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Help me distribute $100,000 to new entrepreneurs in Africa (paulbuchheit.blogspot.com)
220 points by paul on March 3, 2014 | hide | past | favorite | 87 comments

Dear all - I'm Julia, the founder of Zidisha. I'd welcome comments and questions from anyone who would like to learn more about our P2P microlending platform.

If you'd like to hear more about my own journey and the experiences that lead to the founding of Zidisha, see http://www.huffingtonpost.com/julia-kurnia/why-i-founded-zid...

In the Huffington Post article, you wrote: "Years of working with NGOs and government aid programs were convincing me that handouts are a dead end, temporarily soothing the acuteness of the injustice but taking donor and recipient down a path of dependence that ultimately makes the international wealth divide even wider."

Do you feel that way about a universal basic income? Does your statement only refer to single-recipient donations, that tend to cause dependence? I can't claim any personal experience, but from what I've read in e.g. [1] and [2], an unconditional basic income has positive effects on the community. The lesson I've taken from such pilot studies is that direct, conditionless donations are a very effective way to help the poor. I'm curious if I've learned the wrong lesson, and the benefits only appear if it's happening for a large population (or perhaps even that's not effective, and the studies are flawed or misleading).

[1] http://www.bignam.org/BIG_pilot.html [2] http://www.dominionpaper.ca/articles/4100

Hi David, this is a complex question and I agree with you that a lot depends on the circumstances and details.

My understanding is that many cash transfer programs have had measurable positive economic effects, both when they are targeted and when they are offered to an entire community. And there are obviously situations of humanitarian catastrophe, such as a natural disaster or a famine, where direct distribution of aid is the right answer.

My objection to most handout programs is based on the negative psychological effects I experienced time and again while working with development assistance grants in Africa and Asia. The resources we distributed would certainly result in an economic boost, but they also fundamentally changed the way the recipients saw themselves, and the way we saw them. Handouts caused the recipients to view themselves as dependents whose fortunes were subject to the whims of luck and on pleasing donors, rather than on themselves as drivers of their own lives. When repeated enough, this psychological side effect can be devastating not only for the individual recipient, but for the broader community that has come to depend on the handouts.

The dynamics in microfinance loans are much healthier in my experience - especially in a market-oriented community like Zidisha, where borrowers offer their own loan terms and lenders base their lending decisions on the borrowers' own demonstrated performance with past loans. It feels more like a business partnership than a handout.

In the pilot studies, about 10% of people who would otherwise be working choose not to work and instead become dependent on the BI. So the BI pilot studies do agree with Julia's impression.


That is a gross misrepresentation of the results:

> The total amount of work hours decreased by only 13%. Breadwinners hardly cut down on their hours, women used the basic income for a couple of months of maternity leave and young people used it to do some extra studying.

> Forget’s most remarkable discovery is that hospital visits went down by 8,5%. This amounted to huge savings (in the United States it would be more than $200 billion a year now). After a couple of years, domestic violence rates and mental health also saw improvement. Mincome made the entire town healthier. The basic income continued to influence following generations, both in terms of income and health.

You are correct - it was hours worked, not # of workers. Thanks for the correction.

I'm not sure how it's a gross misrepresentation - Julia's impression was that free money induces people to become dependent and work less. How does the distinction in hours worked vs # of workers change that?

Taking care of a baby for a few months or getting back to studying is hardly becoming dependent on free money.

Also, notice the last sentence: "basic income continued to influence following generations, both in terms of income and health." That was long after the pilot ended.

The Namibia study is interesting, but it's essentially attacking a different problem from the one Kidisha aims to address (lack of access to relatively high sums by local standards to do specific things)

It's also unfortunately too short term and micro-scale to really address the main criticisms which are (i) prices of basic goods in short supply and ground rents will rise to the point very poor people are often not better off, and sometimes worse off (ii) trying to set the basic income sufficiently high to allow subsistence (which the Namibian study didn't) would cause massive economic instability even if it could effectively be funded (iii) without massive and relatively expensive administrative oversight, most of the money will be siphoned off by the corrupt in underdeveloped countries and regions and (iv) if you make payments for children you encourage even more excessive population growth and if you don't, families still suffer.

How do you distribute funds and receive payments on loans? The reason some of your competitors use local banks is because it is extremely difficult to manage loans in some parts of the world and it requires boots on the ground. How do you address this difficulty?

