
How Zidisha (YC W14) Is Misleading the Public About Its Interest Rates - modernm
http://modernmicrocredit.blogspot.com/2014/04/4-ways-that-zidisha-yc-w14-is.html
======
rdl
I initially was a huge fan of Zidisha _because_ of all the bullshit the
microlending providers pull. Which is exactly like this. (fixed fees on small
loans would be the main trick; stuff like flat-fee vs. declining balance APR
is a bit more subtle.)

I hope they post a response, and this turns out to be some kind of
misunderstanding.

~~~
rdl
And, in fact, based on the Zidisha founder's response above, it looks to me
like this was a mix of some legitimate issues (which will be addressed), some
misunderstanding by the modern microlending analyst, and some in a gray area
I'm not really sure about.

I do really appreciate the quality of analysis Modern Microlending did here.
It's also great that Zidisha responded within hours with a pretty full and
honest accounting. This is how this kind of thing is supposed to work, I
think.

~~~
unreal37
I agree. The original analysis made some important points, and the response by
Zidisha was great too.

------
devinmontgomery
The way Zidisha markets its rates feels like a lot of services I see. It's how
my phone bill, electric bill, almost all my bills work - hidden fees charged
by everyone so you just assume you're going to be paying more than is quoted.

They're following the status quo, are probably not intending to be evil, and
are surely feeling the pressure to be 10x better.

But I worked in the Philippines in college, and you want to know what would
really blow their minds? Not screwing them over. Everybody else does that. 10x
better is being honest. Given their alternatives, 25% isn't that bad. Initial
adoption might be slow - they're so used to corruption and being bullshitted
that they'll think it must be 25% plus something - but once word spreads that
Zidisha is really just 25% and offers the most valuable commodity in places
like this - honesty and transparency - it will blow up. And then you'll get
more fraud, but that's challenge 2.0.

~~~
SyneRyder
I was just about to say "surely there are honest alternatives in the
Philippines below 25%", but I just checked my most recent Kiva loans in the
Philippines, and the portfolio yield on my most recent ones range from 28% -
45%. Thanks for the reminder to check the Yield when lending.

------
jfasi
While is commentary makes an excellent case for dishonesty on Zidisha's part,
I wonder if some context is necessary. Looking beyond the dishonesty, this
commentary talks about a 25 percent interest rate in the implicit context of
the credit environment of a developed country. In that context, these
practices and interest rates are extremely suspicious, morally dubious, and
possibly illegal.

This raises the question of why Zidisha is making these statements. To assume
a developed-world business context excludes the possibility that these
practices are accepted and commonplace in the markets Zidisha serves. I have
no experience with those markets, but it's worth excluding this possibility
before expressing distaste for these practices.

Consider the following plausible scenario: Zidisha performs research into the
market and discovers that these practices and rates are acceptable. One can
even imagine they are preferable to the status quo. The issue is that Zidisha
as a company has to generate press and justify its business to a developed-
world audience whose gut reaction to such practices would make the company
look like a pack of usurers, when in fact they could very well be doing a lot
of good.

To me, this communication seems a compromise response to this conflict:
translate the numbers and practices as best you can into language and terms
developed-world audiences understand. Perhaps the company took some liberties
with labeling and conversions along the way, and if this is the case they
would do well to be more conservative, but overall I give the benefit of the
doubt that this communicate is the result of a tricky conflict of business
environments rather than deception.

~~~
potatolicious
> _" is the result of a tricky conflict of business environments rather than
> deception."_

Can't it be both? Intentional misrepresentation in the pursuit of a worthwhile
goal is still intentional misrepresentation. I look forward to seeing
Zidisha's response, but as it is this looks highly intentional and highly
deceptive.

