Money and microfinancing in the developing world (Part 3 of 3)

by mcampbell on December 12, 2012

 

Zidisha – Peer to peer lending

The trouble with Kiva (and other well-meaning institutions with similar strategies) is that while they make capital available, the high (possibly usurious) interest rates can prove a disaster for some lenders:

“What does this mean in human terms? According to a recent survey of microfinance borrowers in Ghana published by the Center for Financial Inclusion, 18 percent of borrowers reduced their food intake in order to repay microfinance debts that had not proven sufficiently profitable, and 5 percent resorted to taking their children out of school in order to repay microfinance loans. These statistics illustrate the reality that while overpriced microfinance loans help some people, they may actually harm others.” (Kurnia, 2012)

This is a bit of a disaster for any charity; “do no harm” is the general axiom. Zidisha is an attempt to rectify this through a rather exiting system of peer to peer lending. Like Kiva, it is a non-profit organization and leverages modern communication technology (the internet and cell phones) to enable interaction between Zidisha, the lender, and borrower.

By cutting out the middleman, the moneylender, interest rates can be maintained at lower rates. Zidisha still manages the loan, but they arguably work smarter and at less cost. Does this lack of a moneylender increase risk? Not by much it seems; repayment rates are only about 0.8% lower than Kiva’s. This is significant, not deadly considering the motivations of the lender. Repayment rates are still over 98%. If this bothers you, compare it to the leveraged loan (higher risk) default rates for the US (Miller, 2012). Keeping in mind that people in the developing world live in a financially risky environment, it seems pretty acceptable all in all.

Zidisha’s interest rates are reasonable, averaging less than 10%. This certainly isn’t out of line with what is paid in the developed world. Aside from this, there are three other factors that make this really intriguing:

1) The borrower sets the maximum interest rate that they are willing to pay, with a minimum rate of 5% (needed by Zidisha to cover the loan overhead costs). An excess above the minimum may be offered by the borrower as an incentive to lender. Higher interest may be offered for time sensitive loans. Often, lenders will offer a lower rate of interest or even an interest free loan, at their discretion. I find the offer of interest, even when it’s a small amount and may not even be required by the lender, to be very respectful for both parties.

2) The system allows the lender and borrower to connect on a personal level. This is a critical component of peer to peer microfinancing. A loan can have a personal relevance for the lender beyond a pretty story on a web page.

3) It is not strictly a charity. Because many of the borrowers offer interest to the lenders, it is a business, but a business with a conscience.

Zidisha’s approach is very compelling. Here are their published statistics as of Dec 2012:

Loans raised:                                                                        $580,166 (USD)

Businesses financed:                                                            1,009

Average lender interest:                                                    4.26%

Write-off Rate:                                                                        1.79%

Repayment rate:                                                                   98.21%

Number of registered lenders:                                        1,980

Number of registered borrowers:                                  894

Countries represented by Zidisha members:            81

 

The problem with Zidisha is that it is still small and lacks the geographical presence of organizations like Kiva. Give it time.

 

Link: https://www.zidisha.org/

 

Afterword:

It is interesting that we live in a time when an average individual from the developed world can create a business agreement, especially one with a deeply personal element, with an average individual in the developing world. This agreement isn’t arranged by a third party, it’s merely facilitated. Keep in mind that these are people that have no physical or cultural connections and may very well live on opposite sides of the planet.  Zidisha pushes this situation further by promoting direct contact, information sharing, and experience exchange between the individuals thereby creating the basis of a true relationship. The implication is that the “Global Village” (1962), as predicted by media visionary Marshall McLuhan, is well upon us … and it’s not exclusive. This person with whom you interact is now part of your community, perhaps more so than the neighbor down the street (that perhaps you don’t interact with). The world isn’t shrinking, it is truly imploding. All of this is enabled by the sheer power of modern communication, and the growing accessibility of the internet and smartphones.

 

 

References Cited:

Kurnia, J. (2012) “A Kickstarter for Emerging Market Entrepreneurs”. Daily Kos, August. Available online: http://www.dailykos.com/story/2012/08/26/1124453/-A-Kickstarter-for-Emerging-Market-Entrepreneurs  Accessed: Dec 2012.

Miller, S. (2012) “Leveraged loan default rate forecast trends lower: LCD’s quarterly survey”. Forbes, September. Available online: http://www.forbes.com/sites/spleverage/2012/09/25/loan-default-rate-forecast-trends-lower-in-lcds-quarterly-survey/  Accessed: Dec 2012.

 

 

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