We only ship to addresses in the USA. Live somewhere else? Please order from our international distributor. Click Here
Product added to carts.
BK Blog Post
Posted by Hugh Sinclair, COO - Economist - Author, Alliance Microfinance.
Hugh Sinclair works in turnaround management, helping ailing Microfinance Institutions in accounting, software automation, rescue strategy, and doing due diligence.
The question recurs frequently. Well-meaning individuals, and occasionally institutions, contact me asking how they can invest in microfinance. Sometimes they are disillusioned with their existing choice of investment vehicle, other times they are considering microfinance for the first time. Since my recent critical post on Kiva, and their feeble defence, such requests have increased. “If Kiva is flawed, what else can I do?” I need to address this question. But please, this is not formal advice on how to invest, but rather an analysis of the options available.
Essentially there are two types of investors: institutions or individuals. Generally the latter invest smaller amounts than the former. For the purposes of this post, I will focus on individuals wishing to invest in microfinance. I use the term “invest” inter-changeably for debt or equity investments, but in the vast majority of cases the ultimate vehicle is debt-based, i.e. a loan to an intermediary that then lends to the end client. There are essentially 3 main options for individuals:
There may be other categories, but these three represent the majority of options. For this blog series I will not address (1) above, and will reserve (2) merely as a comparison for the focus of these posts – option (3): the P2P lending platforms.
P2P platforms claim to take funds from the ultimate lenders and on-lend them to individual borrowers, thus harnessing the feeling of a bilateral relationship between (multiple) lender(s) and end-borrower(s). Within the P2P category, there are essentially 3 main sub-categories, and I base this categorization on an excellent paper by Iris Ollivault, Markus Grillitsch and Christopher Hoeglinger, who discuss the first two in detail:
There are a variety of platforms out there, in each of these categories. What I will attempt to do over the coming weeks is explain the pros and cons of each method, and analyse the main platforms available within each category. This will not be an exhaustive comparison of all such platforms. Finally, once complete, I will summarise which appear to be the best options per category, and compare P2P lending to its most obvious alternative mechanism – investing via a retail microfinance fund.
My analysis begins with the first category, the purest form of P2P lending, and yet in some regards the least well understood. Pure P2Ps.
Pure P2Ps – an introduction
For all the hype surrounding microfinance, and the P2P, or crowd-funding lending methodology in developed as well as developing nations, actual pure P2P lending is rare in the microfinance sector. Call me pedantic, but the very terminology “P2P” suggests to me that there is no more than a facilitator in-between lender and borrower. This is simply not the case in most so-called P2P microfinance lending platforms, where the intermediating MFI plays a huge role in the process, potentially invalidating the very name “P2P”. Doesn’t it annoy you when you take a direct flight only to find it does a stop-over en route, but that didn’t appear on the ticket because you don’t have to actually get off the plane?
Within the “pure P2P” space there are two main players: Kiva Zip, and Zidisha. The former has only recently progressed from beta to alpha stage, and lends only in Kenya and the US currently. My views on Kiva, its transparency, operating efficiency and choice of partners are well documented and not entirely positive. Instead I will focus initially on Zidisha – the first genuine microfinance P2P lending platform, with a multi-country focus.
Julia Kurnia founded Zidisha following a disappointing realisation that the operating costs of traditional microfinance lending, via a local MFI, required the interest rates charged to the end borrower to rise substantially. In her own words:
“In order to manage the loans we opened an office [in Senegal], hired a loan officer – and saw our overhead costs shoot up to more than a third of the value of the loans we were making. The interest we would have had to charge to cover our costs was high enough to wipe out the borrowers’ profits, defeating the purpose entirely.”
It sounds so obvious, and yet it is a point many have failed to grasp in the microfinance sector. Such people assume the poor are somehow indifferent, or immune to often extortionate interest rates. They believe microfinance is so miraculous that even APRs of 200% are fine. I disagree with them, and so, presumably, do Zidisha.
Kurnia decided to harness the power of the internet, and the increasing prevalence of internet accessibility in developing countries, to bypass the MFIs altogether. Thus Zidisha was born.
Zidisha offers loans in Senegal, Kenya, Ghana and Burkina Faso, and to a lesser extent in Zambia, Niger, Indonesia, Guinea and Benin. It has lent approximately $2m in total in 6000 loans to about 5000 end clients (i.e. some repeat borrowers), with a little under 8000 lenders. According to their statistics page (April 17th) they suggest the typical lender charges about 5.26%; that three quarters of those loans that should have been repaid by now have in fact been repaid. Of those that have not been repaid (25%), about 5% are late but not in default, 1% have been forgiven, and 19% have been written-off.
Three observations here are important to note. Firstly, these are cumulative statistics from the inception of the company, and secondly that repayment rates have improved recently. However, it has to be stated that these statistics are nowhere near as impressive as those boasted by other P2Ps. Kiva current suggests its repayment rate is 98.93%. The extent to which this figure is true has been questioned, however. Recent criticism of Zidisha has suggested their repayment rate is low enough to render the model ineffective. This brings me to my third observation: this is not the experience I have had with Zidisha. I therefore use my own real, personally verified data to analyse what happened with my loans on Zidisha, in the following post: