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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.

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