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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.
I first came across Zidisha on a radio program with Rose Aguilar in San Francisco. Kiva had refused to participate, so Rose arranged for Zidisha to participate by phone. Knowing very little about them I was a little nervous. However, as we discussed matters, live on-air, I found myself provisionally impressed with their model. So, some months later I decided to analyse them in the best way I know how – I put some money on the platform. There is no substitute for decent analysis than having skin in the game!
Recently there has been some debate over the effectiveness of Zidisha. I can neither confirm nor refute the statistics claimed, or the conclusion the (anonymous) author arrives at. What I shall do here is simply explain why I have found this to be an intriguing model so far.
My bottom line on Zidisha
I uploaded $1.173 in total. This was actually in two chunks a few months apart, but for all practical purposes let’s assume this was one transfer, about 18 months ago. This number consisted of a $35 transaction fee paid to PayPal, and a voluntary $138 donation to Zidisha (I was feeling generous). Anyway, this resulted in $1.000 to lend on the platform.
I downloaded my entire transaction history from the website on April 6th 2014.
I bid a total of $2.019 over the entire period, of which $201 were not successful. Another Zidisha lender basically offered a lower interest rate than me, or the loan was not made for some reason and the funds returned to me. So, the total I actually lent over this period was $1.818. This is more than the initial funds available because some loans were lent, repaid and re-lent.
I have received a total of $829 over the period. This includes capital repayments, interest repayments, occasional defaults, and foreign exchange losses. I do not know the breakdown of these, not does it interest me much at this point. Now, if I lent a total of $1.818 and have been repaid $829 over the same period, my current outstanding should be the difference between these two: $989.
My actual current outstanding portfolio is $966, plus I have $30 in bids outstanding, and $11 in cash. Thus the current value of my “assets” on Zidisha is $1.007. This is $7 more than the initial money I uploaded. In short, I have made a profit. This profit does not cover the PayPal fee I was charged, so overall I have made a minor loss, but I’ll focus only on the transactions done on the platform.
I made a modest 0.7% over 18 months, or approximately 0.4% APR. For all practical purposes I broke-even. What is interesting is that this is net of all foreign exchange losses, late or missed payments, outright defaults etc.
Am I typical Zidisha lender?
Probably not. The total lending by Zidisha’s 7800 clients is about $2m, so the average lender has done about $250, suggesting I have lent about 4x more than the typical Zidisha lender. Also, I have worked in microfinance for a little over a decade, including in the P2P space, and spent much of this time in the field with banks and clients, so I may have a better idea of clients more likely to repay a loan. Plus many of the accumulated defaults at Zidisha appear a historic legacy from prior periods, so I may have benefitted from the tightened policies of Zidisha over this period. But I am not presenting a generalised opinion here, but simply stating my personal experience.
I have made 40 loans on Zidisha: 10 have been fully repaid, 1 outright defaulted, and 29 are underway. The weighted average interest rate which I charged was 4.4% flat, equivalent to about 8.8% in APR terms. This ranged from a few 0% loans to one at 20%. I forget why I charged Hellen Festo so much – sorry Hellen!
If I look at the average actual final interest rate charged on these 40 loans, it is 9.2% flat. However, this includes the 5% flat fee that Zidisha charge. I can confirm this is the case because the four loans I did at 0% were because the client refused to pay any interest to the lenders, and the interest rate on these loans is precisely 5% flat – the Zidisha fee alone. So, this suggests the average other lenders on these 40 loans charged an average rate of 4.2% flat (9.2% total interest less 5% Zidisha fee), or 8.4% APR – slightly less than the rate I charged (I shouldn’t have charged Hellen so much – I feel bad as she’s 100% on schedule). And of course, Zidisha’s 5% is flat, so equivalent to roughly 10% APR.
However, at the end of the day a total interest rate of 9.2% flat (about 18.4% APR) is an extremely reasonable interest rate in the microfinance sector. The cheapest loans that I have co-financed cost 5% flat (10% APR), the most expensive was 19.66% flat to Hellen, or nearly 40% APR (partly because of me charging such a high rate).
But, the key consideration here is that with this overall interest rate, I lost no money. Nor did I make any. I basically broke-even (excluding the PayPal fee). Were I to increase my average interest rate only a small amount I could probably cover the PayPal fee also.
Zidisha recently announced they would cap lender interest rates at 5% flat (roughly 10% APR). Frankly, this wouldn’t really effect my lending, as my average rate is below this anyway, but it will impact a few Zidisha lenders. And with the Zidisha fee fixed (at least currently) at 5% flat, this equates to a maximum possible interest rate of 10% flat, or 20% APR. Reasonable by any standards. Which MFIs, particularly in Africa, are charging such rates? Which of Kiva’s African partners offer loans at such rates.?
