Guest article, by Julia Kurnia, Director Zidisha Inc.
Entrepreneurs in low-income countries often face a dilemma: their business activities don’t earn enough to support their families, but they lack the investment capital needed to make the businesses more profitable. Restrictive political and economic conditions and geographic remoteness make it expensive for local banks to lend to small business owners. Some of these borrowers are serviced by microfinance institutions, but individual business expansion loans often carry prohibitive collateral and interest requirements due to microfinance institutions’ high administrative costs. So the businesses don’t grow, and the families they support remain impoverished.
Charitable microlending platforms such as Kiva.org and MyC4.com aim to improve disadvantaged entrepreneurs’ access to capital by providing platforms for microfinance institutions to raise subsidized loans directly from web users in wealthy countries, on the assumption that the high cost of financial services in developing countries is due to the organizations’ limited access to affordable lending capital. Yet this solution does not address another crucial barrier to affordable financial services for small business owners in developing countries: the high cost-to-revenue ratio inherent in small loans offered in marginalized geographic areas. The average Kiva field partner institution must charge borrowers more than 30% interest on loans financed at zero interest by Kiva lenders. Even at these rates, most microfinance institutions simply cannot afford to extend services to the remote rural areas where access to financial services makes the greatest impact on people’s opportunities for economic advancement.
It is generally assumed that such high interest rates are a necessary cost of lending to entrepreneurs in isolated and impoverished areas. In the classic microfinance model championed by Nobel laureate Muhammad Yunus in the 1970s, loan officers go on the road to collect repayments in person from borrowers, who are required to attend training sessions and participate in compulsory savings exercises in order to ensure responsible conduct. Even today, most local microfinance institutions which raise capital from Kiva or MyC4 are based along this model, with loan officers visiting borrowers at their businesses and communicating with lenders on their behalf. It is assumed that the borrowers not only lack the necessary computer skills to communicate with lenders themselves, but also that they cannot be trusted to repay loans, as residents of wealthy countries do, without constant visits by loan officers.
Zidisha Microfinance is a nonprofit microlending platform that operates on very different assumptions. First of all, there are no local intermediaries: instead, the entrepreneurs themselves post loan applications on the website and communicate directly with lenders via Facebook-style profile pages as their business investments grow. To make this possible, Zidisha taps into the growing population of computer-literate, but still economically disadvantaged, small business owners and explosive growth of internet access that have transformed developing countries in recent years. Borrowers access the Zidisha website from cheap cybercafés, old laptops donated to local charities and schools, and even the internet-capable smart phones which have begun to proliferate in even the poorest locations, often with one handset being shared by an entire village. Current Zidisha borrowers assist new applicants with navigating the website, and enlist the help of younger tech-savvy relatives when needed. New client orientations and technical assistance is also provided by Zidisha’s Client Relationship Managers, young adults from the United States and Europe who relocate to the borrowers’ countries and liaise with borrowers on a volunteer basis.
Zidisha compensates for the lack of formal credit scores in African countries by requiring borrowers to have successfully repaid loans to local banks or microfinance institutions, and having their self-reported credit histories independently verified before the borrower’s account is activated for posting of loan applications. The local loan repayment record becomes the basis for the borrower’s “feedback rating”, a system similar to that used by business platforms such as eBay and Amazon, in which each lender is invited to post a comment and approval rating upon completion of a loan, and borrowers with high, positive feedback ratings find it easier to raise larger amounts at lower interest rates in the future.
Zidisha does not outsource loan disbursements and repayment collection to local intermediaries, but rather uses grassroots technology like mobile banking, whereby money is sent directly to borrowers via SMS on their cell phones, to conduct financial transactions with borrowers directly. The spread of cheap electronic payments technologies in developing countries in recent years allows Zidisha to bypass the geographic barriers that traditionally made lending in remote rural areas prohibitively expensive.
The direct lender-to-borrower connection allows lenders to earn a financial return on their loans while funding borrowers at much lower cost than what is available to them from other sources. Borrowers pay a transaction fee of 5% of loan principal per year the loan is held to cover money transfer costs, and a small one-time registration fee to cover the cost of the required local credit history background check for new borrowers. They may also choose to offer interest to lenders, who bid to fund loans at or below the proposed rates via reverse auction.
Zidisha disbursed the first loans funded through its platform in October 2009. To date, there have been no defaults, and the vast majority of repayment installments are made right on time, with none more than 30 days overdue. The solid repayment performance is due to Zidisha’s rigorous background check, which screens out any applicants with less than perfect local credit histories, and the strong incentive for borrowers to maintain access to future loans from Zidisha.
The typical Zidisha borrower has completed at least some schooling, and has learned to use computers as an adult from friends or courses taught by local nonprofits. They live in economically marginalized areas, remote rural villages and city slums, and often have remarkable life stories. Average household income among Zidisha borrowers is between $500 and $2000 per year, and borrowers are often parents of numerous children whom they aim to support through high school or even college – a rarity in their communities. Most borrowers are exceptionally self-motivated, and have established a solid history of responsible credit repayment with local lenders before borrowing from Zidisha. They are dynamic, innovative self-starters and entrepreneurs in every sense of the word.
Over the next six months, we intend to grow our lending volume at a steady pace while continuing to provide great personal service to lenders and borrowers while enhancing the Zidisha.org website in response to user feedback. We also aim to extend our lending services to additional countries both within and outside Africa, and are currently laying the groundwork for a pilot lending program in rural Indonesia. We believe that controlled growth now will provide a strong basis for operating at scale while maintaining the high quality of Zidisha’s loan offerings.
To learn more and check out profiles of Zidisha borrowers, please visit www.zidisha.org.