Hi devinmontgomery,
Do you mean this page? https://www.zidisha.org/microfinance/borrow.html
How would you suggest modifying this to make it more transparent?
729 karma · joined February 28, 2013
Do you mean this page? https://www.zidisha.org/microfinance/borrow.html
How would you suggest modifying this to make it more transparent?
It would certainly be possible to eliminate the registration fee, and make up the difference with a slightly higher recurring service fee. (We are not yet supported by any major foundations.) There are two main reasons we have not done so:
1. As a small nonprofit with limited financial resources, one of the measures we've adopted to ensure that we always have enough cash to cover our costs as we grow is to couple service fees closely with actual expenditures. There was historically a large up-front cost to admitting new borrowers, as we used to contract with local partners to verify applicants' credit histories with local lenders. We no longer work with local verification partners, but even today there is an up-front cost in Skype and SMS charges, as we verify the information of new borrowers with local contacts. Coupling registration fee income with the cost we incur to admit new borrowers ensures we will always have enough revenue to cover our costs, regardless of the pace at which Zidisha grows.
2. Shifting a portion of the costs borrowers pay to join Zidisha to a lifetime membership fee paid up front makes strengthens the incentive to participate responsibly with Zidisha over the long term, because costs of borrowing decrease as members build up a track record of on-time repayments over time.
I'm the director of Zidisha, and have just posted this response to the blog post. I'd be happy to respond to questions here.
Dear Modern Microcredit,
I'm sorry that you found our website information misleading. I'd like to address your points here:
1. Interest rate diagram: As we do apply a 5% transaction fee, I agree that the diagram showing a range of 0% to 15% is incorrect. A volunteer had donated the diagram to us years ago, and we did not scrutinize it sufficiently before using it in our website. We have now removed the diagram until it can be adjusted to reflect the 5% minimum cost.
2. Registration Fee: This is approximately $12 paid when a borrower first joins Zidisha, and provides lifetime membership. We do not include it in the interest cost calculation because it covers the unlimited number of loans that borrower may receive over the course of many years.
3. Zidisha service fee: This is a flat 5% of the loan amount per year the loan is held. Most Zidisha loans are held for less than a year, so it is usually less than 5% of the loan amount. For example, the 5% fee for $50 loan held for three months would be 1.25%, or about 63 cents. That is hardly exorbitant.
4. Interest offered to lenders: We allow borrowers to offer any interest rate they choose to lenders, from 0% up to a maximum of 25% of the value of the loan per year the loan is held. In practice, the highest rates are usually offered by first-time borrowers who have not yet established track records with Zidisha (much as new eBay sellers offer the first few items at a discount).
5. Using a collection of randomly selected loans as a proxy for average cost to Zidisha borrowers is misleading. First-time Zidisha loans are overrepresented in this measure, because they are smaller and repaid more quickly, and are therefore more numerous than the larger subsequent loans taken by established borrowers. Since first-time loans pay the highest annualized interest (because they are held for a short time), using them as an example overstates the average cost of Zidisha loans. Our statistics correct for this by using a weighted average based on dollar amounts rather than single loans.
6. We use flat rates not in order to deceive, but simply because they are more intuitive to borrowers and lenders than APR. The vast majority of our borrowers are used to flat rates being quoted by local lenders, and when they tell us they want to borrow $100 at 10% interest, they mean that they wish to repay $110. If we wanted to distort our data to appeal to lenders, it would make more sense to use APR, as the higher quoted rates would make lending through Zidisha seem more profitable. In fact, our intent is simply to make the cost easy to understand for everyone. For extra clarity, we provide extensive explanation of APR vs. flat rates, and display the exact dollar amounts borrowers pay for each loan in the loan profile pages. I don't see how this can be construed as hiding information. Using APR in Zidisha's situation would mean sacrificing a measure that the majority of our members understand easily for theoretical precision.
