
How Zidisha Hides Its 20% Loss Rate From Lenders – And Why It Matters - modernmicro
http://modernmicrocredit.blogspot.com/2014/04/can-zidisha-yc-w14-disrupt-billion.html
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sara125
The thing that bothers me the most about all this deception is that at the end
of the day, lenders will not only lose their money, but they won't be
maximizing the the donation they will eventually be making (not of choice) via
Zidisha. Kurnia wrote in Huffington Post that she doesn't believe in handouts.
Yet, why should I as a donor give to Zidisha instead of an organization like
GiveDirectly which has proven its impact in the most rigorous way possible?
Zidisha will always come back to silly jargon like transparency or handouts
instead of facing the real truth: admit your platform is not primarily a
lending platform and then lets have a real comparison between donations made
on Zidisha and cash transfers made through GiveDirectly. I believe Zidisha is
a good experiment, but to succeed, it needs to start answering real questions.

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mcherm
I notice the ongoing trend toward more transparency by Zidisha (for instance,
the change the article describes in August of 2012 which started listing non-
paying loans as a loss of principle). This is an excellent step. I want to see
the whole story -- even if parts of it are ugly -- because that builds my
trust that those running the system have taken the best possible options and
are running things reliably. Apparently there is much more that could be
achieved here -- better information about rescheduled loans, for instance.

The trend is good; it should continue.

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mcherm
To clarify: I actually think that the article's main complaint (a large loan
loss rate) may be ACCEPTABLE if it is made clear up-front.

Zidisha is not a place for lenders to make huge profits. It is a place for
lenders to support others making a difference for themselves. If the loan
default rate can be lowered enough that it is covered by lending rates, then
it could ALSO be a place where the lenders' money can support others over-and-
over through repeated loans (and even be withdrawn by the lender at some
point) -- and that would be GREAT. But it is not _necessary_ : what is
_necessary_ is clear and honest communication.

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jkurnia
I would agree with these statements: Zidisha is a platform for philanthropy.

We're optimized for giving disadvantaged entrepreneurs in the world's poorest
places the chance to improve their lives, not for storing financial assets. I
think we make that distinction abundantly clear to prospective lenders. See
for example our first FAQ for lenders, "Is Zidisha a safe place to store my
savings?"
([https://www.zidisha.org/microfinance/faq.html](https://www.zidisha.org/microfinance/faq.html)),
or the first paragraph of our Trust and Security page
([https://www.zidisha.org/index.php?p=123](https://www.zidisha.org/index.php?p=123)).

That said, repayment rates at Zidisha are increasing steadily as we
continuously improve our lending model in response to experience. The 18%
writeoff rate includes mostly loans that were issued over a year ago (which
have had time to mature).

Our credit risk control mechanisms have improved dramatically since that time,
such that I think it's reasonable to expect that the value of lending funds
can be maintained over time without erosion for the loans that are being
issued today. That said, Zidisha is still not a safe place to store funds one
cannot afford to lose, and we do not market it as such.

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modernmicro
"Our credit risk control mechanisms have improved dramatically since that
time, such that I think it's reasonable to expect that the value of lending
funds can be maintained over time without erosion for the loans that are being
issued today."

To achieve that at the max interest rate you allow (~10% APR), you would need
a 2.4% loan loss rate. That's an order of magnitude below where Zidisha is
now. That would be an incredible achievement and I would gladly cover it as a
huge story!

Is Zidisha on track to deliver a 2.4% loan loss rate?