This ultimately comes down to the classic "do the ends justify the means"
debate. It also leads to immediate suspicions of a slippery slope - if the
founders of this startup are willfully misrepresenting the _core_ nature of
their business in furtherance of their goals, what else about them is
negotiable?

~~~
unclebucknasty
This. People seem to assume that the target audience is too unsophisticated to
understand anything beyond flat rates. Zidisha itself implies as much through
their claim that flat rates are simpler to understand.

In fact, flat rates are more confusing because they are misleading. So, not
only is Zidisha joining in on this customary practice, they are promoting it.

Instead, they should educate their clients, re-express competitive rates in
terms of APR, etc.

So, the net is that it does appear to be intentionally misleading, which is
made no better by the fact that such misleading may be common practice in some
parts of the world.

------
jkurnia
Dear all,

Although I do not agree with Modern Microcredit's allegations that we are
intentionally misleading, the discussion that has resulted is a useful one.

As I see it, we have a several options:

1\. The status quo: Continue to quote flat interest rates in our website along
with an explanation of the calculation in a modal box, and display the dollar
amounts paid for each loan for extra clarity.

2\. Transition from a flat rate methodology to APR. This would be more in line
with the standard used in most lenders' countries, but would be more difficult
to understand for borrowers. (It would also require a rewriting of much of our
website. Zidihsa has only one web developer, so implementing this option would
probably have to wait until have more programming resources.)

3\. Continue to use flat rates as the basis for calculating the cost of
Zidisha loans, but display the equivalent APR rates along with them. Perhaps
Microfinance Transparency could help us develop a tool to facilitate this.

4\. Continue to use flat rates, but use the term "fee" instead of "interest."
This would be easy to implement and could help lenders avoid mistaking our
flat rates for APR, but makes cost comparison with loans in borrowers'
countries less straightforward.

Zidisha has little value without transparency, and those who have commented
here obviously care deeply about it. I'd welcome everyone's advice on which
option Zidisha should adopt, or alternative proposals.

~~~
unclebucknasty
> _2\. Transition from a flat rate methodology to APR. This would be more in
> line with the standard used in most lenders ' countries, but would be more
> difficult to understand for borrowers_

This statement implies bad-thinking with regard to borrower clarity and
understanding. As is well-known and obvious, flat-rate pricing actually
obfuscates the true costs. So, to say that it helps borrowers understand is to
say that it purposely gives them a false sense that they understand when they
actually do not.

Again, this is obvious, and anyone who understands APR and its purpose must
make this admission. And, if one makes this admission and still continues to
promote flat-rates as somehow clearer to borrowers, then he/she must also
admit that he/she is now willfully misleading borrowers for whatever purpose
("simplicity", self-interest, or otherwise).

~~~
dragonwriter
> As is well-known and obvious, flat-rate pricing actually obfuscates the true
> costs.

Huh? Flat-rate pricing makes the true cost absolutely clear. If you have _N_
payments with an _k_ flat rate, and principal _P_ , the total of all payments
will be _P_ × (1+ _k_ × _N_ ). The "true costs" with APR are _no more_ clear.

Declining balance interest (APR) is perhaps a more _fair_ and economically
_efficient_ basis for charging for credit, but its not at all more _clear_ as
to the "true cost".

~~~
makomk
Their loans have substantial fees attached that are not included in the quoted
flat rate.

~~~
dragonwriter
And declining balance loans often have up-front fees that are separate from
the quoted interest rates. Fees outside of the stated interest are an
orthogonal concern to flat-rate vs. APR interest methods.

Insofar as "substantial fees attached that are not included in the quoted flat
rate" obfuscate the costs, that has nothing to do with flat rate interest
(obviously.)

~~~
unclebucknasty
> _And declining balance loans often have up-front fees that are separate from
> the quoted interest rates._

As I mentioned in my response to your comment above, you appear to be using
the "strict" (mathematical) definition of APR vs flat-rate _calculations_. In
the U.S., APR is generally understood to be inclusive of up-front fees as
defined by the Truth In Lending Act.

Whether or not this is perfect in practice, on this thread (and in the
article), the term APR is meant to convey a number that _is_ inclusive of all
fees and non-interest charges, such that it reflects the truer cost of the
loan.

------
bargl
My knee jerk reaction to this is disgust. Which typically means that it
deserves a lot more research and validation on my part. I thought Zidisha was
a game changer and a website I could be proud to support. I didn't look at it
as a way to invest but a way to support young entrepreneurs in other
countries. Does anyone else see anything about this that is redeeming for
Zidisha?

------
ska
Looks like Zidisha is taking a page from the payday loan folks playbook, not
exactly a desirable role model.

~~~
unreal37
It doesn't look like that at all. Microlending loans are a bit different than
the "go to the bank and borrow $100K" loans that we are all used to. The bank
doesn't charge a fee, because they make $1000s on interest on that loan over
it's lifetime and it covers it.

Your bank won't lend you $50 as a loan. It's not worth it for them. But if you
add in some reasonable fees (like $11 for credit check report), an $11 one-
time fee on a $50 loan converted to APR looks huge! 500% APR! But it's only
because the amounts we are talking about are so small.

I think we need to look at this more carefully and not compare apples and
oranges. Big loans and small loans are different things.

(And payday loans are evil. But microlending is not the same as that.)

