Peer to Peer Microfinance
* Master's thesis: Peer to Peer Microfinance: The Case of Zidisha.org. Sander Van Damme.
(for additional information on the topic, see P2P Microfinance)
The Future of Peer to Peer Microfinance
Sander Van Damme:
“It remains hard to tell how peer to peer microfinance will evolve; Zidisha is only a small website which currently only has a very local impact. However, given the current success of altruistic platforms such as Kiva, able to finance $231 million in loans since its launch in 2005, it is clear a big potential for such websites exists. The only constraints to growth that remain are the current small portfolio of prospecting borrowers and the limited geographic focus. The platform is currently working on this second point by offering new applications from Indonesia and Burkina Faso. Furthermore, the growth of mobile banking is an important factor for the operational model of getting the money to the most remote borrowers in rural areas.
As discussed above, Zidisha presents itself as a clear model for real peer to peer microfinance, based on computer-literate entrepreneurs with credit history and philanthropically motivated lenders. We can foresee more such platforms to develop as mobile banking becomes more widespread, and see it as a logical evolution in line with developments which the Irish Loan Funds and the English Friendly Societies also experienced: as microfinance institutions develop a credit history in developing markets, others will be able to profit from this and take away their most successful clients. Of course the platform is very young and only very few loans have currently been repaid, it remains therefore to be seen how lenders will react when loans default and their money is lost. We foresee this to be a very important test for the platform and urge further research to keep track of this evolution and its possible implications.” (https://www.zidisha.org/editables/news_docs/Louvain.pdf)
Sander Van Damme:
“In this thesis we have researched peer to peer microfinance and whether it is to be understood as a competing technology to present-day microfinance institutions, as an addition to it, or rather as an alternative to charity and philanthropy. We have looked at the historical antecedents to social lending and found similarities between today's peer to peer microfinance and 17th to 20th century friendly societies and Irish loan funds. We found their demise was mostly caused by the higher tier problems of corrupt fund managers and fraud, as well as to increased competition from banks, able to profit from the credit history these institutions created. Although peer to peer microfinance, as illustrated by the Zidisha platform, currently does not yet have such problems in its management, it needs to stay weary of any forms of fraud that might surface and act proactively to prevent them from causing any harm. We also studied the differences between these higher tier and lower tier problems and found how the actors involved in a credit relationship have to cope with the issues of adverse selection and moral hazard. In our research it turned out Zidisha discovered a non-standard way of overcoming these two lower tier problems: through only allowing those who already have a positive credit history to apply for loans; by having local loan officers supervising the loans; and by offering a unique product in the markets where it is present: low interest rates.
As a means of handling the higher tier problems in the future, the platform is having all payments handled transparently online and it has reduced the number of intermediaries needed in its operations to a minimum. Although this is an important first step, the platform still needs to work on ensuring it does not succumb to higher tier problems of fraud and theft in years to come.
Thirdly we considered the motivations for using peer to peer microfinance, both for lenders and for borrowers. The latter's is easiest to define, it lies primarily in the access to finance itself as a means of smoothing income and in the lower interest rates it offers. Lenders' motivation on the other hand is more complicated. It turns out many different variations exist of a combination of philanthropy – wanting to have a positive impact on the lives of the poor – and getting some return from it. Most of the weight currently goes to the aid-aspect, rather than the financial return, although a purely altruistic motivation is rare as well.
In the last chapter we also looked at the business model of the Zidisha platform itself in order to find out what the fundamentals behind this non-profit were. As is apparent from its legal build-up, making a profit does not seem to be very important. Nevertheless, a business can be very successful and sustainable without really 'making money'. In the end a business is about paying your employees, being able to invest in growth and rendering stakeholders happy. Zidisha could be doing all of this. Through growth and perhaps minor modifications to its model it could be able to afford wages for some of its current volunteers, while keeping some of the funds aside to invest in further website development and reaching more countries. At the same time its stakeholders are pleased: the borrowers get funded at low rates and the lenders are happy to be 'making a difference' with their savings and perhaps getting a little return on the side.
Through researching Zidisha as an example of peer to peer microfinance we gained further understanding of this novel market. Rather than being a tool for the wealthy to get more wealthy, it turns out Zidisha is mostly about philanthropy and helping the poor. It is a tool for Western philanthropists to really have an impact in developing countries and at the same time a means for credit-starved entrepreneurs to get the funds they need to set up their business ideas and be able to better cope with poverty. Nevertheless, this also presents an interesting model for a sustainable business that could help scale up microfinance operations to reach an ever larger amount of the world's poor.
When looking at the trends in social media, the propagation of the internet and the innovations in mobile banking, we believe this website offers us a glimpse of what the future of aid and banking will look like. Although not necessarily a mainstream tool for everyone on this planet, it will surely become part of many a person's portfolio. Rather than donating anonymously to some big NGOs who will use the money for projects we do not know about; people want to see their impact and be able to connect with each other across the globe. Whereas we set out to discover whether peer to peer microfinance was a viable solution in the first place, we came across a business model that in the long run could allow both investors and entrepreneurs to profit from their exchange. Although for a lender it might not be competitive with a savings account or stocks and bonds, the rewards are clearly much larger than that. And for borrowers it could finally prove to be a tool that liberates them from the high interest rates that keep on mortgaging their futures. Microfinance institutions finally do not need to see it as a competitor trying to steal their market but rather as a complement and an inspiration, allowing them to focus on the very poorest, while knowing the people they helped previously are not being abandoned.” (https://www.zidisha.org/editables/news_docs/Louvain.pdf)