Hi pilom, It was extremely difficult to send payments to individuals in pretty much all developing countries until about five years ago. Since then, mobile phone payment services, which allow funds to be sent via secure SMS message, have proliferated in a few countries, especially in Africa.

Kenya is at the center of the mobile phone payment revolution with its M-PESA service, and is the reason Zidisha was first piloted in Kenya. Thanks to M-PESA, Kenya is still our largest country today.

Most Zidisha loan payments are transferred via mobile phone. For example, we use M-PESA in Kenya to transfer funds from our US bank account electronically to a bank account in Kenya, and from there to the mobile phone M-PESA account of the recipient. The recipient can exchange the M-PESA credits for cash at a local M-PESA kiosk. We receive repayments the same way.

In countries where mobile payment services are less developed, such as Burkina Faso, we transfer payments by sending a disbursement order to the local bank account where our funds are held. This is a much less scalable solution than mobile phone payments, and is one reason our growth is more rapid in the countries - Kenya, Ghana, and Indonesia - where mobile phone-based payments are enabled.

I have an unrelated question, which you might have strong opinions on or information about.

I just finished reading http://www.amazon.com/exec/obidos/ASIN/0465016154/ which espouses the theory that the root of a lot of problems is that countries set up formal property systems that exclude most of their population, and then fail to capture the contracts that people actually live by. Because of this, people are unable to secure loans because they can't prove to the broader world that "their" property is theirs.

It is a classic, "Here is the problem, fix this and all else gets better" kind of prescription. I'm always suspicious of those.

But as an expert in this area, what do you think of this one? Is it as big an issue as they claim? How much would fixing it help?

Hi btilly, I am not an expert in property law in general. I understand it is a contentious issue in much of Latin America, Hernando De Soto's area of focus. I can tell you that many Zidisha borrowers do have formal legal title to farming plots and homes, but they do not use this property as collateral for loans because they cannot afford the risk of losing it.

More broadly, I do not think any one service - property reform, or business growth capital, or health or education for that matter - is a cure-all. All of these services are needed, and each works optimally when the others are present.

On the Zidisha statistics page† it says you have roughly 10% default rate but only 5% average interest rate. So if I make 10 loans of $1000 each, I expect to make $450 in interest and lose $1000 in principal to a default. That is a negative expected return. Why are Zidisha lenders willing to accept such terms? It seems like the interest rates should be higher given the risk of delinquency or default.


According to their FAQ [1], Zidisha is a charity, not a place to put your money if you want to get a return.

(It would be interesting to compare social-impact-per-dollar of Zidisha versus, e.g. GiveDirectly [2], one of the best-known ways of doing good in the developing world [3].)

[1]: https://www.zidisha.org/microfinance/faq.html - look for the question "Why does the Zidisha website not track the precise financial returns earned on my loans?"

[2]: http://givedirectly.org/

[3]: http://www.givewell.org/charities/top-charities

Actually I just looked at Zidisha's website to see how it works, and their terms of use [1] basically state that once you make a loan, the money is no longer yours:

<< Zidisha makes no guarantee or representation that funds lent through its website will be repaid to lenders, regardless of whether the loans financed with lender funds are repaid to Zidisha. Any cash payouts are promotional gifts offered solely at Zidisha's discretion. >>

So basically, I make a loan and then if the entrepreneurs makes a repayment, Zidisha can choose to give me my money as a "promotional gift." But wouldn't lenders have to pay taxes on their "promotional gifts"? And aren't I getting taxed on my entire loan (principal and interest), not just my interest income like with a normal loan?

I don't get it... why structure things this way?

[1] https://www.zidisha.org/index.php?p=5

I agree that this is confusing.

We state in our terms of use that we are not obligated to return lender funds because doing so could be construed as selling securities under US law - something we are not licensed to do. In practice, we have honored every lender request to withdraw funds that we have received since we were founded four years ago.

I am not a tax expert, but I would be surprised if a tax authority construed Zidisha lending activity as taxable investment income, because according to our terms of use the loans are not financial assets.

> I am not a tax expert, but I would be surprised if a tax authority construed Zidisha lending activity as taxable investment income, because according to our terms of use the loans are not financial assets.

Your practice, as you describe it, treats them as such, and regulators are often prone to treat things as what they are in practice even if the contract between the two parties claims they are something else.

(This applies to securities authorities as much as to tax authorities.)

Presumably to avoid liability issues associated with representing the loans as investments, particularly relieving themselves of any obligation to chase missed repayments on behalf of creditors.

