Is direct P2P microlending financially sustainable?
p2p-microlending-blog.zidisha.org
p2p-microlending-blog.zidisha.org
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.
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.
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.
You can view the data used to generate the repayment graph here: https://www.zidisha.org/index.php?p=114
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.
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.
> 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.
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.
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.
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.