7. You imply that Zidisha does not in fact lower the cost of microloans in developing countries. That is not true. Even the $50 loan you cited above, which chose to offer to lenders the maximum interest rate we allow at Zidisha, ended up costing the borrower only $1.73 in interest and fees. I would be surprised if any other lender would offer an online applicant with no credit history a short-term loan at such rates.
Zidisha's cost savings to borrowers have been independently analyzed. Below is an excerpt from a study published by microfinance analyst Daniel Rozas. (Note that the average interest borrowers have opted to pay lenders has increased from 2-3% at the time of this study to about 5-6% currently, but this does not invalidate the conclusion that Zidisha's rates are substantially lower than what has hitherto been available.)
Zidisha’s interest rates are remarkably low, ranging between 7-8% annually (quoted flat), of which 2-3% is charged by lenders and 5% is levied by Zidisha to fund its operations. An additional fee of some $10-20 is charged for initial registration (but not for subsequent loans). This is far below the local prevailing rates – MFTransparency places similarly-sized loans (50,000 KES) at about 35% APR (Zidisha’s loans are 15-18% APR). And it’s all the more noteworthy, considering that Zidisha’s borrowers are largely in rural areas, where credit tends to be more expensive. The key to the low rates rests on Zidisha’s avoidance of costly staff and operations on the ground, and its ability to leverage low-cost funds from socially-motivated lenders. (from http://www.financialaccess.org/blog/2011/07/microfinance-wit...)
I'd be happy to provide further information as desired.
I have personally known many people who have dramatically improved their living standards thanks to Zidisha loans. Here is one example: https://www.zidisha.org/microfinance/loan/nbsarr/408.html (see the comment area for updates on the results of her loans).
Over and beyond measurable economic effects, I would argue that having access to the chance to raise affordable financing is transformative because it changes the way a person views the range of opportunities for advancement in life. For example, all Zidisha entrepreneurs know they can progress to raise up to $10,000 if they maintain a solid track record of repayments over time. Simply knowing that opportunity exists removes the ceiling people would otherwise put on their own ambitions. The result is intangible, but no less important because we cannot measure it.
We structured Zidisha as a nonprofit because our mission is genuinely philanthropic. Nobody is in it to make money. At heart, we are a cause-driven group of people and the nonprofit structure is a natural fit for that. Also, we do not want to be in a position where equity holders might oblige us to charge high fees to generate profits. Finally, our nonprofit status reinforces the message that lending through Zidisha is a philanthropic, not a financial investment activity.
Why do we accept donations to run our organization? We provide a valuable service to lenders in developing and maintaining the web platform and community that allows them to connect with the entrepreneurs they wish to support. We could charge lenders a fixed fee to cover the cost of this service, but we decided to structure it instead as an optional tip made while funding loans. The optional tip allows lenders who can afford more to donate generously.
Currently about half of our income comes from service fees paid by borrowers, and the rest comes from lender tips. We view both as payment for service we are providing, rather than a free handout.
Our concern with a profit-sharing model is that there seems to be no practical way to enforce truthful reporting and sharing of the profits. Relying on self-reporting alone would result in a system where honest people are penalized (by having to make payouts based on their honestly reported profits) and dishonest ones are rewarded. At best, it would degenerate into a simple handout program.
If we at Zidisha had a way to provide advice and contacts that are sufficiently localized as to be useful to the entrepreneurs, we certainly would do so. However, my experience is that Western business advice is useless or nearly so to most people surviving on a dollar or two per day in Africa or Asia. The best results I have seen come about when people are connected with resources in a market system, and allowed to decide for themselves how to leverage those resources.
If you would like to lend to entrepreneurs in the US, I would recommend checking out Kiva Zip, which does lend to Americans as well as Kenyans. https://zip.kiva.org/
At Zidisha, we don't restrict the purpose of loans (other than requiring that it be legal and ethical). The vast majority of applications nevertheless feature small businesses. This may be because the applicants are simply telling the lenders what they think the lenders want to hear, but the business uses of the loans have usually been confirmed when our volunteers visit the borrowers. (See this blog kept by an intern in Kenya last year for some good examples http://talkingstorykenya.wordpress.com/.)