~~~
ska
I didn't mean that they were the same thing at all; the "page" they are
borrowing is the hiding of fees and service charges behind the bold text of a
"low rate".

Your example is fine, by the way. Yes, that $50 is costing you 500% APR. And
yes, that is exactly how you should think about it, and how they should
advertise it. Anything else is problematic. It doesn't matter how the cost is
arrived at, this is the cost to you of borrowing that money, and it is this
entire cost that must be balanced against the value you will see from it, not
any nominal rate.

There is absolutely nothing wrong with doing the sort of loan they are talking
about, and the costs may be perfectly reasonable too; certainly microlending
is a different risk landscape that typical bank loans.

However, the only ethical way to handle financial details like this is to
always be as transparent as you can.

Lots of sectors get this wrong, by the way -- payday loans are particularly
egregious but the auto finance industry is pretty slimy on this too, in
different ways.

By the way, payday loans as an institution obviously meet a lot of market need
that wasn't being addressed before them, or they wouldn't have popped up
everywhere. I don't think they should be run out of town, but they should be
honest about the costs.

~~~
aestra
> but the auto finance industry is pretty slimy on this too, in different ways

This is true that the auto industry (some anyways) will extend the life of
your loan to make the car look cheaper. You can only afford $100 a month? Have
a ten year loan! However, I was with a friend when she bought her car and on
the finance agreement there was a (possibly legal requirement) box where it
said clearly "this is the total amount of interest you will pay over the life
of the loan." You had to sign that you got that number and that it was pointed
out to you. Regulations in the US make lenders less scummy.

------
jkurnia
Dear all,

I'm the director of Zidisha, and have just posted this response to the blog
post. I'd be happy to respond to questions here.

Dear Modern Microcredit,

I'm sorry that you found our website information misleading. I'd like to
address your points here:

1\. Interest rate diagram: As we do apply a 5% transaction fee, I agree that
the diagram showing a range of 0% to 15% is incorrect. A volunteer had donated
the diagram to us years ago, and we did not scrutinize it sufficiently before
using it in our website. We have now removed the diagram until it can be
adjusted to reflect the 5% minimum cost.

2\. Registration Fee: This is approximately $12 paid when a borrower first
joins Zidisha, and provides lifetime membership. We do not include it in the
interest cost calculation because it covers the unlimited number of loans that
borrower may receive over the course of many years.

3\. Zidisha service fee: This is a flat 5% of the loan amount per year the
loan is held. Most Zidisha loans are held for less than a year, so it is
usually less than 5% of the loan amount. For example, the 5% fee for $50 loan
held for three months would be 1.25%, or about 63 cents. That is hardly
exorbitant.

4\. Interest offered to lenders: We allow borrowers to offer any interest rate
they choose to lenders, from 0% up to a maximum of 25% of the value of the
loan per year the loan is held. In practice, the highest rates are usually
offered by first-time borrowers who have not yet established track records
with Zidisha (much as new eBay sellers offer the first few items at a
discount).

5\. Using a collection of randomly selected loans as a proxy for average cost
to Zidisha borrowers is misleading. First-time Zidisha loans are
overrepresented in this measure, because they are smaller and repaid more
quickly, and are therefore more numerous than the larger subsequent loans
taken by established borrowers. Since first-time loans pay the highest
annualized interest (because they are held for a short time), using them as an
example overstates the average cost of Zidisha loans. Our statistics correct
for this by using a weighted average based on dollar amounts rather than
single loans.

6\. We use flat rates not in order to deceive, but simply because they are
more intuitive to borrowers and lenders than APR. The vast majority of our
borrowers are used to flat rates being quoted by local lenders, and when they
tell us they want to borrow $100 at 10% interest, they mean that they wish to
repay $110. If we wanted to distort our data to appeal to lenders, it would
make more sense to use APR, as the higher quoted rates would make lending
through Zidisha seem more profitable. In fact, our intent is simply to make
the cost easy to understand for everyone. For extra clarity, we provide
extensive explanation of APR vs. flat rates, and display the exact dollar
amounts borrowers pay for each loan in the loan profile pages. I don't see how
this can be construed as hiding information. Using APR in Zidisha's situation
would mean sacrificing a measure that the majority of our members understand
easily for theoretical precision.

7\. You imply that Zidisha does not in fact lower the cost of microloans in
developing countries. That is not true. Even the $50 loan you cited above,
which chose to offer to lenders the maximum interest rate we allow at Zidisha,
ended up costing the borrower only $1.73 in interest and fees. I would be
surprised if any other lender would offer an online applicant with no credit
history a short-term loan at such rates.

Zidisha's cost savings to borrowers have been independently analyzed. Below is
an excerpt from a study published by microfinance analyst Daniel Rozas. (Note
that the average interest borrowers have opted to pay lenders has increased
from 2-3% at the time of this study to about 5-6% currently, but this does not
invalidate the conclusion that Zidisha's rates are substantially lower than
what has hitherto been available.)

Zidisha’s interest rates are remarkably low, ranging between 7-8% annually
(quoted flat), of which 2-3% is charged by lenders and 5% is levied by Zidisha
to fund its operations. An additional fee of some $10-20 is charged for
initial registration (but not for subsequent loans). This is far below the
local prevailing rates – MFTransparency places similarly-sized loans (50,000
KES) at about 35% APR (Zidisha’s loans are 15-18% APR). And it’s all the more
noteworthy, considering that Zidisha’s borrowers are largely in rural areas,
where credit tends to be more expensive. The key to the low rates rests on
Zidisha’s avoidance of costly staff and operations on the ground, and its
ability to leverage low-cost funds from socially-motivated lenders. (from
[http://www.financialaccess.org/blog/2011/07/microfinance-
wit...](http://www.financialaccess.org/blog/2011/07/microfinance-without-mfi-
zidisha-tests-boundaries-microlending-methodology))

I'd be happy to provide further information as desired.

