A smaller microloan organization that has been using an online peer-to-peer direct lending model since 2009. This organization is the first of its kind. The repayment rate is 0.38 percent. So far they’ve distributed about $130,000 in the 2 years since its inception.

Definition

Zidisha is a nonprofit peer-to-peer microfinance internet platform that allows people to lend small amounts of money directly to entrepreneurs in developing countries.

By comparison, Kiva doesn't really apply real p2p lending, but as of late 2011 began to pilot direct p2p microloans based on Zidisha's model.

Description

Sander Van Damme, in his master's thesis on Peer to Peer Microfinance:

"This platform is the only true peer to peer microfinance website which we came across in our research. It offers lenders the opportunity to directly send funds to developing nations' entrepreneurs, without any intermediaries. It is a direct financing tool that gives the investor decision power on whether or not loans will be disbursed and at which interest rate they will be funded. And these are the borrowers themselves who are responsible for putting information online about their performance and any difficulties they might encounter. This different approach is due to the fact that they started off from a different assumption than other platforms; they target the computer-literate entrepreneurs in developing countries that already have credit history through previous microcredit. It is the next step, where the poor, after having built up a credit rating through successfully repaying previous microfinance loans, now have access to cheaper credit. All Zidisha does is connect the peers and verify the borrowers’ credit history." (https://www.zidisha.org/editables/news_docs/Louvain.pdf)

Business Model

Sander Van Damme:

“Before looking at where we think the future of peer to peer microfinance lies, we still want to investigate the business model of Zidisha in more detail to understand how they pay their bills and where their revenues come from. As shortly explained above, the platform has two main streams of revenues: a fixed fee new borrowers have to pay to check their credit history, and a 5% borrower transaction fee on repayments to cover expenses and transaction fees. This is being supplemented by “another small but significant source of revenue” (Kurnia, 2011), namely donations, which are tax-deductible in the USA. As for expenses, the website does not have that many either: the credit checks are being repaid by the fixed fee and all people working on the platform, as well as the local country managers, are volunteers for the moment. In fact it is the lender who bears much of the cost: it is he who pays the Paypal fees when uploading or withdrawing money and it is he who carries all of the exchange risk. When we compare the 5% fee on Zidisha to the African average ratio of operating expenses over loan portfolio of 22,64% (MixMarket, 2009), it is clear that under the current system, and certainly with the current small size of the loan portfolio, the platform would not be able to pay out any salaries. Currently, Zidisha is able to get a small surplus of $100 per month on their fees, which is being used for platform improvements. The non-profit expects to be able to afford one paid full-time staff person by the time it reaches $1 million in loans per year, a goal they feel “is not a far-fetched target” (Kurnia, 2011), given where they currently are and the growth they are experiencing. However, in the immediate term, the website will remain to be managed on a volunteer basis by all staff involved.

When indeed payment streams would increase and the platform would grow to many times its current size, Paypal fees would decrease and the 5% borrower transaction fees would possibly be able to cover more of the expenses. Nevertheless, even affording one staff member already seems to be a big success when we think of Kiva's proposal to donate 15% of the loan amount in order for them to pay their operational expenses. The more so since Julia Kurnia, in a recent newsletter promised to channel through all reductions on Paypal costs to the lenders. Because of the evolution the website has gone through, it is highly difficult to now still increase this fee with the purpose of paying for these expenses or even making a profit. First the question of what to do with current borrowers would have to be answered and then a possible problem would surface of coming back to excessive moneylender fees which currently already exist in the countries involved. In case of a minor increase (say 10% instead of 5%) this latter problem would remain fairly limited given the fact that earlier loans were successfully repaid at rates of 13-14% and lenders seem happy to accept returns of 3 to 4%. Nevertheless, we feel that such a move, because of the clear philanthropic motivation present in Zidisha founder Julia Kurnia, remains unlikely.” (https://www.zidisha.org/editables/news_docs/Louvain.pdf)

Interview

With Julia Kurnia, Director and Founder:

"Nearly 2 years have passed since our first interview. In that time Zidisha has grown considerably. Looking back, how satisfied are you with the achievements?