In some respects, having the up-front option to to waive any right to withdraw repaid loans might be better for people who actually have no intention of doing anything with repayments other than loan them to other Africans, assuming charitable donations whose use and re-use you're continually able to influence can still be legally tax deductible.

Hi notahacker, a few of our lenders have requested non-withdrawable accounts. The idea is that the full amount credited to these accounts would be tax-deductible, and lenders would retain control of how the funds were lent out. Informal consultations among our lenders did not reveal strong enough demand to justify the cost (mainly in additional complexity for newcomers to our platform to take in), so we refrained from introducing this option for now.

You found more information than me.

Tried to "read terms of service" > redirected to the main page.

Whois returned "not found"

dig returned a GoDaddy dns proxy.

Two Emails sent to me by them. The first a email confirmation. Zidisha, Inc. 21900 Muirfield Circle #302 Sterling, Virginia 20164

The second thanked me for joining their email list.

My profile page has several links like "Lend Fund", "Join a group". Not sure what to do next... Basically this meant i signed up for a mailing list

Hi iiiears, thanks for giving Zidisha a try and for this feedback. I'm so sorry our website gave you a redirect when you tried to view our terms of service. Would you mind letting me know which browser you are using so that we can try to replicate and fix the bug?

We'll try to make the next steps after creating a new lender account clearer. If you would like to make a loan, you can do this via the "Lend" page.

For some discussion about Zidisha vs GiveDirectly search "Zidisha" in the comments of these two articles: 1)http://blog.givewell.org/2012/04/26/microfinance-and-cooksto...


Would love to hear Kurnia's thoughts on this.

Hi pratyushag, in general, I am not a fan of handout-based approaches to charity. In my experience the negative psychological effects of handouts outweigh the short-term economic benefits. See http://www.huffingtonpost.com/julia-kurnia/about-to-send-a-d... for a more thorough presentation of my views.

Hi minimax, you are correct - if you lent at 5% interest with a 10% default rate, you would lose money.

Note that most borrowers offer interest well above 5%, and lenders are free to fund the loans at or below the offered rate. In my experience, many lenders have opted to fund at low or even zero interest because they wish to offer their selected entrepreneurs low-cost loans, rather than make a profit. The rate paid by the entrepreneur is more important to them than their own rate of return.

We don't interfere in our users' interest rate decisions, other than to limit the maximum interest to no more than 25%. Our platform accommodates all lending philosophies, from those who do not believe in charging interest to those who believe the best way to help entrepreneurs is to structure transactions in a way likely to generate positive financial returns for both lender and borrower.

minimax, the Zidisha statistics page significantly understates the amount the average lender will lose, which is in fact closer to 30-35%. The Zidisha stats page performance is steadily declining toward that end. In the hypothetical case you describe, making 10 loans of $1000 each, you would expect to make $500 in interest but lose about $3,000 in principle to default over a 12-month period. Individual results have been both somewhat better and worse than the 30% number.

Julia and the Zidisha team are awesome. Their customer support and product experience rival those of the best internet startups :)

Hi Julia,

Before I get to my questions, I want to applaud your and Paul's efforts. It's great to see resources being spent in pursuit of causes that really matter.

First, what basis do you have for believing that micro lending is an effective means of poverty alleviation? I've yet to come across a well-respected study that proves it is, but have read a few [1] that question its efficacy.

And second, given your stance on aid, I'm curious why you structured Zidisha as a non profit? Couldn't an argument be made that the same negative effects you claim handouts have on the poor [2], also negatively impact Zidisha if you accept donations to run your organization?

Thanks for your responses.

[1] https://www.givedirectly.org/pdf/DFID_microfinance_evidence_...

[2] http://m.huffpost.com/us/entry/4623503

Hi smithm9, I also do not know of any study that definitively "proves" that microfinance alleviates poverty. I think one reason is that it is hard to decouple the effects of microfinance from the many random events that determine household income in developing countries. Another reason is the high interest rates charged by most traditional microfinance programs.

I have personally known many people who have dramatically improved their living standards thanks to Zidisha loans. Here is one example: https://www.zidisha.org/microfinance/loan/nbsarr/408.html (see the comment area for updates on the results of her loans).

Over and beyond measurable economic effects, I would argue that having access to the chance to raise affordable financing is transformative because it changes the way a person views the range of opportunities for advancement in life. For example, all Zidisha entrepreneurs know they can progress to raise up to $10,000 if they maintain a solid track record of repayments over time. Simply knowing that opportunity exists removes the ceiling people would otherwise put on their own ambitions. The result is intangible, but no less important because we cannot measure it.