~~~
zaroth
Julia, I think you need to spend some more time considering MMC's analysis and
hopefully some more significant changes to how you present and market the
costs of these loans.

I had never heard of 'flat rate' vs 'declining balance' interest rates. As far
as I'm concerned, it's abusing the word to call your fees an 'interest rate'
because they are not. They lack the necessary property of a 'interest rate',
that is, being based on balance over time. What you are charging is a fee,
based on the starting balance and period. I think you should stop calling this
an interest rate, and I'd be surprised if it's not illegal to do this anyway.

It sounds like your 'service fee' is ALSO a flat rate fee based on the
starting balance and period, which makes splitting it out and consistently
footnoting it in your marketing seem deliberately misleading. The reason we
insist on APR is because you can't hide anything from it. When lenders make up
terms and market them, it's almost invariably because they are trying to hide
costs. Somehow this cost hiding is always couched as 'better for the
borrower'.

The "it's only 63 cents" trick won't work with this crowd. Because we
understand how "interest rates" are supposed to work. If it's just 63 cents,
then easier to refund it than write the blog post. But 5% of $2m is $100,000
so lets get real.

MMC includes a screenshot showing 'About this Loan' a few times during the
article;

    
    
      Amount Requested:      USD 50.00
      Repayment Period:      6 weeks
      Grace Period:          1 week
      Offered Interest Rate: 25.00%
      Service Fee:           5.00%
      One-Time Reg Fee:      USD 11.78
    
      Total Amount (Including
      Interest and Transaction   USD 51.73 (30.00%)
      Fee) to be Repaid:
    

It was confusing to me, even with the explanation in parenthesis, that the
'Total Amount' did not actually include all the fees. You should call it a
'Partial Amount' if you want to leave parts of the total amount out.
Otherwise, it should actually be, you know, the _total amount_.

If you can get users to pay the 'Registration Fee' completely independently of
getting a loan, then by all means, have them pay it separately, and keep it
out of the loan statement. But, what I imagine really happens is, users pay
this fee to get a loan, then it's a loan fee, and you have to include it when
you do things like report your total loan costs!

~~~
jkurnia
Hi zaroth,

Am I understanding correctly that you are suggesting we not use the term
"interest", but instead call the amounts borrowers pay to lenders a fee?

That is worth considering. It would avoid much of the confusion over flat
rates versus APR, and would still be clear to borrowers that the amount
represents the cost of the loans.

I'd be interested to hear others' perspective on whether Zidisha ought not to
use the term "interest" at all, but instead replace it with "fee" or some
other term.

~~~
zaroth
I think the problems run deeper than that, because you have multiple different
groups you are trying to communicate with, and some of them are getting
incorrect information here.

If borrowers want to know how much they are paying in interest rate, then I
think you should tell them in terms of APR. If borrowers want to know how much
they are paying in terms of dollars, then that's easy, just tell them.

I think itemizing out fee A, fee B, fee C, is just a silly game. If you go
back to your "About this Loan" table, what you call 'Service Fee' and
'Interest Rate' are the same thing, just combine them. Then, if I want to know
how much they actually cost, I have to look at Total and subtract $50? But
then it's still missing the "one-time fee".