When funds have not been used for revenue-generating purposes, this is usually due to an unplanned contingency, such as a health emergency in the family or a time of financial scarcity coinciding with school tuitions falling due.
I personally would not object to more loans being used for purposes such as tuition or home improvements, but understand that it is often too risky for individuals without regular sources of income to use debt to finance assets that do not generate revenue.
1. Loans once repaid can be lent out repeatedly, thereby helping many more people.
2. Repaying a loan at a reasonable interest rate puts lender and entrepreneur on a more equal footing, and is therefore more dignified for both.
3. Loans encourage a proactive and independent mentality on the part of the entrepreneur, rewarding success rather than neediness.
We'll try to make the next steps after creating a new lender account clearer. If you would like to make a loan, you can do this via the "Lend" page.
The main alternatives to debt that I am aware of are forms of Islamic financing, such as rent-to-own and profit-sharing models. We have explored the possibility of offering a profit-sharing financing product, but failed to come up with a feasible way of implementing such a model. The successful implementations of profit-sharing models seem to rely on strong information verification systems and intensive interaction with local staff, which we as an online service cannot offer.
More broadly, I do not think any one service - property reform, or business growth capital, or health or education for that matter - is a cure-all. All of these services are needed, and each works optimally when the others are present.
"Despite being born and raised in the rural parts of Kenya, I have managed to train and get tech savvy. I grew up with no electricity and i first saw a computer when i was 19years old when i enrolled for further studies. I put in long hours after classes just to be able to catch up with my peers. I learnt to create programmes and i had my first commercial software in the second year of campus. In my fourth year of campus, I had to drop out of school because of lack of school fees. I got a job that enabled me to save up enough money to clear my studies."
Most of our borrowers seem to feel a strong obligation to repay their lenders despite the disparity in wealth and culture. Maybe this is because they see the lenders as individuals like them.
Our members, borrowers and lenders, communicate with each other regularly through the website, and sometimes meet in person as well - for example, Zidisha members in Nakuru, Kenya, held a conference last week. It would be interesting to try to develop that into a network more focused on sharing advice and help, like YC.
We state in our terms of use that we are not obligated to return lender funds because doing so could be construed as selling securities under US law - something we are not licensed to do. In practice, we have honored every lender request to withdraw funds that we have received since we were founded four years ago.
I am not a tax expert, but I would be surprised if a tax authority construed Zidisha lending activity as taxable investment income, because according to our terms of use the loans are not financial assets.
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.
I wrote this to provide greater clarity to our users and the public, who frequently asked how our services were different. Some readers had the impression that the post was meant to attack Kiva Zip. That was not my intention.
In fact, Kiva Zip and Zidisha have helped each other, and exchanged lessons learned, for over two years now. See https://zip.kiva.org/blogs/4
We did not end up introducing profit-sharing at Zidisha because even in consultation with experts, we did not manage to come up with a viable way to ensure the profit verification on which this model rests. Zidisha is purely an online service, without local loan officers, and our understanding is that applications of profit-sharing models to microfinance rely on extensive personal monitoring of the funded businesses.
We chose Kenya as the first country to pilot Zidisha, largely because it was the world leader in mobile phone-based payments, which we use to disburse the loans and receive payments electronically. Also, internet and Facebook penetration was especially high in Kenya, and that made it easy for many people to adopt and share our service.
We currently offer loans in these countries:
Benin Burkina Faso Ghana Guinea Indonesia Kenya Niger Senegal Zambia
Note that most borrowers offer interest well above 5%, and lenders are free to fund the loans at or below the offered rate. In my experience, many lenders have opted to fund at low or even zero interest because they wish to offer their selected entrepreneurs low-cost loans, rather than make a profit. The rate paid by the entrepreneur is more important to them than their own rate of return.
