Zidisha Expands a Niche
- Created on Friday, 01 June 2012 17:29
One of the issues that is still plaguing Microfinance is the problem of high lending rates. In many local regions of developing countries the average interest rate
charged by MFIs is between 30% and 45%. We know that high costs of business operation reduces profitability and counter the central principles of alleviating poverty. However, considering that microfinance institutions must balance serving the poor borrowers with meeting the expectations of their funders, it becomes difficult to achieve equilibrium. To tackle this problem, Julia Kurnia, our Director, co-founded Zidisha Inc. in October 2009 and launched a microfinance platform called peer to peer (P2P). Zidisha means "to grow or expand" in Swahili language. Julia’s focus was to provide an outlet where borrowers and funders could deal and transact business so that their partnership is mutually beneficial. Blassys spoke with Jason Ladieu, the Communications Manager to discuss Zidisha and its evolving P2P program.
Blassys: Please describe the platform of your organization.
Jason: Julia initiated the peer to peer lending platform because she believed that people have the desire to help others in a way that connects them on a personal level. The platform was incubated when Julia was working with another micro-lending organization in Senegal, West Africa. Zidisha is the first peer-to-peer (P2P) micro-lending service to offer direct interaction between microfinance borrowers in remote locations around the world without the middleman. Lenders can be individuals or corporations. Our program connects lenders to earn a financial return on their loans while funding borrowers at much lower cost than what is available to them from other sources. The lower cost is possible because Zidisha does not outsource loan disbursements and repayment collection to local intermediaries, but rather uses grassroots technology like mobile banking, whereby money is sent directly to borrowers via short message service (SMS) on their cell phones, to conduct financial transactions with borrowers directly. One such unique service is M-PESA. M-PESA provides major access to the mobile phone money transfer, and it helps to manage loan transactions through web-based payment systems. We have operations in Senegal, Indonesia, and Burkina Faso, but our main market is in Kenya. Currently, Zidisha has more than 1,000 lenders from over 65 countries.
Blassys: What makes this platform attractive?
Jason: As stated earlier, the direct lender-to-borrower connection allows lenders to earn a financial return on their loans while funding borrowers at much lower cost than what is available to them from other sources. With Zidisha’s peer-to-peer lending, the interest rates on loans cap at 30%. Lenders earn 3% interest on average and there is a one-time registration fee of $12 to cover the cost of the required local credit history background check for new borrowers. In addition, borrowers pay a transaction fee of 5% (prime rate) of loan principal per year the loan is held. The transaction fee is used to cover money transfer cost. There are no other charges. The borrowers effectively set the interest rates. With these flexible financing terms, borrowers have the opportunity to obtain credit needed without losing most of their profits to excess interest. The reduction in interest rates along with zero charges help to ensure that the entrepreneurs' profits stay right where they belong – with the community. With more cash flow available, borrowers can expand their business or improve their livelihood. Furthermore, this platform is mutually beneficial because the funders with interests to lend to borrowers in other countries can make a global impact without having to travel. With the surge in web usage by individual entrepreneurs, lenders can really see for themselves how lives are changed in the world’s most isolated and impoverished areas by their actions.
Blassys: How do you sustain the business when there are restrictions on interest rate?
Jason: The spread of cheap electronic payments technologies like the mobile phone based banking services like M-PESA in developing countries in recent years allows Zidisha to bypass the geographic barriers that traditionally made lending in remote rural areas extremely expensive. It should be noted also that while most of the entrepreneurs are economically disadvantaged, they are computer literate and have verifiable credit histories with local microfinance institutions. In addition, the locals tend to be supportive of the entrepreneurs via training or sharing the hardware needed to communicate. With all these resources, the retinue of volunteers working on the program, and no intermediaries, we are able to deliver loans that are affordable to our clients and profitable for business
Blassys: What are the prerequisites for lending?
Jason: We expect our borrowers to have established credit (borrowing) history. They cannot have outstanding microloan debt. The typical Zidisha borrowers are literate and have learned to use computers or have access to cybercafés. Most of our borrowers live in economically marginalized areas and remote rural villages. Their average household incomes are minimal and they often are parents to numerous children. It helps that they have business acumen, are innovative, self-motivated, and enterprising. Additionally, in order to promote responsible lending and repayment, we encourage open access of communication; improved social services, and disassociation from illegal ties. Interested borrowers must have valid forms of identification.
Blassys: You want established credit history and no outstanding debt, how do you verify that?
Jason: Direct peer-to-peer lending platforms in the US and Europe rely on standardized credit scores to evaluate the credit-worthiness of applicants. Zidisha perform its due diligence via a partnership with an independent auditing firm like ‘CollectionAfrica’. This compensates for the lack of formal credit scores in African countries by requiring borrowers to have successfully repaid loans to local banks or microfinance institutions, and have their self-reported credit histories independently verified by this reputable private credit bureau. With such a feedback rating system in place, our loan repayment rate has been between 95 and 98.5%.
Blassys: What are the risks and challenges?
Jason: There are inherent risks such as foreign exchange fluctuations, illegal ties, misrepresentations, and defaults. Additional challenges included ensuring that our service is compliant with United States securities regulations, and proving the viability of the concept with a privately funded set of test loans before reaching out to lenders from the public. Most of these are anticipated risks and are handled accordingly. Other elements like currency risks and cultural dynamics are easily abated because foreign lenders assume currency risk since for them the activity is charitable. Additionally, loans are disbursed to borrowers in local rates. As for cultural dynamics, we avoid conflict by focusing on our primary function which is to alleviate poverty by bringing mutual parties together.
To learn more about Zidisha, please visit www.zidisha.org