What if the table did say; (and I'm not saying you _should_ do this)

    
    
      Loan Date:        April 14, 2014
      Repayment Date:   June 2, 2014   (7 weeks)
    
      Amount Requested: USD 50.00
      Loan Fees:        USD 13.51  (200% APR)
      Total Amount:     USD 63.51
    

Of course your system knows if I'm a repeat borrower, and can automatically
charge the $11.78 or not. Look, it's a hard truth that the first loan has
terrible terms because of the registration fee, but you can't hide from it.

The only problem with this is it doesn't really help me understand how much
it's going to hurt if I need more than 7 weeks to repay. But I don't know
enough about your payment model to really comment on that.

~~~
jkurnia
Hi zaroth,

This makes sense, and we are already doing some of that.

In the loan application form that borrowers see, the 5% fee to Zidisha and the
interest offered to lenders is in fact combined. Borrowers choose any combined
rate from 5% up to a maximum of 30%, with a text description indicating that
the first 5% of this is paid to Zidisha and the rest is paid to lenders.

The loan application page also indicates the registration fee, as a cost
separate from the combined interest / fee rate that the borrower selects.

We separate the service fee from the lender interest in the loan applications
that are displayed to lenders, because the intent is to indicate the maximum
interest that they can expect to receive from each loan proposal.

------
akg_67
Author of the article is confusing "borrower" facing data with "lender" facing
data. Lender interest rate is what lender gets and not what borrower pays. 5%
lender interest rate is correct because that is what lender gets. Lender
doesn't get service fees and origination fee. It will be very confusing for
lender if Zidisha published 25% borrower interest rate as lender may assume
that they are getting 25% interest rate which will be incorrect. If Zidisha
was telling borrowers that they pay 5% interest rate or telling lenders that
they receive 25% interest rate then that will be misleading. Author needs to
spend some time understanding the terminology and nuances of lending/debt
market from both borrower and lender view. This is the most confusing aspect
most people new to lending side face as they are only used to seeing borrower
side. Lender side view is very different from borrower side view.

~~~
misterjangles
I don't think he confuses the two - he talks about both in detail. The issue
is with the concept if the flat interest rate combined with service fees and
signup fees that make the advertised borrower rate misleading.

But there is a likelihood that not everybody understands it. Journalists and
bloggers just throw out the 5% figure without specifying what it means because
it makes for a nice sounding blurb.

------
netcan
I think microlending is loan sharking by another name, and that's _a good
thing_. I'm not a libertarian but you still need to consider that outlawing
something voluntarily or even just singling it out as a pariah has tricky
effects. It often harms those who are ostensibly being protected.

A few years ago Australian politicians started targeting 'payday loans' and
other "predatory lenders." The upshot was that these weasels target vulnerable
borrowers with 100%+ APR loans, who are ultimately harmed. 'Vulnerable' is
hard to define or measure. Harm is virtually impossible. 'Predatory terms'
(interest rates) were the only easy of defining and singling out these guys.
Legally it seems to have been hard to target predatory lending so name-and-
shame was the main tactic .

A typical loan is a few hundred dollars payable in a few weeks. The ideal
borrower goes down a revolving credit hole. For a class-minded political
activist this screams evil. It's like the middle class debt trap, beefed up
and tailored for the poor and/or dysfunctional. The marketing targets addicts,
gamblers, welfare recipients, etc. The whole thing stinks to high heaven.

The first thing that happened when all this negative attention came about is
that banks got out of anything even similar to payday loans. No point in
tarnishing their brand for a tiny unattractive business. The guys who stayed
in business were the scummiest, the ones who didn't care about brand and
didn't care about their business. It became like running a brothel, legal but
unsavory. The industry boomed as more legitimate businesses ceded market share
to the shadier players.

Realistically, there are two facts that can't be wished away. High risk, low
value loans are expensive to provide. People want/need payday loans and they
will get them from whoever is giving them. It can't be done at non "predatory"
APRs and it can't be shut down. If they had outright outlawed payday loans,
then shady businesses would have given way to outright criminals, the leg
breaking loanshark cliche.

In comes micro-finance. Nobel peace prize winning, poverty alleviating,
enlightened, woman emancipating microfinance. These ran with a lot of support.
They attracted great people at far under-market salaries. Motivated employees
with a mission and received outright donations from the public. Major banks
created microfinance programs as a part of their corporate responsibility,
goodwill project.