We don't interfere in our users' interest rate decisions, other than to limit the maximum interest to no more than 25%. Our platform accommodates all lending philosophies, from those who do not believe in charging interest to those who believe the best way to help entrepreneurs is to structure transactions in a way likely to generate positive financial returns for both lender and borrower.
My understanding is that many cash transfer programs have had measurable positive economic effects, both when they are targeted and when they are offered to an entire community. And there are obviously situations of humanitarian catastrophe, such as a natural disaster or a famine, where direct distribution of aid is the right answer.
My objection to most handout programs is based on the negative psychological effects I experienced time and again while working with development assistance grants in Africa and Asia. The resources we distributed would certainly result in an economic boost, but they also fundamentally changed the way the recipients saw themselves, and the way we saw them. Handouts caused the recipients to view themselves as dependents whose fortunes were subject to the whims of luck and on pleasing donors, rather than on themselves as drivers of their own lives. When repeated enough, this psychological side effect can be devastating not only for the individual recipient, but for the broader community that has come to depend on the handouts.
The dynamics in microfinance loans are much healthier in my experience - especially in a market-oriented community like Zidisha, where borrowers offer their own loan terms and lenders base their lending decisions on the borrowers' own demonstrated performance with past loans. It feels more like a business partnership than a handout.
Kenya is at the center of the mobile phone payment revolution with its M-PESA service, and is the reason Zidisha was first piloted in Kenya. Thanks to M-PESA, Kenya is still our largest country today.
Most Zidisha loan payments are transferred via mobile phone. For example, we use M-PESA in Kenya to transfer funds from our US bank account electronically to a bank account in Kenya, and from there to the mobile phone M-PESA account of the recipient. The recipient can exchange the M-PESA credits for cash at a local M-PESA kiosk. We receive repayments the same way.
In countries where mobile payment services are less developed, such as Burkina Faso, we transfer payments by sending a disbursement order to the local bank account where our funds are held. This is a much less scalable solution than mobile phone payments, and is one reason our growth is more rapid in the countries - Kenya, Ghana, and Indonesia - where mobile phone-based payments are enabled.
If you'd like to hear more about my own journey and the experiences that lead to the founding of Zidisha, see http://www.huffingtonpost.com/julia-kurnia/why-i-founded-zid...
Microfinance as a poverty-fighting tool is hotly debated among donors. Here is a recent post about why we believe microfinance is healthier and more effective than handout-based charity: http://www.huffingtonpost.com/julia-kurnia/about-to-send-a-d...
But don't just take my word for it. I'd encourage anyone interested in what microfinance borrowers themselves say about their loans to check out our universal member comment feed. This is simply an uncensored feed of the latest 100 comments posted on Zidisha loan profile pages by our members worldwide. It gives some insight into the wide variety of loan uses and results, and how the borrowers themselves describe the impact of microloans in their lives: https://www.zidisha.org/microfinance/testimonials.html
Today, the generation just entering the working population in developing countries still live on pretty meager incomes, but unlike their parents, are commonly on Facebook and able to participate in an online community without any intermediation from local organizations.
Most Zidisha borrowers are young adults living on about a dollar a day in the urban slums of Africa and Asia. They often have high school degrees and many are enrolled in university, but they live in sheet-metal shacks in muddy streets lined with sewage. They help support their families by searching for low-pay day labor or selling small inventories of low-value items. They usually access our website via public cybercafes (the price to browse the internet in Nairobi is just about ten cents).
So to answer your question, to support Salamatu herself you would probably need to lend through Kiva or another local organization. But if Salamatu has children, they may well be raising their own microloans through Zidisha someday.
Here is a story about one of our members who operates a cybercafe in Nairobi, which gives a pretty good idea of how young adults in developing countries are going online: http://p2p-microlending-blog.zidisha.org/2013/06/12/life-wil...