

Is direct P2P microlending financially sustainable? - jkurnia
http://p2p-microlending-blog.zidisha.org/2014/06/13/is-direct-p2p-microlending-financially-sustainable-lessons-from-zidisha/

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manishsharan
Hi Julia, Zidisha seems to be serving a valuable need.

I had designed and developed a credit exposure and credit risk management for
large corporate and commercial banking for a large Canadian bank and I am
curious to know how credit exposure and risk is managed by Zidisha.

a) what collateral do you accept and how do you value the collateral?

b) do you consider country risk ? and how do you quantify individual's risk
profile ? have you developed a credit risk model ?

c) would you consider offloading credit risk by partially securitizing your
loans?

d) Countries where you operate in have a serious risk of document fraud. can
you share stories of fraud mitigation ?

f) finally, what kind of lenders do you seek ? Are you looking for altruistic
people or people seeking to spread their investment risk ?

e) Also, do you realize that you have the opportunity to become the Equifax of
third-world countries ?

~~~
jkurnia
a) what collateral do you accept and how do you value the collateral?

We don't accept any collateral, because 1) most of our borrowers are low-
income individuals just entering the working population, and don't have any
substantial assets, and 2) a collateral-based credit risk mitigation system
would be too expensive relative to the size of the loans (the starting loan
amount is $50 - $150).

b) do you consider country risk ? and how do you quantify individual's risk
profile ? have you developed a credit risk model ?

Currently, once a borrower is admitted to Zidisha, lenders alone judge country
and credit risk. However, we're currently working on a data-driven credit risk
model to complement our other risk mitigation measures.

c) would you consider offloading credit risk by partially securitizing your
loans?

Not in the near term, because our lending model is too new and changes too
rapidly for credit risk to be easily quantifiable. In addition, we'd be
concerned about moral hazard.

d) Countries where you operate in have a serious risk of document fraud. can
you share stories of fraud mitigation ?

One of the major shifts in our lending approach has been a move away from
document-based vetting. For example, we used to require local community
leaders (religious officials, school principals etc.) to sign recommendation
forms for loan applicants. We found that fraudulent applicants would forge
these, even having false organizational stamps manufactured for this purpose.
It was possible to mitigate this by telephoning the officials who signed the
forms and asking them to verify their institutions' addresses or other hard-
to-remember information, but it proved too difficult for our all-volunteer
staff to cope with the erratic phone networks and linguistic barriers once we
started processing thousands of applications.

We never did figure out a way to mitigate document fraud at scale. Instead, we
developed other verification methods that were more difficult to falsify, and
reduced the initial loan amount, until the costs of getting a fraudulent
application through our vetting system outweighed the expected gains.

f) finally, what kind of lenders do you seek ? Are you looking for altruistic
people or people seeking to spread their investment risk ?

We are looking for altruistic people, who want to help people in the world's
poorest places without dependency-creating handouts or exorbitant interest
rates. Zidisha at present is not viable as a purely commercial investment.

e) Also, do you realize that you have the opportunity to become the Equifax of
third-world countries ?

Yes, that's an interesting possibility, though I've not yet heard of Zidisha
being used in this way. Most people who can borrow with Zidisha do not seek
credit elsewhere.

------
jkurnia
I'm Julia, the founder of Zidisha. I'd be happy to answer questions here.

~~~
marcell
Have you considered adding bitcoin support to your product? Assuming the
receiver has a way to convert bitcoin to/from their local currency, this may
remove some friction in transfering value between individuals. btcjam.com is
doing something like this with bitcoin.

~~~
jacquesm
What use would that be? Far more people in the world have not used bitcoin
than the percentage that has, it looks like it might be a cheap PR win but in
actual usage it will amount to a small fraction of nearly nothing. And then
you still have to convert them with associated costs and repay the lender in
some ridiculously volatile currency.

Supporting bitcoin (unless you are a bitcoin start-up) seems like a silly
thing to do for a company that needs to prioritize due to resource
constraints.

~~~
marcell
1) People without bank accounts can receive BTC, and sell them for cash

2) Sending BTC internationally is simpler than sending fiat

~~~
jacquesm
How will they sell them for cash without using an exchange and/or a bank
account?

I can't just convert a bitcoin sitting in my wallet to something I can give to
someone else to exchange for cash without a whole pile of guarantees.

The only people I can trade bitcoin with for cash is other bitcoin users,
which - as I noted above - are few and far between.

Yes, sending BTC internationally is simpler, but that does not mean the
recipient can do the same things with them as they can do with fiat, and as
such it just shifts the problem to the recipient. When you send cash (using
for instance western union) it is almost instantly available as well, without
all the downsides of having to find someone that will trade your bitcoins at
something approaching their market value.

~~~
rational-future
Western union will often take over 5% of a transfer through fees and extremely
greedy exchange rates. A BitCoin transfer on the other hand is virtually free.

IMHO there will be a high overlap between people using a lending startup and
Bitcoin users, as both are modern bank alternatives.

In my humble experience exchanging Bitcoins for cash was hard a couple of
years ago, but not today. All my geek friends and colleagues use it.

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atmosx
Can this be approached as a (low or high risk?) investment, from the
borrower's perspective, or is it mostly about helping third world inhabitants
without any substantial ROI for borrower?

~~~
jkurnia
We are intended as a platform for philanthropy. Any interest returns wouldn't
be enough to compensate for risk.

~~~
atmosx
thanks for clarifying!!

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misterlocke
I like the concept of P2P microlending, especially enabled by technology, so
the loan sharks can be kept out of the system.