These amount to a real and substantial summary. Annualized interest rates are
still very high. Lower than payday loans and much lower than village lenders
and loan sharks they displace but higher than the worst credit card.

Two ends of the spectrum. One on the border region of legality below the
decent folk morality threshold. The other, literally a charitable activity.

Interesting to think about. Make something illegal and it runs as a criminal
enterprise. Treat it as a predatory pariah and it behaves like a predatory
pariah. Treat it as a charitable act, and it behaves that way. In no case does
it go away.

~~~
stdbrouw
I'm willing to grant you that outlawing payday loans and similar predatory
practices without consequently causing all sorts of nasty side effects is
hard. But what you're saying amounts to "it's hard so let's just not bother at
all" which is incredibly defeatist. Using that reasoning, why bother doing
anything about anything at all?

~~~
vidarh
There's a very big difference between trying to outlaw something the assumed
victim does not want to be part of, e.g. murder, theft etc., vs. something the
assumed victim is engaging in voluntarily, though we might suspect "forced" by
circumstance, or by lack of knowledge etc.

As much as there are many things that it is easy to think "should" be illegal,
outlawing the latter rarely works, not least because the assumed victim is
likely not to want to cooperate with you, and potentially being outright
hostile because they see a ban as being what is victimising them, rather than
the provider of the banned service.

I don't think it's defeatist to accept this - it just means another angle is
needed that the presumed victim will actually agree is beneficial to them,
such as providing free financial advice, or mandating better information about
actual loan costs. This is the approach taken to payday loans in the UK.

It doesn't stop the people who has a genuine need for cash even if it is
expensive, doesn't drive them into the hand of hardened criminals, but
hopefully helps to minimize demand. And improved labelling helps providers
that can provide more competitive rates as well - at least one UK pawnbroker
explicitly targets payday loan providers with their advertising by pointing to
the lower rates they can provide, for example.

------
pistle
People don't seek out micro-loans to establish sustainable, value magnetizing
ventures. They take micro-loans to get through today, tonight, and next week.
All micro-lenders I've investigated long enough turned out to be charity-
arbitrage. "You got a guilty feeling? I've got some pictures and stories that
will make you feel good. You can just click the (your) pain away." They do
just enough to keep selling the narrative and sucking the life out of their
believers/volunteers while gold-plate-lining someone's ever heavier pockets.

I don't feel charitable if I expect interest to be paid to me or my
"emissaries."

------
pratyushag
This makes YCombinator look bad. Did they know about this before investing in
Zidisha? If not, maybe consulting the likes of GiveWell could be a good idea.

~~~
onalark
GiveWell? Aren't those the guys that astroturfed MetaFilter a few years ago?

~~~
pratyushag
Yep. Although they apologized publicly for it and came out being a much
stronger organization.

Their apology (not half bad):
[http://www.givewell.org/about/shortcomings](http://www.givewell.org/about/shortcomings)

Deceit in lending is not uncommon among microfinance organizations, but it's
surprising to see it from a YC-backed company. I look forward to Zidisha's
response, I'm sure they'll shed more light on it.

~~~
gohrt
Also, _6 years later_ , their apology is still posted and crosslinked on their
website, years later, in an easily accessible/sharable URL.

MeFi's analysis, which FWIW, notes that most of the offending activity was
done under the founders' real first-names:
[http://mefiwiki.com/wiki/Givewell](http://mefiwiki.com/wiki/Givewell)

(Where is AirBnB's apology for violating Craigslist's TOS with the spamming
from "Jessica"?)

------
cpwright
I've never even heard of a "flat rate" loan until now. For the average
american it sounds very close to a fixed rate which we are more used to even
though it is far different.

~~~
aestra
Not at all. A fixed rate loan is one where the interest can't change in
response to events. So if I borrow money for 30 years with a fixed rate loan
at 5%, I will pay 5% the entirety of the loan even if inflation rises to 10%
or I am late with a few payments. You can always refinance though, but that
creates a different loan.