We structured Zidisha as a nonprofit because our mission is genuinely philanthropic. Nobody is in it to make money. At heart, we are a cause-driven group of people and the nonprofit structure is a natural fit for that. Also, we do not want to be in a position where equity holders might oblige us to charge high fees to generate profits. Finally, our nonprofit status reinforces the message that lending through Zidisha is a philanthropic, not a financial investment activity.

Why do we accept donations to run our organization? We provide a valuable service to lenders in developing and maintaining the web platform and community that allows them to connect with the entrepreneurs they wish to support. We could charge lenders a fixed fee to cover the cost of this service, but we decided to structure it instead as an optional tip made while funding loans. The optional tip allows lenders who can afford more to donate generously.

Currently about half of our income comes from service fees paid by borrowers, and the rest comes from lender tips. We view both as payment for service we are providing, rather than a free handout.

Have you experienced any places or cultures that have not yet adopted a debt based economy? I don't know if any still exist but if so is there any concern for introducing a debt based economy in an area that has so far resisted it? I guess your service wouldn't have much value in an area that doesn't already have a debt based infrastructure in place. Do you have any particular thoughts or opinions about economies based on debt? Can other modals exist?

Hi janj, I am not familiar with any place where debt is not used in some form or another. (See http://www.amazon.com/Portfolios-Poor-How-Worlds-Live/dp/069... for a really thorough exposition of the variety of debt strategies low-income households use to manage their finances.)

The main alternatives to debt that I am aware of are forms of Islamic financing, such as rent-to-own and profit-sharing models. We have explored the possibility of offering a profit-sharing financing product, but failed to come up with a feasible way of implementing such a model. The successful implementations of profit-sharing models seem to rely on strong information verification systems and intensive interaction with local staff, which we as an online service cannot offer.

I love the idea, but I have one concern, which may or may not be real.

I think 5% is below market rate for what you are doing. By establishing 5% as the rate, you crowd out any local investment options which would need to charge above 5% (but not 60%). By making the subsidy non explicit, you make it even harder for local lenders to compete.

I don't know what a market rate for this kind of loan would be, but in the US, it would be more like 10%. Some kind of explicit discount due to social benefit or something like that, or marketing to launch a new business, or whatever, could make sense, but I really don't want to see the same situation where USAIS dumps free or subsidized goods and services and crowds out the local producer.

At the same time, sacrificing the (not yet extant) p2p lending sector in Kenya might be ok if it helps enough other businesses -- similarly communication and security being subsidized might be a net good.

Hi rdl, the question of which interest rate will result in the best social impact is one of the most frequently debated topics among Zidisha users.

We allow borrowers to offer any interest rate they wish, up to a maximum of 25%. Lenders are then free to fund the loans at any rate up to the maximum offered by the borrower. Many lenders opt to fund loan applications at well below the offered rate, resulting in an overall average of around 5%.

We have not taken a position on the "optimal" interest rate, other than limiting it to no more than 25%. It will be interesting to see whether the average interest rate changes over time and as we continue to grow.

Have you thought about establishing a minimum interest rate lenders can set to avoid indirectly contributing to the traditional trap of foreign aid?

25% is still pretty usurious.

25% is close to a U.S. angel investor's cost of capital. Capping rates across a market does not lower the cost of capital, it depresses capital availability.

For a lending charity, rate caps reduce interest income. This, in the long run, depletes the charity's capital base. An interest rate (>5%) lower than the expected default rate (~10%), as it appears to be here, amplifies the effect. That said, the decision could make sense. If "non-usurious lending" increases donor interest enough, it could offset the capital depletion effect.

I think many people would feel the same way. We usually see 25% rates offered for small loans for new members, which are only held for a short time. For example, a new borrower may request $50 at 25% interest and hold it for one month, and total interest payments would be $1.04. Even then many lenders normally opt to fund the loan at less than the rate offered.

I don't think the percentage rate is that big a deal, even at 25% (although I'd probably go for ~15-20%, assuming 10% default rate and 5% cost of capital) -- the area where I'd try to subsidize or otherwise avoid passing through cost/profit is fees.

I'm fine with short term loans at 25%. As you say, $50 at 25% for a month is $1.04. The problem is when a $1-5 fee is applied on top of that, giving interest rates >100% annualized. That's the kind of usury which has been common in the US payday advance industry (although better now in most states after regulatory action), rent-to-own, etc.