Two years ago, few believed that low-income individuals in developing countries could successfully participate in a genuine peer-to-peer lending community. The conventional wisdom was that people in remote, impoverished communities would not benefit from or repay loans unless the loans were administered in person by expensive local bureaucracies. As a result, the world’s poorest borrowers pay some of the world’s highest levels of interest and fees – between 35% and 40% is the global average for microfinance loans in developing countries. Though there are quite a few other microlending websites that allow individuals to fund loans in developing countries, all of them rely on local microfinance organizations to communicate with lenders, create loan applications and collect repayments. In these intermediated microlending platforms, the communication is all one way, so that the borrower is often completely unaware of the lenders who funded his or her loan. And the intermediaries pass on their high overhead costs to borrowers, so that even when loans are financed at zero interest by charitable lenders, borrowers end up paying well over 30% in fees and interest. Such high rates reduce borrowers’ profits, sometimes to the point of making them poorer than they were before they received the loan. Unlike the postings on other microlending platforms, the loan applications and comments posted on Zidisha’s loan pages are written by the borrowers themselves. This opens the way for dialogue between lenders and borrowers, so that lenders can receive answers to their inquiries about the loan and business directly from the entrepreneur they are funding. At the same time, the direct peer-to-peer connection reduces the administrative cost of loans by automating and outsourcing to borrowers and lenders themselves many of the record-keeping and credit-screening functions traditionally performed manually by local microfinance institutions. As a result, the average Zidisha borrower pays about 8% in annual interest and fees, including interest paid out to lenders. Over the past two years we’ve facilitated over 100,000 US$ in microloans for low-income individuals in four countries. Zidisha borrowers have maintained a repayment rate of 99.5% for ended loans – disproving the notion that the working poor in developing countries cannot be trusted to repay loans without the support of expensive local organizations.

How is the borrower feedback? Are there any suggestions for points to improve?

Last month we completed the first survey of all Zidisha members worldwide. In contrast to lenders, who gave a variety of reasons for choosing to join Zidisha, borrowers were unanimous in citing our low interest rates as the principal benefit of borrowing with Zidisha. Other benefits cited by borrowers included: no forced savings or collateral requirements, flexible credit conditions and repayment schedules, and the fact that Zidisha lenders place trust in their integrity and rewards responsible conduct rather than relying on legal protections alone to ensure repayment. 100% of borrower survey respondents said that they are actively recommending Zidisha to others – and indeed, we have never needed to advertise our platform in order to attract new borrowers. When asked for suggestions for ways we can improve our service, a majority of respondents proposed the ability to raise larger loans. Zidisha currently limits maximum loan sizes based on amounts applicants have successfully repaid in the past, in order to ensure that they have the ability to repay the loans comfortably. However, some borrowers clearly feel that this loan size limitation policy constrains the growth of their businesses unnecessarily.

The repayment rate is very high. How important is keeping defaults low to growing a p2p microfinance service? Do you perceive overall risk level in p2p microfinance to be rising or decreasing?"

Like any financial service, peer-to-peer microfinance relies on the trust of clients in its integrity – and keeping defaults low is essential to maintaining that trust. If defaults are consistently high, the program’s due diligence and/or incentive structure probably need to be adjusted. I would say that the overall risk in p2p lending is decreasing: as the industry matures, poorly designed or managed platforms go out of business, and those that remain improve their risk management based on earlier experiences." (http://www.wiseclerk.com/group-news/countries/us-interview-two-years-zidisha-part-one/)

"Zidisha is doing direct p2p lending. Do you think it is likely that there will be a substantial shift from indirect p2p lending (like Kiva does) to a direct model without MFIs in the future? Yes, I think that is the future of online microlending. As Zidisha has proven that the concept is viable, I’m sure that we will inspire many similar initiatives. I expect to see other organizations – both new start-ups and established platforms – experiment with direct P2P lending across the international wealth divide. This will be a welcome development, generating positive social impact beyond the reach of our organization, valuable learning opportunities for P2P lending and microfinance practitioners, and useful variety for our clients." (http://www.wiseclerk.com/group-news/countries/us-interview-2-years-zidisha-second-part/)

Status

1.