A variable rate loan is one where interest can change. Credit cards are
usually variable, so if I miss a payment your interest rate can go up or if
you've been a customer for a long time and have a good history of paying on
time your interest rate can go down. Mortgages with variable rates usually fix
the rate for x years and then they reevaluate in x years. During the housing
bubble, variable rate mortgages with were common.

~~~
cpwright
I understand a fixed loan and a variable loan, and those are what I'm used to
considering when deciding whether to borrow money.

I think the issue that the post brings up is that the target market for the
microcredit borrowers consists of people used to flat rate loans, which is
totally alien to the target market for lenders. I think the lenders will
likely mentally map "flat rate" to the closest thing they are aware of, which
is likely "fixed rate."

------
azundo
Solving the credit problem for the developing world is a very challenging
undertaking with huge potential rewards, which is why this is so
disappointing.

Organizations like this should not be not-for-profits. I don't believe that a
business with such misrepresentation would have lasted this long without being
called out. Hiding behind the not-for-profit label in markets where for-
profits should be operating does nothing but distort the market and lull
consumers/lenders into a false sense of do-gooding. These are financial
markets and so we need to find effective market actors instead of not-for-
profits that can unfairly compete due to their status.

By using the not-for-profit label and misrepresenting interest rates, Zidisha
is also painting the picture (whether they intend to or not) that businesses
in this space are exploitative and that Zidisha is good. Micro-loans are
expensive loans! Businesses have to charge a lot for them to be economical,
but access to credit for high-turnover businesses can make a huge a difference
if it makes sense for the business.

What is really needed in the space isn't necessarily a lending platform, but
more data and better techniques to lend. It's tough to vet entrepreneurs
cheaply and at scale, but something I hope we will continue to get better at.
There is a ton of money in the impact investing sector right now that could do
a lot of good through market channels but lending in the developing world is
still just too expensive and too risky.

I'll close with another misleading statement from the October 2012 interview
that the author of the blog post didn't discuss:

... the total rate paid from the borrower’s perspective averages 8.40%. Note
that this is not much above the average rate of inflation in the borrowers’
countries.

The problem here is that this statement assumes a stable currency against the
US dollar. While 8.40% may be close to the inflation rate, for many of these
countries an additional several percentage points of currency devaluation
against the US dollar will raise the effective interest rate in local
currency. I would love to understand how Zidisha deals with the challenge of
currency fluctuations, especially when educating its borrowers.

I hope the takeaway from this is not that micro credit and lending in the
developing world is bad and exploitative - just that it is expensive and
nobody is that great at it yet. I'm disappointed in Zidisha's
misrepresentation but I hope it makes it clear that this isn't a solved
problem that greed and bad business practice is getting in the way of. It's an
extremely difficult, unsolved problem that we need more smart people working
on to solve.

------
smackfu
Interesting how important the length of the loan is. A 5% one-time fee on a 5
year loan may be acceptable. A 5% fee on a 6 week loan is massively higher
than the actual interest charged.

~~~
jusben1369
Yes. I agree that the author seems to want to completely ignore the fact that
it is a 1 time fee vs an interest rate.

------
nwenzel
Question for the OP: Who profits from the service? Who profits more by
"misleading" borrowers, lenders, and/or donors?

If the OP is uncovering exorbitant fees, someone must be getting rich. I'd
like to know what happens when you follow the money. If no one is getting
rich, is that evidence of an honest service trying to make the world better
for those born someplace other than the developed world?

------
dsugarman
question to the OP: Aside from believing the information is misleading, do you
believe that Zidisha is still improving microlending?

------
jkurnia
Dear all,

Thanks in part to this debate, we have opted to reduce the interest Zidisha
borrowers may offer to lenders. You may view the full announcement and
discussion here:

[https://news.ycombinator.com/item?id=7558816](https://news.ycombinator.com/item?id=7558816)

------
rajacombinator
I think the blogger misinterpreted the "lender interest rate" to mean
"borrower interest rate." However, the markup/hidden fees do look extremely
shady.

------
azth
Unfortunately, just another usury-based company entering the market. What a
way to exacerbate the already worsening economic situation.

~~~
pbhjpbhj
Surely not just a usury-based company but instead one exacting usurious
repayments by lending other peoples money. Truly champions of capitalism.

~~~
azth
Couldn't have said it better myself :)

------
drawkbox
So it is essentially a credit card rate.

~~~
ZeroGravitas
A pretty good credit card rate. If you do a search for credit cards for people
with poor/no credit history you'll see 35%-60% APR rates.

~~~
aestra
[http://www.creditcards.com/bad-credit.php](http://www.creditcards.com/bad-
credit.php)

30% seems to be common.