That sounds reasonable. I suspect in time the market will probably head more toward the market rate.

In fact, that seems to have been the trend so far. A year ago, the average rate paid to lenders was only 3% annually.

I find the effort here commendable, but it will probably not take a very long time for these guys to realize that "Africa is not a country" . I'm Nigerian, and I have been to a few African countries. First of all the challenges you have to overcome while doing business in Nigeria alone, varies wildly from one City to another. Now comparing that to East Africa for example, the difference is night and day. It may serve these guys well to begin their venture in one African country they find most familiar / friendly, then expand their efforts from there.

Obviously Africa is a huge and incredibly diverse place, but listing all of the countries in which Zidisha is currently working in the headline is kind of impractical. Julia (the founder of Zidisha) certainly isn't naive to the realities of working in Africa either -- you can read more about her experiences at http://www.huffingtonpost.com/julia-kurnia/why-i-founded-zid... and she's also responding to questions here as "jkurnia".

Hi nanijoe, we have not yet had the chance to offer a program in Nigeria, but hope to soon.

We chose Kenya as the first country to pilot Zidisha, largely because it was the world leader in mobile phone-based payments, which we use to disburse the loans and receive payments electronically. Also, internet and Facebook penetration was especially high in Kenya, and that made it easy for many people to adopt and share our service.

We currently offer loans in these countries:

Benin Burkina Faso Ghana Guinea Indonesia Kenya Niger Senegal Zambia


One thing to note is Kiva has been doing direct lending in Kenya for about 2 years now using M-PESA via Kiva Zip. Zidisha still has some differences, but I'm surprised at the confrontational tone a lot of Zidisha posts have taken towards Kiva. We're both trying to solve some of the same problems, would be great if instead of negativity, we could work together on doing that, share learnings etc. Anytime I get the chance, I share learnings or offer to help Watsi, and I'd like to think I could feel the same way towards Zidisha.

Hi nowarninglabel, I did publish a post last week comparing our service with Kiva Zip: http://www.huffingtonpost.com/julia-kurnia/zidisha-vs-kiva-z...

I wrote this to provide greater clarity to our users and the public, who frequently asked how our services were different. Some readers had the impression that the post was meant to attack Kiva Zip. That was not my intention.

In fact, Kiva Zip and Zidisha have helped each other, and exchanged lessons learned, for over two years now. See https://zip.kiva.org/blogs/4

Was just reading up on Kiva and Zidisha on Wikipedia, and noticed this on the Kiva talk page. Looks like someone at Zidisha (from a Mountain View IP) edited Kiva's Wikipedia page to add criticism of Kiva and plug Zidisha. Is this part of the "help" you're referring to above?

<< Zidisha Edits

Removed the lengthy section spotlighting a known competing organization, Zidisha from the interest rates section. The information is consistent with Zidisha marketing language and the editor IP is attached to a series of edits inserting Zidisha into other pages. Seems like clear COI: http://en.wikipedia.org/wiki/Special:Contributions/67.188.17...

IP is also in Mountain View, where Zidisha is working this quarter http://www.ip-adress.com/reverse_ip/ https://www.zidisha.org/forum/threads/zidisha-launches-at-y-... — Preceding unsigned comment added by Djbrusca (talk • contribs) 17:01, 3 March 2014 (UTC) >>

Hi kanamekun, thanks for bringing up the point about Zidisha being a competing organization with Kiva. Do you think it would be better for readers if they were not aware of Zidisha as an alternative way of addressing the high interest rates charged by Kiva partners?

That's not how Wikipedia works. Everyone always thinks that readers should be made aware of their own service, so they're constantly editing promotional info into various pages.

At the very least, you should always disclose your affiliation with Zidisha when making edits:

<< COI (Conflict of Interest) editing is strongly discouraged. COI editors causing disruption may be blocked. Editors with COIs who wish to edit responsibly are strongly encouraged to follow Wikipedia policies and best practices scrupulously. They are also encouraged to disclose their interest on their user pages and on the talk page of the article in question, and to request the views of other editors. If you have a conflict of interest, any changes you would like to propose that might be seen as non-neutral should be suggested on the relevant talk page or noticeboard. >>


I see now that somebody has removed the mention of Zidisha as a lower-interest alternative and left a discussion of Kiva Zip in its place.

It looks like someone reverted your conflicted edits, and posted about the edit to the Talk page:



That's pretty much spot on policy for Wikipedia.

