Zidisha Revisited – my experience as a lender 1 year on

In January 2013 I wrote about Zidisha, a micro-lending site that connected altruistic lenders with those in need of loans in poorer Countries, seemingly with many in Africa. In that post I compared Zidisha’s model with that of Kiva.   The major reason that I was starting to dislike Kiva is that they often charge interest rates of up to 60% to these impoverished borrowers, which I think is counter- productive to the goal of helping them achieve financial success.

Kiva has defended their outrageous APRs by stating that it is required by their field partners in remote areas who go out and visit villages to educate on financial matters (and collect the checks) but I still felt that there was too much ‘fat’ in that equation and the poor folk were being exploited, not for Kiva’s sake, but for their Partners.

Zidisha came at things differently – it went into a direct peer-to-peer model, stripping out the costly field partners and making the loans more efficient.  It also allowed borrowers to pay back interest rates that they set, so there was interest to be earned (and passed on to the lender) but it was in a much more reasonable rate, often far below 5% APR.  The lenders are kind folk, and they were trying to keep the costs as manageable as possible.

The results of my lending

Clearly, this is hardly a comprehensive empirical study, as Zidisha was new to me I started off with a deposit of $150, split into three loans, the status of which is:

• One Loan is being paid on schedule
• One Loan was paid off early, in order to apply for a bigger loan
• One Loan has defaulted after 36% was repaid

That loan that was paid off early I didn’t trust either, the guy was weird.  Zidisha allows correspondence on the lender pages and he was too pushy towards showing how he paid down in full and was a good borrower, my spidey sense told me that he was planning a default, but wanted to do it at a higher value of loan since you would only get that one shot.  Call me untrusting, but there were too many flags in his exchanges.  As of today, about 14 months later I have $88.25 returned to me, with potential for another $37.50 if the first guy doesn’t default.

If you compare that with my Kiva data:

As I mentioned, it isn’t fare to directly compare since the data sets are different, but as much as I like to be the guinea pig for you guys here and test things out, there is no way in hell I am going to put in $13K to Zidisha based on how they started out with me.

Could Kiva’s model be right?

I think it could be that the field partners who are actual human beings visiting the borrowers encourage a higher repayment rate. Not only by pressuring and enforcing repayment schedules overtly, but simply by forming that human connection, and looking these people in the eye.  I have found from my experience that when people are dealing with other people they feel trust and obligation towards them.  However, when the internet is faceless, people are much more inclined to break promises, and betray trusts.

The reason is simple, and evident throughout our history.  In order to create a way to validate the breaking of inherent trust and ethics a person must find a way to dehumanize the other party.  We see this constantly with people who say it is ok to rip off a faceless corporation, but never another individual.  Actually, you could take this concept further and bring concepts as extreme as genocide into play – in order for people to be convinced to do atrocious things to other human beings, the leadership finds ways to dehumanize the victims, so that it can be acceptable to murder, steal and rape.

I feel that this is what is happening with Zidisha’s model, the lack of that human contact has made it too easy for the borrowers to default on loans, and it breaks the model.  Kiva has a better solution for this, but they are being charged too much by their field partners for this, and it needs refinement.

Can new players help?

A reader who had a similar experience of loans defaulting, actually losing 50% of her $750 of loans is exploring a new player in the space called United Prosperity  I just reviewed their site and it seems they have the same model as Kiva in that they team up with a local field partner, however I am not sure what sort of APR the borrowers are being charged.

I think the key to success though is that screening step, humanizing the money, connecting it emotionally to the lender (even if in the borrowers mind the lender may appear to be the local field partner) and ensuring that as much money is repaid as possible.

I think all of these companies are doing great work, none seem perfect yet, but we don’t live in a perfect world so that will be hard to achieve. Hopefully by their combined efforts, and some losses on our side we will refine and improve lending and help these needy people achieve their goals.

That cycle of improvement can be seen by Zidisha, and here are the steps that have been made to improve.  The model still worries me somewhat though:

Over the past year we have made many improvements to our lending model based on experience.  These include:

• Prohibiting the practice of posting loan applications on behalf of non computer users, with whom communication often becomes difficult when the helpers are no longer available to follow up with repayments.
• Requiring new members in most countries to prove online identity by linking a unique, actively used Facebook account.
• Sending automated SMS confirmation requests to all community leader, inviter, family and neighbor contacts provided by applicants.
• Requesting Volunteer Mentors to review separately the applications of all new members assigned to them, before approving their loans.
• Using the performance of other Zidisha members connected with new applicants – invitees of their inviters, other members recommended by their community leader, and so forth – to evaluate the credit risk of new applications.
• Using a state-of-the-art anti-fraud software to detect suspicious patterns in new borrower applications.
• Reducing the standard first loan amount for uninvited members to just $50, and requiring consistent on-time repayments over time to progress to larger loan amounts.
• Adjusting our loan size progression criteria to eliminate loopholes that became apparent with time and experience.
• Introducing a new member invite program that incentivizes high on-time repayment rates by inviters and invitees alike.

 

What are your experiences? Have you tried Zidisha, and if so what were your repayments like? And does anyone know if United Prosperity offers anything better than Kiva (especially on the APR side)?