I have already written about online lenders (Online lenders – threat or promise?) or about the use of alternative data for credit assessments (As excited about alternative data?). Even though I find the concepts very exciting and the underlying promise hugely convincing, there is always something which worries me. It might be old fashioned but microfinance is based on the knowledge about the client receiving the loan. Since there is little collateral being provided it is important that the loan officers evaluates the client, determines repayment capacity, get cross references from neighbours, etc. I am still not convinced that this can be done remotely. There is definitely a role for alternative data to play to complement a client credit profile, but I am hesitant to believe that it is wise lending to poor people just based on how many people they have in their phonebook on their mobile phone.I recently heard about Zidisha… might this be the future of microfinance? In order to reduce interest rates for end clients, will it not be enough to use technology? will we have to cut out the local intermediaries and lend to microentrepreneurs directy?
I am not yet 100% convinced since I truly believe that a functioning financial system is required for economic development. If however, we bypass financial institutions, assess (“assess” on a very simple credit scoring basis) the loan in Europe or the US and then channel the loan via mobile banking to a client`s e-wallet, the local financial sector can never assume its role.
At the same time, I thought it would be interesting to briefly present you Zidisha. Zidisha describes itself as “the first online microlending community to connect lenders and borrowers directly across international borders”.
It sounds like Kiva, but Kiva is connected with microfinance institutions that take over the loan assessment. Zidisha is real peer-to-peer lending, where they facilitate the communication between farmer Rodrigo in Nicaragua puts his profile online, Hannah sees it in Luxembourg and decides to finance his EUR40 for inputs of his 2ha farm.
According to Zidisha, this mechanism is a lot cheaper than the Kive way to proceed. The average borrower funded at Kiva pays over 35% in fees and interest. Zidisha borrowers pay only 5%.
Zidisha has been operating since 2009 and since then they have facilitated USD 5m worth of loan projects in Africa, Asia and Latin America. Their community has grown to 48,000 users in 155 countries. Unfortunately there is no data on portfolio at risk, the brochure only states that Zidisha “achieved a loan repayment performance comparable to that of US small business loans” (not sure if this is a good performance compared with the standard microfinance repayment standards
The concerns or the bad taste in my mouth when reading this come from my following thoughts:
Repayment capacity not taken into account. However, you can get information on on-time repayment rate of all loans funded within a given date range. With “on-time repayments” defined as amounts paid in full (within a threshold of $10 or the value of the installment amount, whichever is lesser) within ten days of the due date. i.e. PAR 5 is not even calculated. Is this prudent microfinance lending? Also, from the information provided by Zidisha, I do not see if there is an actual credit analysis done on each client. It looks more as if the client presents his/her need which might be in excess of his/her repayment capacity, i.e., exposing the client to the risk of not being able to repay the loan. Many microentrepreneurs might overestimate their repaiement capacity, but since nothing happens in case of non-payment they will also not fall into the debt trap.
Only investor suffers of non-repayment. There is also no information on what happens in case the client does not repay. I assume nothing, but the client would be taken off the website and could not benefit from future loans. The lender would just have lost his funds, but would not have any way to recuperate them since there is no collateral involved.
KYC or other regulation. I am not a friend of too much red tape, but how can an investor be certain what he or she actually finances? With all KYC normally applicable for bank loans and the loan monitoring procedure, how would this look like in a scenario where no KYC is being done and nobody checks for what funds are being used? With regards to the borrower`s identity, Zidisha does provide some ways to check. And the client`s online identity is verified by linking an “active personal Facebook account to their Zidisha account.” (what is an “online identity”?)
Full cost not accounted for. Great that Zidisha can offer its loans comparatively for so much cheaper. However, since over 100 people are volunteers, the company does not have to cover real personnel cost, plus with no arrears, there are no provisions or losses for the company. This just to say that comparing Zidisha with a bank or other commercial online lender but be like comparing apples and pears.
No local currency lending. This is a common problem of hard currency lending and not specific to Zidisha. I assume most lending is done in USD since funds are being sent via mobile money from the United States. This would however mean that in case the local currency devaluates, the client would have to pay back a lot more than he has initially received.
And many more. So, it sounds great at first sight, however, when you look closer there are still quite a few questions one should ask. Zidisha is however fairly transparent about the risks involved. On their FAQ page they list a large number of questions people might ask about repayments, cost, etc. Will we have to accept higher risk to reach the 2.5bn currently unbanked people?