Julia has collaborated with Kiva in the past.


Kenya is also fairly unique on the continent, outside of South Africa, in that you can access pretty good internet. We pay attention to emerging markets for online services and we've noticed recently that Kenya is coming up strong in terms of demand.

In the past year especially, many of the loan uses we are seeing in Kenya are computer or internet-related. The internet is spreading fast among young adults. Here is a pretty typical account, posted a few days ago by one of our new members:

"Despite being born and raised in the rural parts of Kenya, I have managed to train and get tech savvy. I grew up with no electricity and i first saw a computer when i was 19years old when i enrolled for further studies. I put in long hours after classes just to be able to catch up with my peers. I learnt to create programmes and i had my first commercial software in the second year of campus. In my fourth year of campus, I had to drop out of school because of lack of school fees. I got a job that enabled me to save up enough money to clear my studies."


This mindset seems to be relatively prevalent in Western business circles, but I don't think that is the mindset of this person. I think he's simply interested in distributing micro loans for interesting projects in Africa. Admittedly, it would be nice to have a little more direction to go off of than that.

If anyone reading this is interested check out the book "Success in Africa" to get an in depth look into the perception of Africa as a single homogenous place.

Hi Paul,

First of all, I would like to commend your worthy contribution to the good work the people at Zidisha are doing.

There is something I want to draw to your attention to(searched and did not find your email)

I am wondering how to balance the stereotyping to the "African Entrepreneur" while at the same time not forgetting the millions of small scale business owners in Africa.

When I first saw the headline, I was excited that finally, a top tech investor would be investing in African startups. Only to look and see yet another (VERY COMMENDABLE)but "charity like" donation.

In general, you do not see VCs from the west investing in African startups. That door is almost always closed. When they do it has to be under the category of impact investment and/or a "social enterprise"

Why do you think this is so?

Two years before the WhatApp acquisition, a Ghanaian startup SAYA https://www.saya.im/ came for disrupt but they could not get any funding. Even with hundred thousands waiting signups. Almost like they were not worthy to tackle high tech.

I am very certain that if these guys had built an SMS app to remind farmers of prices in the market (or something along that line) they would have got funding.

Thankfully, things are changing a bit as Dropifi http://www.dropifi.com/ (from Ghana) got funding from 500 Startups.

PS: I want to make it clear that what you are doing is very worthy and commendable and this is not meant to be a criticism of you or this action in ANY way.

PPS: I will be in SF from Wed-Sunday this week and would be very happy to chat with people who want to learn about the tech scene in Nigeria (yes and that includes 'Nigerian scams' et al :)).

Oh. I also do not mind surfing on your couch if available too :). You will be paid in Nigerian beer (I brought some).

my email is in my profile.

Part of what I like so much about YC is that we are open to entrepreneurs from anywhere in the world. In fact, the latest batch has founders from 23 different countries: https://twitter.com/paulg/status/411897120572989440

I think we've had Nigerian founders in the past, and I'd love to see more African entrepreneurs in the program. I believe it benefits everyone to have a more diverse set of perspectives in the batch.

Obviously the big problem for many is getting past the American immigration system. We'd all like to reform that system, but unfortunately those changes take a long time. Maybe some day we'll expand the program to a location that has better international accessibility.

It would be great to see more programs targeted at entrepreneurs from developing countries actually in those countries themselves. There seems to be a big gap in FDI in developing countries between support for lifting micropreneurs out of poverty and major infrastructure projects supported by multinationals or the World Bank, and I doubt it's one which is generally well supported by local financial institutions or investors. And I suspect it's the smart ambitious locals that could generate the highest returns on that support if they got it. Ultimately the resulting business models may look different - fewer exit options than SV but also drastically lower medium-term funding requirements and untapped regional markets.

Then again, reforming the business environment in many developing countries to make it an attractive destination for modest-sized equity investments in SMEs might prove a even bigger challenge than reforming US immigration...

Note: Kiva has a program called Kiva Zip where you can make direct loans to entrepreneurs in Kenya at 0% interest: https://zip.kiva.org/

Interest is the worst thing you can use in a continent like Africa.

Why didn't you guys opt for the profit-sharing philosophy?

Contract laws in some countries can turn some entrepreneurs insolvent because of interest, but profit-sharing won't have such a devastating impact.

I'd help, but not under compound interest restrictions.