One blogger has suggested that this would be insufficient to cover the default and forex losses of lenders. I have no reason to dispute his/her statistics, but all I can say is that this is not my experience on Zidisha. The blogger makes a fuss over the one-off credit rating fee that the clients have to cover (about $12), suggesting this should be included in the APR calculation. What about the bus fare to get to the internet café? No, I consider this a reasonable additional one-off fee that is not only entirely justified for this lending model, but might also dissuade outright fraudsters from trying to manipulate the model. I am in favour of transparent pricing, but if this blogger finds Zidisha to be non-transparent – check out Kiva – they don’t even make an effort to mention an interest rate, and eventually conceded that in fact they have no idea what they are! The blogger criticises Zidisha for citing flat interest rates instead of APRs, a point I agree with, and Zidisha seem to be considering this. Great. Zidisha could be even more transparent, and I hope they are, but I am a transparency fanatic: my website is www.microfinancetransparency.com (unrelated to the excellent website www.mftransparency.org), and I do not find Zidisha deceptive, particularly when compared to the likes of Kiva. I pointed this out to the (anonymous) blogger in his/her comments section, but received no response. However, for true transparency, see MyC4.
Admittedly I am basing this entire analysis on a number of large assumptions. Firstly, that my current outstanding loans will be repaid with the same reliability as my completed loans. I cannot prove this, nor can anyone else – that would require a crystal ball. Perhaps I have simply been lucky? Perhaps I am particularly skilful in selecting clients to lend to! But this is my data, on my loans, at my interest rates, with my forex and default rates. The bottom line is simple: I have basically made no money, my nominal rental income offset my losses. I made the same amount of money as I would have done on Kiva ($0) but the client paid a substantially lower PAR for the loans. In my opinion that is impressive. It is also disruptive. And it is no surprise that Kiva are furiously trying to copy this model: the genuine P2P model, where funds do not go via a third party.
Another huge assumption I implicitly make here is that Zidisha is scalable. Perhaps they can pull off this feat on low volumes, but when their outstanding portfolio reaches 8-digits their default rates may increase. Or perhaps they will constantly refine their model in the process and defaults will decline. Again, no one knows. Indeed, we do not know the number of borrowers that are suitable for the Zidisha model. Perhaps the supply is very finite? I think the fairest thing we can conclude at this stage is that these are valid questions, the answers to which are pure speculation.
I like Zidisha. I’ve never actually met them face-to-face, but I like their attitude. They are more transparent than most P2Ps (with the exception of MyC4, whom I will discuss in the next post, who define transparency in the P2P space but are fundamentally distinct to Zidisha in that they use the traditional P-2-MFI-P model).
When Kiva panicked at the prospect of engaging with me in a radio debate, Zidisha embraced the dreaded heretic! And they impressed me. I have no axe to grind against the P2P sector, or the microfinance sector in general. I like things that work, I dislike things that don’t work, are fraudulent, deceptive, ineffective or non-transparent. I cannot respond to the critics of Zidisha in any other manner than “this is my experience”. I do not refute their findings. I am not even claiming my experience is typical. If anyone would like my complete transaction history to confirm the calculations I will send it to them (in Excel, no one is getting my Zidisha password!). I might conclude in 6 months that Zidisha is a disaster, particularly if none of my outstanding loans are repaid. I reserve that right. But this is the story to date (data accurate to April 6th 2014), and 18 months is a decent enough trial period.
Zidisha doesn’t merely challenge the P2P sector. It challenges the entire microfinance sector. Intermediating MFIs may not be as useful as we all once thought. Poor Africans might be more trustworthy than we once thought. Perhaps they don’t need (often aggressive) loan officers hassling them to make a repayment, or threats of having their cattle confiscated and being black-listed if they default on a loan. Zidisha provides decent enough data to be able to analyse a portfolio, and even manages to publish the actual interest rates on a loan – a feat that has evaded Kiva to date. Could the data be better? Yes. But let’s be pragmatic – Zidisha depends on a modest donor income and revenue stream from lending traffic. Do we really want them spending millions on hugely detailed data and a rocket-science website? Frankly they exceed the minimum standard I would demand, and are improving weekly. This is not a serious complaint in my opinion.
Obviously I risk falling into one fatal trap here that has plagued the microfinance sector. Repaying a loan does not imply that the loan helped the recipient. I have no idea if my money actually helped these people. Some of the repeat clients claim a previous loan helped them, but I have no way of verifying if this is true. Neither have I any means of verifying that the stated and actual purpose of the loan coincided. But nor do I claim to have “catapulted 40 people out of poverty with $25 a pop”. And nor do Zidisha make such claims.
Versus the traditional P2P model, whereby funds are channelled from lender to platform to MFI to borrower, and back, Zidisha demonstrates an entire link in the chain may be unnecessary – the MFI. This may expose the lender to additional risk (debatably), but it certainly reduces the extraction of wealth from the poor via higher interest rates to finance the intermediating MFIs. MFIs that are often privately-held, shareholder-driven, for-profit institutions. They receive funding from specialised microfinance investment funds, whose own profits depend on passing funds via MFIs – that is their core function. Expect little sympathy for the Zidisha model from either group of players.
In theory Zidisha should not work. But isn’t that what everyone says about disruptive business models? Does Zidisha work? From what I have seen to date, it does a pretty good job, and better than any other platform I know. I also lend on MyC4, and while I can make a few additional percentage points in interest on their platform if I want, the poor pay through the nose as a result of going via an MFI. That’s a topic for another day, but I would advise anyone looking at the P2P space to seriously investigate Zidisha. And the moment I change this advice in this rapidly evolving market, I will post an update accordingly.