Julia Kurnia is the founder of Zidisha, the first online community to enable direct person-to-person lending to entrepreneurs in developing countries without local intermediary banks. We had our first Q&A with her last year. You can find her on facebook and twitter.
- What makes a person-to-person lending platform so unique in the microfinance world?
Person-to-person lending platforms like Zopa, Prosper and Lending Club have reduced the cost of loans in wealthy countries for many years. Zidisha was the first to apply the direct person-to-person lending model to microfinance loans in developing countries.
Unlike traditional microfinance services, we don’t have branch offices or loan officers. Instead, we provide an online crowdfunding platform that connects internet-capable microfinance borrowers directly with individual lenders worldwide.
Traditional microloans, even those funded by charitable lenders through microlending websites that work with local partner organizations, pass to borrowers at interest rates averaging over 30%. This is due to the high cost of personnel and branch infrastructure, relative to the small amounts of the loans.
The direct person-to-person lending model makes it possible to reduce the cost of microloans substantially. Zidisha borrowers pay only a service fee of 5 percent for the loans (which are interest-free). The lower cost means borrowers keep more of the profits from their loan investments.
- How does Zidisha balance using 5 percent service fees to be sustainable and being client-centered? Have you ever been tempted to raise the fee?
Since we don’t have physical offices or staff in borrower countries, our costs are far lower than those of traditional microfinance services. Our main costs are money transfer fees, SMS messaging, and website development, and these are fully covered by the 5 percent service fee income.
We’re a nonprofit organization, and our mission is to help disadvantaged entrepreneurs in developing countries access affordable investment capital. An important value for us is to keep a very low overhead cost ratio, and pass on the savings to our members. This constraint has often been an advantage, as it has forced us to develop innovative ways to keep costs low, such as automation and decentralizing to the community tasks traditionally done by loan officers.
Though we’ve never raised the 5 percent service fee, we originally allowed borrowers to offer interest to lenders. We discontinued interest for lenders in 2015. One of the reasons was that it undermined our value proposition of providing very low-cost loans – the main reason many lenders as well as borrowers choose to participate.
- What role does trust play in Zidisha’s borrower to lender relationship?
Trust is the most difficult challenge for a web-based marketplace. Since Zidisha borrowers aren’t vetted by loan officers, and we don’t require collateral, we’ve had to evolve other ways to manage credit risk and ensure responsible participation.
We make use of cutting-edge technologies, like using machine learning to develop fraud detection and credit risk predictive algorithms. However, our most important credit risk control measures are simple and low-tech.
Every first-time borrower must repay a small test loan before they can post a larger loan application for funding by Zidisha lenders. Thereafter, credit limits increase based on each member’s track record of successful repayment. Borrowers who wish to raise larger amounts more quickly may qualify to do so by making a payment into a reserve fund, which we use to refund lenders for any defaults. This makes it possible for lenders to preserve the value of lending funds over time, even without earning interest.
Most new borrowers come to us via word of mouth, and new members who have invites from established borrowers with good repayment records enjoy higher starting credit limits. Established borrowers may continue issuing invites, in limited quantities at a time, as long as their invitees continue to demonstrate good overall repayment performance. Over time, this leads to a system where networks of responsible members grow and become the dominant behavior.
- What kind of relationships have you seen come out of your person-to-person model?
At Zidisha borrowers create their own profiles, sharing their personal story as well as a loan proposal. Lenders and borrowers can post messages and photos. Conversations often focus on the loan project, with the borrower answering lender questions and sharing photos and news of progress made thanks to the loan investment.
However, lenders and borrowers often go further, sharing family photos, describing local holidays and even exchanging recipes. One of the really special things about our community is the friendships that are forged across vast geographic and socioeconomic distances. It’s a way to experience the world through the eyes of someone in very different circumstances – a life-changing experience for both lenders and borrowers.
- Why is it important to give the borrower a high degree of control and flexibility? How does trust play into that?
Another of our values is to respect our members’ judgment, and intervene only as needed to ensure responsible participation and protect the integrity of our lending community. We believe people perform best when allowed to make their own decisions and take responsibility for them. For this reason, we don’t have any restrictions on the use of loans, other than that it be legal and ethical.
We also allow borrowers to design their own repayment schedules, with the only requirement being that a repayment installment must be paid at least once weekly to maintain a good on-time repayment record. Borrowers choose the day of the week on which installments fall due, and how much will fall due each week. During the loan period, borrowers may adjust their weekly installment amounts as needed to accommodate changes in cash flow.
We’ve found that this flexibility does not usually result in excessive loan periods; most borrowers repay as quickly as they can afford, in order to access new loans to further grow their businesses. And it helps ensure that the loans never cause harm by forcing people to choose between procuring basic livelihood and making a scheduled repayment installment.
- How do you think client-centered microfinance has evolved and where do you think it’s going?
When Zidisha was founded seven years ago, it was a niche product, available only to the small minority of low-income individuals in developing countries who had access to the internet. Now, the spread of smartphones is bringing connectivity to far greater numbers of people. Smartphone app-based lending services are proliferating and providing much-needed competition to traditional banking models. This is a regulatory challenge, but also an opportunity to bring affordable financial services to far more people than has ever before been possible.
- Where is Zidisha going in the future?
We recently launched lending programs in Haiti, Rwanda and Mexico, following the spread of mobile phone-based payment technologies. In Mexico, we’re using Bitcoin to transfer money for the first time. We’d like to continue to expand to more countries as payment services develop.
As our lending volume continues to grow, we’re able to predict repayment performance more accurately, and develop better fraud prevention algorithms. We’re investing more in data collection and analysis.
We also launched a smartphone app for borrowers, and an increasing percentage of Zidisha loans are raised via the app instead of our website. Learning how to adapt our website-based model to a smartphone interface is an ongoing challenge, and opportunity.