
Zidisha (YC W14) reduces interest rates for P2P lending to developing countries - jkurnia
http://p2p-microlending-blog.zidisha.org/2014/04/09/interest-rates-for-lenders-now-capped-at-5-flat-10-apr/
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elecengin
How does Zidisha handle compliance with SEC regulations around issuing
securities? I know that both LendingClub and Prosper had to go through a
lengthy process to offer their notes with proper documentation and
disclosures.

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jkurnia
Hi elecengin,

Zidisha is registered as a 501(c)(3) nonprofit only, and does not have a
securities license. For this reason, our terms of use do not offer lenders any
guarantee they will be able to withdraw repaid loan funds. Legally, Zidisha
lending accounts are not financial assets, and any payouts to lenders are
treated as voluntary promotional payments offered at Zidisha's sole
discretion. That is one more reason we try to keep the emphasis on
philanthropic impact, rather than the financial aspect of the loans.

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kanamekun
If the SEC ever decides to shut you guys down for operating without a
securities license, would lenders lose their ability to withdraw their own
money (i.e. to make one of those "voluntary promotional payments offered at
Zidisha's sole discretion")?

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jkurnia
According to our attorney, they would not.

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7Figures2Commas
> We believe the reason is that, while allowing higher interest improved the
> financial attraction of lending with Zidisha, it simultaneously weakened its
> humanitarian appeal.

As someone who donates money to 501(c)3s that are focused on the developing
world and who also dabbles in P2P lending, I see a disconnect. There's nothing
magical about a 10% APR figure. Maybe it feels better to some folks, but for
me personally at least, if I'm looking for "humanitarian appeal", I would far
prefer to donate money than lend.

The blog states "higher interest rates do not seem to have resulted in higher
levels of loan funding overall." This is an interesting statement. It could
mean one of two things: Zidisha lenders are not actually interested in lending
and are going to allocate capital regardless of risk, or the higher interest
rates aren't high enough to attract capital to the theoretically riskiest
borrowers. Without more data answering the question "Why?", it's premature to
use this as justification for capping interest rates.

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jkurnia
Hi 7Figures2Commas,

It is true that the conclusion that higher interest has not led to more
lending is not based on rigorous data. It is rather based on the general
observation that during the past year or so, loan funding volume has not
noticeably increased at times when the highest interest rates offered at
Zidisha increased.

The generalization that Zidisha lenders are not primarily attracted by
financial returns is likewise not based on data, but rather a subjective
assessment resulting from many years of survey responses, comments posted on
our website and conversations with lenders.

(An important caveat is that many of our lenders do care about preserving the
value of their lending funds over time, and often try to lend at interest
rates that they believe will help them achieve this goal. But this is a very
different motivation than profit maximization.)

I agree with you that offering dramatically higher interest may well attract
more capital, from lenders who are motivated by profit rather than
philanthropy. This would not necessarily be a bad thing, but it is not our
mission or core area of expertise.

It will be interesting to see if a profit-based variation of Zidisha emerges,
and whether it ultimately has a greater impact on the opportunities available
to entrepreneurs in developing countries than our philanthropic platform.

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7Figures2Commas
Thanks for the thoughtful response.

Regarding your comment that "It will be interesting to see if a profit-based
variation of Zidisha emerges...": it seems to me that you have a positioning
dilemma. The minute you invite someone to lend for interest, you are profit-
based. The fact that you cap interest rates, perhaps requiring that lenders
charge far less than risk would otherwise indicate, doesn't change this.

If your lenders aren't motivated at all by profit, don't care to allocate
capital in a manner closely aligned to risk, and you don't see yourself as
being profit-based, why not simply allow me to donate money to specific
individuals? Being able to target small donations to a specific person for a
specific has a lot of appeal. In fact, there are certain charities I'm
familiar with that I know frequently get requests from donors who want to be
able to trace their donations. Unfortunately, tracking individual donations to
individual recipients is something that a lot of major charities cannot do
efficiently at their scale. It would simply cost too much.

Obviously, the lending aspect of your platform allows me to redeploy my
capital, something I wouldn't be able to do if I was simply making a donation,
but as with any other P2P lending platform, my interest earned is taxable
income so contributing through Zidisha is far less tax-efficient than donating
to a 501(c)3.

Here's an idea which may or may not be feasible legally/logistically: I donate
$50 to Zidisha, which Zidisha loans to a borrower of my choosing. When that
person pays back the loan _to Zidisha_ , Zidisha allows me to direct the
lending of $50 plus the interest Zidisha earned to another borrower. And so
on.

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jkurnia
That is an interesting variation on our current model: allow lenders to direct
loans to specific entrepreneurs, but disable withdrawals such that the funds
transfers can be classified as tax-deductible donations.

We had a discussion of this idea in the Zidisha member forum some time ago,
and most participants indicated they would lend less if they did not have the
option of receiving their funds back.

A greater concern is that turning the loans into donations, even though the
individual borrowers are expected to repay them, could change the nature of
the relationship between lenders and borrowers from one of mutually beneficial
partnership, to that of patron and dependent. I don't think this development
would be good for borrowers or lenders.

Our current position is, as you say, somewhere between the extremes of for-
profit lending and outright donations. Some would call this subsidized
provision of capital or "impact investing." As a pioneer in this space, we are
still adjusting our positioning as we learn with experience what works best.

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aw3c2
There is no link to your homepage on your blog, both the logo and the "Home"
link only go through your blog!

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jkurnia
Hi aw3c2, thank you for pointing that out. Our standard Wordpress account does
not seem to have an option to change those links, and we've focused our web
development resources so far on improving our main website rather than our
blog. As a temporary measure, I've added links to our website to the blog post
itself.

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aw3c2
No problem! As a workaround you could probably add a text widget to the
sidebar with the link.

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jkurnia
We'll look into that. Thanks again!

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devinmontgomery
Thumbs up for clarity. There's some inherent complexity to having different
rates borrows pay vs what lenders receive, but having interest broken up by
both flat rate and APR and posting the registration fee in the same place
makes it easier to understand.

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jkurnia
Thanks devinmontgomery. One of our greatest challenges has been striking the
right balance between making detailed information available to those who seek
it, and keeping our website presentation simple and easy to understand for
newcomers.

Thus far, we've opted to display only one kind of interest rate (the simple
flat rate upon which our website calculations are based), along with a modal
box note that the equivalent APR is roughly twice this, and a prominent
display of the actual dollar costs to the borrower.

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rdl
Congratulations. Once I have a charity donation budget again I know where I'll
be contributing (along with Watsi...)

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jkurnia
Thank you! Watsi was the first nonprofit at Y Combinator, and the way they
have combined the best of Silicon Valley technology expertise with a
charitable mission is an inspiration for all of us. Its founder, Chase, has
also been incredibly generous in offering advice and help to the other YC
nonprofits.

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jkurnia
I'm Julia, the founder of Zidisha. I'd be happy to respond to questions and
comments here.