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aurumpotest
FYI jkurnia, when I load the site, it loads in French, as I'm currently in a
French-speaking country. When I click to change to English in the footer, it
reloads the page, still in French. Chrome 33.

~~~
jkurnia
Thank you for letting me know. We'll aim to repair that as soon as possible.

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jkurnia
Dear Modern Microcredit,

I am surprised that you find Zidisha to be insufficiently transparent. Zidisha
has room for improvement in many respects, but we've always considered
transparency to be a strong point of our platform.

We have more detailed statistics on repayment rates, trends in repayment
performance over time, and risk levels in currently outstanding loans than any
other microlending website I know. For example, Kiva, Kiva Zip, United
Prosperity, and other well-known microlending websites do not even publish
Portfolio At Risk statistics.

Since Zidisha is a direct P2P model, our repayment rate is not inflated by
"phantom payments" reported by local intermediary partners.
([http://blog.givewell.org/2009/10/13/kiva-repayment-
data/](http://blog.givewell.org/2009/10/13/kiva-repayment-data/)) When we
report a repayment as having been made, that means the borrower truly did make
that payment.

We make it very clear to prospective lenders that lending through Zidisha is
risky. Here are some excerpts from our website:

"Zidisha is a low-cost nonprofit community managed by volunteers. Our purpose
is to connect individuals in marginalized countries with the chance to improve
their lives through affordable loans. We are not a financial institution or an
investment service, and Zidisha is not a safe place to store your savings or
financial assets. We recommend you treat lending through Zidisha as a
philanthropic activity, and that you not lend any funds that you cannot afford
to lose." (first paragraph, Trust and Security,
[https://www.zidisha.org/index.php?p=123](https://www.zidisha.org/index.php?p=123))

"Is Zidisha a safe place to store my savings? No. Zidisha is a platform for
philanthropy, not a replacement for traditional savings accounts or financial
investments. Zidisha loans are highly risky, and direct person-to-person
lending across international borders is such a new endeavor that expected
losses cannot be predicted with sufficient accuracy to make Zidisha loans a
safe way to store funds you cannot afford to lose. We recommend that you treat
Zidisha loans simply as a way to help others, and that you lend no more than
you would normally be prepared to give away to charity." (Lender FAQ number
one,
[https://www.zidisha.org/microfinance/faq.html](https://www.zidisha.org/microfinance/faq.html))

"The principal purpose of Zidisha's lenders in funding loans is to improve the
lives of these entrepreneurs, and not to make a profitable financial
investment. Lending to entrepreneurs through Zidisha involves a meaningful
risk of loss of your principal lent. In addition, you are very likely to lose
money in real terms on any loan you fund, even if it is repaid by the
borrower, as a result of currency exchange rate changes, PayPal fees applied
to uploading credit to your lender account, inflation and other factors
affecting the value of principal and interest payments made by a borrower.
Accordingly, we recommend that you consider lending through Zidisha to be a
philanthropic activity, and you should not lend more money through Zidisha
than you are prepared to lose." (Terms of Use,
[https://www.zidisha.org/index.php?p=5](https://www.zidisha.org/index.php?p=5))

More generally, our website code is open source
([https://github.com/Zidisha/zidisha](https://github.com/Zidisha/zidisha)),
and conversations among our volunteer staff take place in public in Zidisha's
forum. ([https://www.zidisha.org/forum/categories/volunteer-
conversat...](https://www.zidisha.org/forum/categories/volunteer-
conversat...)). Our operational procedure manual is published on the internet
for anyone to see. ([https://sites.google.com/a/zidisha.org/zidisha-
staff/](https://sites.google.com/a/zidisha.org/zidisha-staff/))

If anything, we are transparent to an extreme.

I do agree that Zidisha loans are not viable as a purely financial investment.
Financial investment is not the purpose of our platform. And that is exactly
what we are communicating to prospective lenders.

Best regards,

Julia Kurnia Director, Zidisha

~~~
modernmicro
I'm a long-time observer of microfinance who is an active participant in most
of the lending/crowdfunding platforms out there, including yours. I'm also a
hacker, and am excited about the way that tech is being used in microfinance
and crowdfunding. I think this stuff could have a big impact on the developing
world, which is why I started this blog last month. I'm slowly working my way
through the topics listed here, some of which I hope will be of interest to HN
readers:

[http://modernmicrocredit.blogspot.com/2014/03/modern-
microcr...](http://modernmicrocredit.blogspot.com/2014/03/modern-microcredit-
covering-trends-in.html)

Zidisha just happened to be the first topic I started with. My next article is
going to be about revenue models in crowdfunding. Some companies are using
some dark design patterns in their revenue models, and I plan to cover that as
well:

[http://modernmicrocredit.blogspot.com/2014/04/revenue-
models...](http://modernmicrocredit.blogspot.com/2014/04/revenue-models-in-
crowdfunding.html)

As I mention in the introduction to my article, I wasn't planning on writing a
followup on Zidisha. But then you responded to my last article by dramatically
lowering your interest rates. So I wrote a followup covering what that meant
for lenders.

Like I said in the article, Zidisha shows a lot of promise, and I very much
want the concept to succeed. But to do that, I think you need to start being
more transparent about the problem you have with high loan loss rates. I would
love to see a long response from you regarding the article. I'd be happy to
publish your response in the comments of my article, or even in the article
itself. If you have any corrections, I'd be glad to publish those as well.

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cjbprime
Could you explain why you feel a need to post anonymously?

Thank you for writing the posts, I've enjoyed reading them. (And for what it's
worth, I still feel positive about Zidisha's future after doing so.)