Hi phantom_oracle, we've investigated profit-sharing models, and consulted with some experts in Islamic microfinance about the feasibility of implementing a profit-sharing form of financing for Zidisha. This was attractive to us because it addresses the unfairness of being left to repay a debt when one's business investment has failed.

We did not end up introducing profit-sharing at Zidisha because even in consultation with experts, we did not manage to come up with a viable way to ensure the profit verification on which this model rests. Zidisha is purely an online service, without local loan officers, and our understanding is that applications of profit-sharing models to microfinance rely on extensive personal monitoring of the funded businesses.

>Zidisha is purely an online service, without local loan officers, and our understanding is that applications of profit-sharing models to microfinance rely on extensive personal monitoring of the funded businesses.

Based on this, I would think that giving entrepreneurs money isn't the only way to help them become successful. Most successful startups in the US(especially SV) rely on much more than just money to be successful. Those "old boy" networks, mentors, etc. all play a big role in building successful companies. So why not give stranded African entrepreneurs the same opportunity?

I'd be more than happy to make out a profit-sharing loan and nurture an entrepreneur who hasn't had the luxury to get an advanced education in some field.

Perhaps money isn't all they need...

I certainly agree that entrepreneurs need more than money to succeed.

Our concern with a profit-sharing model is that there seems to be no practical way to enforce truthful reporting and sharing of the profits. Relying on self-reporting alone would result in a system where honest people are penalized (by having to make payouts based on their honestly reported profits) and dishonest ones are rewarded. At best, it would degenerate into a simple handout program.

If we at Zidisha had a way to provide advice and contacts that are sufficiently localized as to be useful to the entrepreneurs, we certainly would do so. However, my experience is that Western business advice is useless or nearly so to most people surviving on a dollar or two per day in Africa or Asia. The best results I have seen come about when people are connected with resources in a market system, and allowed to decide for themselves how to leverage those resources.

Valid counter-arguments. I cannot disagree on those scenarios.

It will definitely be a mission to get honest reporting done (as you will have to "yak shave" to get to that point).

The only method I could think around it, would be to assist an accounting startup and make the local entrepreneurs form a cooperative, so that their 'books' are in order.

I wish you guys all the best :)

I like the idea of p2p financial services. However everything development related is complicated qnd the stories describing projects are often romanticised.

There was a great podcast recorded during the initial microfinance boom. One surprising conjecture is that most small like ans are for consumption, not seed capital and that this is rational.


I think the use of loans depends a great deal on the location and microfinance program in question.

At Zidisha, we don't restrict the purpose of loans (other than requiring that it be legal and ethical). The vast majority of applications nevertheless feature small businesses. This may be because the applicants are simply telling the lenders what they think the lenders want to hear, but the business uses of the loans have usually been confirmed when our volunteers visit the borrowers. (See this blog kept by an intern in Kenya last year for some good examples http://talkingstorykenya.wordpress.com/.)

When funds have not been used for revenue-generating purposes, this is usually due to an unplanned contingency, such as a health emergency in the family or a time of financial scarcity coinciding with school tuitions falling due.

I personally would not object to more loans being used for purposes such as tuition or home improvements, but understand that it is often too risky for individuals without regular sources of income to use debt to finance assets that do not generate revenue.

Neat idea. I love that the repayments are going back in to funding Zidisha itself - a unique way to raise ~$100k! Congrats on the funding round Julia :)

Loans are way much better form of helping, but investing with a partnership and advisors is a better option. Money is the key ingredient, but the some ventures do require lot of knowledge. Are loans preferred due to regulatory issues? How do you overcome "This is just money from rich western guys to dump the guilt" mentality? Are you going to build alumni network in similar vein to YC?

Hi lukasm, an online investment / advising service that bridged the international wealth divide would add immense value. We did not attempt it at Zidisha due to the difficulties in monitoring and policing such a system at scale.

Most of our borrowers seem to feel a strong obligation to repay their lenders despite the disparity in wealth and culture. Maybe this is because they see the lenders as individuals like them.

Our members, borrowers and lenders, communicate with each other regularly through the website, and sometimes meet in person as well - for example, Zidisha members in Nakuru, Kenya, held a conference last week. It would be interesting to try to develop that into a network more focused on sharing advice and help, like YC.

A few facts about Zidisha and Kiva that got erased from Paul's blog yesterday, so reposting here for the benefit of the community.

Kiva launched a new model a few years back: KivaZip.org. Like Zidisha, it allows you to make direct loans to underserved businesses. Starting in Kenya and the U.S., you can make 0% interest loans directly and converse with the entrepreneur.

