, doesn't change this.
If your lenders aren't motivated at all by profit, don't care to allocate capital in a manner closely aligned to risk, and you don't see yourself as being profit-based, why not simply allow me to donate money to specific individuals? Being able to target small donations to a specific person for a specific has a lot of appeal. In fact, there are certain charities I'm familiar with that I know frequently get requests from donors who want to be able to trace their donations. Unfortunately, tracking individual donations to individual recipients is something that a lot of major charities cannot do efficiently at their scale. It would simply cost too much.
Obviously, the lending aspect of your platform allows me to redeploy my capital, something I wouldn't be able to do if I was simply making a donation, but as with any other P2P lending platform, my interest earned is taxable income so contributing through Zidisha is far less tax-efficient than donating to a 501(c)3.
Here's an idea which may or may not be feasible legally/logistically: I donate $50 to Zidisha, which Zidisha loans to a borrower of my choosing. When that person pays back the loan to Zidisha, Zidisha allows me to direct the lending of $50 plus the interest Zidisha earned to another borrower. And so on.
We had a discussion of this idea in the Zidisha member forum some time ago, and most participants indicated they would lend less if they did not have the option of receiving their funds back.
A greater concern is that turning the loans into donations, even though the individual borrowers are expected to repay them, could change the nature of the relationship between lenders and borrowers from one of mutually beneficial partnership, to that of patron and dependent. I don't think this development would be good for borrowers or lenders.
Our current position is, as you say, somewhere between the extremes of for-profit lending and outright donations. Some would call this subsidized provision of capital or "impact investing." As a pioneer in this space, we are still adjusting our positioning as we learn with experience what works best.
Thus far, we've opted to display only one kind of interest rate (the simple flat rate upon which our website calculations are based), along with a modal box note that the equivalent APR is roughly twice this, and a prominent display of the actual dollar costs to the borrower.