How Can I Invest in Microfinance? Part 2: My Zidisha Experience

The author concludes that he made a very modest profit, which only counts as a net loss if a one-time fee to Paypal is counted.

Is there a way to put money into a Zidisha account without paying processing fees? What's the cheapest way to put money into a Zidisha account?

On the lender's end, I think about microfinance more as a "renewable donation" than as an "investment". So, it would be nice if 100% of the donation went to the operation of the charitable organization or the charitable act itself.

edit: less ambiguous question.

Prosper was one of many inspirations for Zidisha. The attorney that led Prosper's legalization deal with the SEC advises Zidisha pro bono.

I saw the HN article questioning Zidisha - Modern Microcredit I think. My experience has differed from that author's impression, and I have tried to be as transparent as possible to explain with hard data why. But I cannot explain HOW this difference in experiences with Zidisha occurs. My concerns with Kiva are more far-reaching, but no point going over that now. I receive many emails asking precisely this question, which prompted me to embark on an overview of the sector, explain the options available (there are more than you might think!), and to examine the individual players in each option. Ultimately you need to decide what you actually seek to achieve, and which model you prefer. Do you need to use a P2P at all, for example? What about simply opening a savings account in a regulated microfinance bank and leaving your funds there, potentially earning a small interest rate? Your funds will be used for the same purpose, lending to microfinance clients, but you won't know which? And if you prefer the P2P mechanism, as far as I can see the key questions are: lend or donate? Lend at interest or interest-free? Lend via an MFI or directly? Once you answer these questions you will have narrowed your search down significantly, and can then do a more detailed analysis of the options available. I think you should think about these questions, and be aware of the options, before you try to select who you should invest with.

You are right that MyC4 is euro denominated. However, I had a quick look at their FAQ:

https://www.myc4.com/About/MAIN_FAQ#WHO_CAN_INVEST

Seems to be available to everyone.

It is true that 74% of loans whose final repayment due date has passed have been repaid. We expect the ultimate repayment rate of those loans will be higher than that, because many loans are repaid after their due dates.

In addition, most of the loans covered by the historical repayment rate displayed in our website were issued over a year ago. Our repayment performance has improved substantially in the past year, such that risk level of loans currently being issued is lower than our historical repayment rate suggests.

Zidisha is still not a safe place to store savings or a lucrative investment opportunity, but I think it's reasonable to expect that the value of lending funds can be preserved over the long term, while offering financing opportunities at dramatically lower cost to the borrowers. As a nonprofit philanthropic platform, that is Zidisha's purpose.

Completely accurate, which is why I state "I am basing this entire analysis on a number of large assumptions. Firstly, that my current outstanding loans will be repaid with the same reliability as my completed loans", and a number of other assumptions in addition. Nor do I know the extent to which previous loans, which may now be 100% repaid, may have dipped into default and subsequently recovered, which also incur a marginal cost in terms of opportunity cost of capital etc. My analysis is very much "cash based", which is limited, but this is the data I have available. A quick look through some of the 100% repaid loans suggests that at certain points in the cycle these were also overdue. Perhaps I could obtain the individual repayments versus due dates for each loan and work this out with greater accuracy, but I haven't bothered so far. To what extent are my current loans likely to default at the 18.65% rate you suggest? I have no idea. To what extent did my previous loans default to this extent? I have no idea. This is why I simply take a bird's eye perspective and look at net cash flows. However, as you accurately imply, for me to genuinely do this with precision I should wait until all current loans have been repaid, which either means I have idle funds on the platform, or I have to complicate the analysis by considering my average outstanding balance, which I have assumed for simplicity is $1000, which it has been to date roughly.

However, are you considering the gross interest income I will earn on the loans that don't default over the forthcoming period? This will partially offset some of the defaults, I can't say with precision to what extent. I count only principal outstanding, not interest income due. So, to some extent this will lessen the impact of possible defaults.

Finally, I have done a couple of new bids since my cut-off date of April 6th when I downloaded the data, so the numbers might not add up 100%. Oh, and Jessica is my wife, she started on Zidisha first, before I took over!

At the end of the day I am hesistant to say resolutely that Zidisha is a break-even venture. It has been so far, but subject to certain assumptions which I hope I have stated clearly. 18 months is a decent trial-period, but it's not a perfect analysis. And if I do subsequently lose a few percent on $1000 that is tolerable. Would I put $10.000 on the platform? No. And comments warning that Zidisha needs to tighten delinquency are completely accurate, and to an extent I am gambling on their ability to do just that - progress seems good so far (in 2014). What intrigues me is the innovation in the business model. It is disruptive. It is a first-mover in this space. Does that mean the model is perfectly refined and cannot be improved? I doubt it, and I look forward to seeing how they develop. But I think it is worth giving them a chance, which is what I have done (to a modest extent), and waiting to see what happens. I will update my blog periodically when more data comes in.

It's the most serious question of all. The evidence is extremely mixed. I love David Roodman's Time Magazine quote for its brevity:

"On current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero"

http://content.time.com/time/world/article/0,8599,2103831,00...

Needless to say the debate rages on. The Zidisha discussion detracts from this central point, but on valid grounds. To some extent the shortfalls of microfinance may be due to the high interest rates charged, the restrictive loan conditions, the profit motivation, the aggressive intermediating MFIs etc., some of which Zidisha addresses. However, if you read the work of Milford Bateman, for example, he raises more fundamental questions about microfinance. In the P2P space profit is not really an option, and in Zidisha's case it is debatable whether one can even break-even. But look at the higher levels, the profits accumulating to Accion in the IPO of Compartamos; the millions made in the IPO of SKS, or at some of the microfinance investment funds - these are the big boys, and at that level yes, there are vast profits to be made. Motivation is a hard thing to prove, but you are right to suggest that profit has come to play an unhealthy role in the debate. The sector is extremely opaque, transparency is rare, there are rampant conflicts of interest and ill-aligned incentives. It is largely unregulated in practice, despite endless window-dressing to the contrary. And when some new start-up promotes microloans for poor people to connect their houses to the drinking water supply, as sensible and this might superficially seem, isn't this a public good that the government should provide?

Reading the standard microfinance mantra one could be forgiven for concluding that all the world's problems can be solved with loans, and that profit maximisation is the best structure to arrange this. We are familiar with the theory, but the evidence is sorely lacking.