Unlike Zidisha, the repayment rate is much higher (90% ontime repayment on KivaZip vs. a 40% ontime repayment on Zidisha) and Kiva Zip has nearly double the loan volume through which risk management can be refined.

Both models are early stage.

Further, when you lend through Zidisha, there's a chance that you will not be able to withdraw your money (given SEC regulation). Kiva Zip has been cleared by regulators since it does not let you earn a rate of return, but you can withdraw your principal.

Both models are early days, but nonetheless important factors to consider when thinking about Kiva and Zidisha. Want to applaud effort by Paul, YC and the community to direct more talent, energy and resources to great problems of the world.

I think this is a great idea. (Disclosure I have been a supporter for Zidisha for a while). This is a great best-of-two world approach of GiveDirectly (pro borrower) and traditional Microfinance (pro intermediary/lender).

The traditional microfinance has been a mess because it creates a lot of over powerful institutions and the usurious rates don't necessarily make lives in Africa better.

The GiveDirectly's direct handout model can be easily abused on the borrower side.

Zidisha bridges the gap between the two with technology. I think it's great disruption.

I do think the international aid microloans need to be subsidized so their rate is affordable but it's good for borrowers. I think even American small business loans need to be subsidized too. It would be very expensive if you make everything determined by market forces. That's why OnDeck and Kabbage get away with their 50% APR loans. But I think it's bad for the small businesses and bad for the economy.

You could try sending some email around. Something like this:

"Hi, please allow me to introduce myself. My name is Paul, and I have recently come into a large amount of money that I would like invest in your country as soon as possible. Due to unforeseen circumstances, I am unable to invest this money myself, and seek your partnership in order to invest the money profitably. I ask your complete discretion so that the money does not fall into the wrong hands.

Please, sir, kindly treat as urgent and strictly confidention. I assure you that this is a 100% risk free transaction."

This is a fantastic thing to do. I do have one question. Do you plan to do the same thing (maybe in a smaller scale) in the US? Say, help people in some impoverished area of the country with some small funding to help them get micro businesses going. Not arguing against the choice to do so in Africa (its great), just interested if there would be a push to do it "locally".

Hi bliti, we do not have any plans to offer lending services in the US. Not because Americans are less deserving, but simply because it is not our area of expertise or focus.

If you would like to lend to entrepreneurs in the US, I would recommend checking out Kiva Zip, which does lend to Americans as well as Kenyans. https://zip.kiva.org/

Why not just give the entrepreneurs the $200?

The money they would be paying back they could use to build up their business.

I doubt anyone would do this investment for a return.

Hi wehadfun, that is a valid question. There are a few reasons we facilitate loans instead of gifts:

1. Loans once repaid can be lent out repeatedly, thereby helping many more people.

2. Repaying a loan at a reasonable interest rate puts lender and entrepreneur on a more equal footing, and is therefore more dignified for both.

3. Loans encourage a proactive and independent mentality on the part of the entrepreneur, rewarding success rather than neediness.

You should be aware before putting money into Zidisha that current non-repayment on Zidisha is ca 30%, and that to break even when lending on Zidisha you need to charge flat interest rate to 32% break-even.

Zidisha is also giving huge credit bonuses to borrowers who invites new borroers, this also gives a danger of increasing default rate.

So I advice not to put more into Zidisha than you are prepared to loose.


Awesome work.

Paul, great that you recognized it and contributed.

I sometimes despair about how much negativity and nit picking there is around people who are doing, or at least trying to do, things that really change the world.

In my mind this is way ahead of Whatsapp getting all the money, yet there was very little negative reaction to that event.

Just a note that the default tweet is actually too long and needs to be manually edited.

Oops. Fixed! I've never been good with that 140 character thing :)


You normally see requests for help distributing money the other way around...

Adding your enterprise to the list: http://bit.ly/africa-hackpad

"Distribute" or "Invest"?

Well, Zidisha appears to mix those two.

Lenders are encouraged to charge an interest rate they find acceptable, but the average interest rate is lower than the default rate... so that means lenders (as a whole) are losing money! This would not be a particularly good investment, but it may be an excellent way to do donations.

- the lenders who select more reliable recipients and those who charge more will make more income, so I am sure many lenders are actually making a profit even if the sum total of the loans by Zidisha is not.

Wow this is awesome. Love the charity:water esque updates idea.

How incredibly cool!

Sure! I'll make sure it gets to them. Where can I pick up the money?

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