"What goals does Zidisha have for 2012?

Zidisha’s long-term objective is to become a universally available lending platform, whereby highly motivated entrepreneurs, regardless of geographic location, can access the capital they need to grow their businesses and improve their standards of living, limited only by their own performance and track record of responsible credit repayment. Zidisha’s goal for 2012 is to continue to grow its lending volume, while maintaining quality loans that have a high social impact, high repayment rate, and good communication with lenders." (http://www.wiseclerk.com/group-news/countries/us-interview-2-years-zidisha-second-part/)

2. September 2012, update, from an interview of Julia Kurnia by David Algoso:

Dave: It looks like Zidisha has about tripled in size since we spoke last December. Is that accurate? What was the cause of this growth?

Julia: Yes, that is accurate. We were at $109K in loans funded last December, and are now at about $350K. About half of this growth in lending volume has come from existing members returning to lend larger amounts following a positive initial experience, and the remainder is thanks to new members joining Zidisha.

Our growth hasn’t come from deliberate marketing or advertising. According to our most recent member survey, the majority of new lenders find Zidisha through their own research. They are interested in microfinance as a way to help individuals in the world’s most disadvantaged locations achieve a better life in a way that is more sustainable and dignified than a charitable gift. At the same time, they are turned off by the often exorbitant interest rates that are charged by traditional microfinance institutions, including on loans funded at zero interest through websites that work with local intermediaries. It is generally through research into better alternatives that new lenders find Zidisha.

Though we look similar to other microlending websites, our philosophy is much closer to that of eBay than to traditional microfinance organizations. And from the borrower’s perspective, the difference between Zidisha and traditional microfinance really is dramatic. For example, the average Kiva borrower pays about 35% in interest and fees to the local microfinance institutions that manage loans financed at zero interest by Kiva lenders. These costs are very typical of the microfinance industry as a whole. At Zidisha, borrowers propose their own interest rates and lenders can choose whether or not to accept them – it’s a market mechanism and very transparent. On average, our borrowers pay about the cost of inflation for their loans. It’s a sea change in the way microfinance has traditionally been done.

Our growth was very slow in the beginning – it took over two years for us to reach the initial $100K in loans funded. We were the world’s only direct person-to-person lending service to connect lenders and borrowers across the international wealth divide without intermediaries, and we wanted to take the time to refine our operating model before scaling up. After maintaining a repayment rate above 97% for almost three years, we are ready to begin growing more quickly, and so have focused on that goal this year.

Dave: Previously you said that the biggest constraint on growth was that you didn’t have enough lenders. Is that still the case? What’s your strategy for bringing new lenders into the system? What has been most effective or most challenging about that?

Julia: Our best growth happens when new lenders and borrowers join Zidisha roughly in proportion, so that there is plenty of loan capital available for the new borrowers, and plenty of loan applications for new lenders to choose from. Sometimes the growth of lenders outpaces that of borrowers, resulting in shortages of loan applications to fund. That said, most of the time growth in borrower demand outpaces growth in lender capital, so I would say that most of the time growth in lenders is our main constraint.

Our strategy for bringing in new lenders is to make it as easy as possible for supporters of microfinance who are interested in alternatives that offer better transparency and fairly priced loans for borrowers to find Zidisha. It is a myth that the world’s poorest people must necessarily pay interest rates of 35% or more due to the small size of their loans. Zidisha is living proof that another way is possible." (http://findwhatworks.wordpress.com/2012/09/14/how-organizations-grow-zidisha-microfinance-founder-julia-kurnia-on-expanding-their-reach/)

More Information

Master's thesis: Peer to Peer Microfinance: The Case of Zidisha.org. Sander Van Damme.

URL = https://www.zidisha.org/editables/news_docs/Louvain.pdf

Zidisha

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