But to really be sustainable and have a high-impact (as a tool for economic
growth in the 3rd worlds, not as a business per se), it should be more
localized. Think at something like localbitcoins.com - as a working system -
ignore the bitcoin part of it. This way you can get rid of the most of the
taxes and decrease the level of fraud.

~~~
jkurnia
I think domestic P2P platforms are a big untapped opportunity in developing
countries, especially large ones. They are still rare; Fairplace in Brazil is
a notable exception.

An international platform like Zidisha can offer a different value
proposition, in that 1) we enable arbitrage in purchasing power parity between
wealthy and developing countries (the price of dinner at an upscale restaurant
in America could finance the startup of an entire restaurant in Kenya), and 2)
our users value the chance to connect with an ordinary person on the other
side of the world, learning about their culture, socioeconomic realities, etc.

------
dreamdu5t
Just a suggestion, you should have a link back to the main zidisha.org domain
from the blog.

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cornholio
Oh great. Payday loan sharks meet Wall-street meet the developing world. The
whole concept of microlending is based on the free market fantasy that poor
people can build their own businesses and be self reliant, as if market entry
barriers don't exist. As if a weaver investing in a manual loom does not face
the competition of textiles industrially produced in China for pennies.

The financial sector jumped all over microlending: it's a virgin market for
financial services ("the unbanked"), the default rate is low because the
existing social structure is leveraged (like MLMs, Amway etc.), and the profit
potentials are huge. Meanwhile, they can claim they are helping people and the
nasty effects of this type of loan sharking take place in a far away country
to people who can barely understand they are victimized.

Poor people need jobs and education, not high interest loans that will just
finance survival. The developing world will increase it's standard of living
the same way the West did: large scale efficient production, ran by educated
and productive workers earning wages and creating demand. It will not be via a
bunch of banana cart pushers.

~~~
viraptor
The short response is: Payday loans have APR up to 1000%. These ones are
comparable with bad rating, but still reasonable, long-term bank loans. Payday
loans capture people who need food or pay the late bills _now_ , discussed
loans are (usually) for pretty well-defined business purpose.

> Poor people need jobs and education

Good, microlending helps them create a job, or sustain it themselves rather
than looking for one. Or do you think someone should come in from outside and
do it for them?

> large scale efficient production

So... China's mass production model then? How do you propose jump-starting
that?

Edit: On a specific example:

[https://www.zidisha.org/microfinance/loan/MwangiGituathi/791...](https://www.zidisha.org/microfinance/loan/MwangiGituathi/7915.html)
(first non-trivial-shop entry from front page)

\- started business using the first loan

\- got successful, tries to expand to another location

\- creates job for another

\- money helps him get the education

Isn't that exactly what you wanted him to achieve? (job*2, education, person
capable of creating your large scale production environment in the future,
wouldn't call him victimised)

~~~
cornholio
> China's mass production model then? How do you propose jump-starting that?

By loans made by the private or public sectors for the purpose of developing
large scale productive capacities ? Craftsmen can't compete with industrial
production, there is a minimal scale problem.

> microlending helps them create a job, or sustain it themselves rather than
> looking for one.

A $50 loan can't do that. You will not get an education and you will not build
a business with $50, not even in the poorest village on Earth. You might help
a small business owner solve a crisis situation and find some stability.

The source of poverty is lack of investment, micro-loans will drain resources
out of the community (principal + interest) and leave very little actual
productive capital behind.

While the idea as initially conceived by Yunus was well intentioned, the focus
on lending (as opposed to developing and building) has transformed it into a
form of loan sharking. Many of the newer Microlending networks that operate in
India have focused so tightly on performance and profit and so little on the
welfare of the clients that it has resulted in a slew of suicides and assorted
tragedies: [http://www.bloomberg.com/news/2010-12-28/suicides-among-
borr...](http://www.bloomberg.com/news/2010-12-28/suicides-among-borrowers-in-
india-show-how-men-made-a-mess-of-microcredit.html)

Edit: the example you provide is just that, an anecdote. It's certainly
possible, but is the dominant story or the exception ? At 20% interest rate in
US dollars, plus any volatility the local currency will induce, we are talking
about credit card level rates, and not business loans. The introductory loan
in 50 to 150$, if you need more you need to build credit, just like credit
cards. How well are the borrowers and their scheme selected ? What's to
prevent it from becoming a way for poor families to finance interest bearing
consumption, just like a credit card ?

On a case by case basis, there are opportunities for development that can
withstand 20% interest because the local need for that service is so great,
thus the amortization is very rapid. There is a massive risk in this internet
driven model that borrowers are selected solely for their ability to repay,
and that scale and growth becomes the driving factors.

You will NOT spur development by simply lending money to the poor, quite the
contrary you will lock them into a high debt, high interest form of
consumption that is all too familiar to poor families in the West.

~~~
SimpleXYZ
>micro-loans will drain resources out of the community

That is so not how capitalism works. Money is a means to induce labor. Right
now there is a lot of human capital in developing countries that is wasted
because there is no financial capital to fuel it. Imagine a young person
willing to labor 18 hours a day building widgets. Instead he just sits around
because he can't find a job building widgets (or afford the materials to buy
the raw materials.)

~~~
cornholio
The key phrase you leave out is "and leave very little actual productive
capital behind". People does not equal human capital, you need educated and
experienced people.

The only way the borrowers can repay the USD principal + interest back to the
external financiers is to participate in world trade, to export or at least
substitute the import of widgets from industrialized nations. Will a micro-
loan create the conditions for such competitive production ? Hard to imagine.

