Q & A with the Founder of Zidisha
Julia Kurnia is the founder of Zidisha, the first online community to enable direct person-to-person lending to entrepreneurs in developing countries without going through local intermediary banks. You can find her on facebook and twitter.
Why did you start Zidisha?
When I was in grad school, I spent a summer volunteering with a microfinance organization in Senegal, which raised loan capital through the microloan crowdfunding platform Kiva. There was this immense desire on behalf of the Kiva lenders to help the loan recipients in a more direct way than was possible with traditional charities, and we were able to raise a large amount of loan funding at zero interest.
But even though we tried our best to be frugal, it cost us about a third of the value of the loans we were making to manage the lending program – rent an office, hire a loan officer to visit the borrowers, provide transportation, and so forth. We would have had to charge the borrowers over 30% interest just to be sustainable!
The high cost structure relative to loan size is why the world’s poorest people pay the world’s highest interest for loans. Interest rates over 40% are commonplace in microfinance, and even microfinance organizations that receive zero-interest lending capital from platforms like Kiva have to charge steep interest rates to the end borrowers to stay in business.
After grad school, I spent several years managing US foreign aid grants to small businesses in Africa. During that time, I saw the internet begin to penetrate even the poorest places. Young adults were using cheap public cybercafes to access Facebook and email. So it became possible to start a loan crowdfunding platform that did not use local microfinance organizations as intermediaries, but instead put lenders in direct contact with internet-using borrowers.
In 2009, Zidisha became the first direct person-to-person lending platform to connect lenders and borrowers directly, without any intermediaries, across international borders. Eliminating the intermediary microfinance organization made it possible to reduce the cost of lending dramatically. Zidisha loans are interest-free, and borrowers pay just a 5% service fee to cover money transfer costs.
How does Zidisha stay sustainable with a zero interest lending model/ how does the model work?
By default, first-time borrowers start with a tiny loan – $20 if invited by an existing borrower in good standing, otherwise $10. In these cases, there is no cost other than the 5% service fee. However, they may also opt to start with a larger credit limit and make a deposit into a reserve fund. The amounts deposited into the reserve fund are pooled and used to refund lenders in the event of default. In this way, lenders can expect their loan funds to sustain their value even without interest.
Loans are repaid in weekly installments, and each borrower’s credit limit increases depending on his or her on-time repayment performance. It’s not uncommon for borrowers who have been with us for a year or more to raise loans of over a thousand dollars. In a low-income country, that’s enough to finance a business that comfortably supports its owner and several employees.
How does Zidisha create trust between borrowers and lenders?
Each borrower creates their own Zidisha profile page, where they share photos, tell their story and explain how they will use the loan. Lenders and borrowers communicate directly via the profile page – lenders can ask questions, and borrowers share progress updates during the loan period. There’s also a lot of personal interaction, with lenders and borrowers sharing photos of their homes and kids, and even favorite recipes.
Repayment performance for past loans is displayed to prospective lenders, and lenders can also leave endorsements for borrowers they have supported in the past. This gives rise to a reputation-tracking system similar to that of eBay and other online marketplaces.
What does client-centered microfinance mean to you and what are the challenges of adhering to client-centered policies?
One aspect of client-centered microfinance is cost – as discussed above, we’ve used technology to build a radically low-cost microlending service. This benefits clients as more of the profits from the loans go to their families and communities, rather than to banks’ overhead expenses.
Another client-centered principle that’s really important to us is autonomy: standing aside and letting the clients make their own decisions wherever possible. Our clients may raise loans for any purpose, as long as it’s legal and ethical. We don’t try to dictate how their businesses should be run or how they should manage their money.
Repayment at Zidisha is unusually flexible. Loans are repaid in weekly installments, but the clients themselves choose the day of the week on which payments fall due and the amount they commit to repay each week. If disruptions in income make it impossible to make the scheduled repayments, clients may adjust the weekly payment amount to what they can afford to pay – even if it is just a few cents. As long as they continue to make the adjusted payments on time and in full, they preserve their good repayment record and their access to new loans. Contrary to what you might expect, this flexibility does not cause loans to be held for unreasonably long periods. Most clients repay loans as quickly as they can, in order to raise follow-on loans to further grow their businesses.
In your view, what should be the role of technology in microfinance as the industry continues to mature and grow?
Technology can not only reduce costs dramatically, but it also opens the door to better flexibility and customization. It would be difficult for a traditional microfinance organization that relies on loan officers to interact with clients to offer on-demand repayment installment adjustments of the type described above. As more and more interactions move online or to mobile phone apps, I think this kind of self-serve, customized service will become more commonplace. The more flexible a microfinance service is, the more it can act as a buffer for the erratic cash flow typical of microfinance clients.