When I got my first CC I just got a low limit ($600), not high interest.

~~~
ZeroGravitas
Coincidentally, that's the same link I googled for my figures.

They have 2 at 30%, 6 at 35%, 1 at 40% and 1 at 60% and all of them need to
approve you even at those levels, and may increase them for particularly bad
risks (they market them as "representative" rates, so some percentage of
people needs to get them I think).

I'd guess the people who aren't savvy enough to go through a price comparison
search also get stung at the high end of these rates too.

------
mfheretic
[I posted this on the MMC website, should have posted here! Mildly edited to
relfect context here]

I get bogged down in such interest rate debates, so decided to put my money
where my mouth is and lend on Zidisha - MY loans, MY transactions, MY
calculations. I uploaded $1000. 18 months later (in fact slightly less as I
did this in two batches of $500, minor detail) my cash + pending loans +
outstanding capital is $1006. For all practical purposes let's say I am at
break-even. I made some money in interest, however calculated, and I lost some
money in defaults, late payments and foreign exchange losses. Overall these
cancelled out (in fact I am $6 up). My average interest rate that I charged,
weighted by the amount I bid, was 4.4% (flat per year I believe). I had a few
late payments, one outright default, and I have no idea how much forex losses
cost me. To repeat, this all largely cancelled out.

I then looked at the average interest rates as stated by Zidisha only for the
clients I had lent to. These were 9.31%, but included the 5% fee that Zidisha
charged, so it appeared that the average investor was charging 4.31%,
marginally lower than me. Indeed, I lent to a few people who were unwilling to
pay any interest, and sure enough their stated rate was 5% - the Zidisha fee
alone. So, in terms of Zidisha claiming the average LENDER interest rate is
5.3% seems reasonable from my personal lending experience (40 loans to date).

I agree that flat rates are inferior. I wish Zidisha would stop this practice.
And it is a fair rule of thumb to double them to get a real APR. There is a
fragment of truth in the claim that borrowers understand flat interest rates
better than APRs, as these are still common in some countries (where they have
not yet been outlawed). Claiming the world was flat a few centuries ago was
acceptable and commonly accepted, although wrong! I agree with the author that
converting to APRs would be better. But, I also agree that the one-off fee for
a credit check, in this lending model, does seem reasonable. But I concede
that this is a debatable point.

So, excluding this one-off fee, it does appear that the loans I have
personally done have an APR of about 20% (9.31% x 2). What's more, by me
charging 4.4% (flat, equivelent to 9% APR), this has covered forex losses and
defaults over an 18 month period, almost perfectly (by coincidence). I don't
lend on Zidisha to make money, but if I can protect my capital, that is fine
by me. This is what most other P2Ps will try to offer. MyC4 offers a net
return, Kiva is generally break-even. What fascinates me about Zidisha is that
there is no intermediary, and the rates do genuinely seem lower. I accept this
might not be the case for a first time client on a $50 loan having to pay $12
for the credit check. The one-off fee is the source of the problem. But where
do we draw the line - what about the bus fare to get to the office? The cost
of completing the forms? The opportunity cost of time in completing the
Zidisha process? Yes, there are entry costs to join Zidisha, as there are in
many services. Indeed, one could argue these present a barrier to entry to
dissuade non-serious potential borrowers.

Do not mis-understand me, I am a fanatic for transparent pricing in
microfinance.

In fact, I should also add that there is an additional fee which I (i.e. from
a lender perspective) have to incur that wipes out my measly $6 profit - the
PayPal fee, which was $34 in my case. So, in fact, I lost $28. But, a rate of
20%, or 25%, or 30%, is alas pretty reasonable, particularly in Africa. I
agree that Zidisha should adopt APRs as soon as possible, but I would be
hesitant to describe this as deceptive. There is no pre-funding, at least they
make an effort to state the interest rate, which some P2Ps don't even attempt.
I do hover the mouse over the blue buttoms and was aware that this is flat,
and I know how to interpret this, but I may not be typical. But compare this
to Kiva, whose greatest effort to explain an interest rate is to state the
self-reported, unverified portfolio yield of the bank as copied from the
MixMarket often years out of date, and this is not even a good proxy of the
APR in my opinion. I did a blog post a year or so ago comparing the stated
portfolio yields reported by Kiva compared to the actual APRs calculated by
Chuck Waterfield, and the divergence is staggering. Is Zidisha perfect, no? Is
it an interesting development, challenging the status quo of the current P2P
market? In my opinion, yes. There is scope for improvement, and I hope they
constantly remain aware of this, but so far I find this a promising venture.
It will be interesting to see how it scales up.

Hugh Sinclair, author/consultant www.microfinancetransparency.com

------
GFK_of_xmaspast
Well I for one am shocked that usurers are engaging in usury.

------
jediknight
se flag blog post? New blog with only one other entry? Something smells rotten
in Denmark.

