Hi HN, I’m Julia, the founder of Zidisha, a loan crowdfunding platform for entrepreneurs in developing countries. We’ve been doing this since 2009 and were a YC nonprofit way back in the W14 batch. Our key approach this whole time has been to bypass the local banks and NGOs used by other microlending websites, and connect lenders and borrowers directly via a P2P community. This allows us to reduce the administrative cost of the loans relative to traditional programs and enable unfiltered communication between lenders and borrowers.
Our model has gone through several iterations over the years, and I thought HN might be interested in our latest one! It’s called “Pay it Forward” and the key idea is that entrepreneurs fund new projects by other entrepreneurs instead of repaying lenders directly. Some background on why we arrived at this iteration:
With our traditional microloans, when the borrower repaid their loan, the money went back to the lenders, who then would choose new projects to fund with it. The problem was that funds often went unused for long periods, because many lenders don’t have the time to choose new projects each time repayments come in. We built an automated relending tool to try to address this, but it lacks the ability to vet projects for quality or to provide the human connection that manual lending does. Normally, the lending process involves messaging, photo sharing, and so on, between lenders and entrepreneurs, which is more meaningful for everybody.
The users who typically spend the most time on our platform are the entrepreneurs. Access to loans is often a life-changing opportunity for them, and many choose to give back to the community by serving as Volunteer Mentors - a role that involves vetting new applicants, conducting orientations of new members via WhatsApp, and mentoring newer members as they grow their businesses. They are often best placed to know who is most trustworthy and which projects are good investments. Many have expressed interest in "graduating" from a borrower to a lender on the platform, but up until now we had no mechanism for the entrepreneurs to fund loans. So we’ve built one!
In the new system, projects must be repaid, just like traditional loans. But instead of repaying lenders, the entrepreneurs allocate the repayments to other projects on the platform. The original lenders can track the follow-on projects that are funded by their chosen entrepreneurs, so they get to see how their impact continues to multiply as funds are recycled over and over.
Unlike loans, Pay It Forward projects have no fees or interest other than a 5% service fee to cover money transfer and operating costs. (First-time participants who don't have an invite from an existing member also pay a one-time fee of about $10, which covers the cost of a background check and lifetime membership.) Once projects are repaid, the entrepreneurs can choose to deposit an extra amount of between 0 and 25% of the amount raised to fund other projects in the platform. Their next project fundraising amount limit is then increased by the extra amount they chose to deposit, plus a matching increase from us. (For example, an entrepreneur who raises $100 can choose to repay the $100 then contribute an extra up to $25 to the community. If they contribute an extra $25, then their next fundraising amount is $150.) This enables financial sustainability and growth of the project funding capital, without burdening any entrepreneur who prefers not to make extra payments.
We have opened the Pay It Forward product to the community after a period of beta testing. Early data suggest that repayment performance will be the same or better than that of our traditional loans. Thus far, the majority of entrepreneurs have opted to make some extra payment into the community at the conclusion of their projects.
This is a departure from the traditional P2P lending concept and we're not aware of a similar model being tried elsewhere. I'm very interested to hear your ideas and feedback in the thread, and you are always welcome to contact me at julia@zidisha.org!
1. What percentage of your loans end up being delinquent for each of the countries you are in?
2. How do you handle defaults?
Your FAQ mentions:
If you miss a scheduled payment, Zidisha will issue one courtesy reminder by text message to your mobile phone. If the payment still is not made, Zidisha will request mediation from members of your community. If mediation is not effective, Zidisha may determine that the loan is defaulted. The consequences of defaulting on a Zidisha loan include disqualification from funding any new loans in the future, reporting of the default to your national credit bureau, and legal prosecution resulting in confiscation of property, fines and other legal penalties.
But then I noticed elsewhere on the site, mentions of a “ Credit risk payment: Goes into a fund that compensates lenders for loan defaults”.
In the past, default rates have usually fluctuated between 15% and 25%. No country has consistently been higher or lower than the population as a whole.
We handle defaults as described in the FAQ. In addition, the volunteer mentor (experienced borrowers who help vet and orient new members) who was assigned at the time the member joined may call the member to help them establish a payment plan.
The credit risk payments were fees intended to offset default losses under the old system (before the pivot to the Pay It Forward system). We do not apply them anymore. Instead, the optional extra payments deposited to the loan fund once projects are repaid are expected to offset default losses.
Yes, my experience in cofounding a Kiva field partner NGO in 2006 was an inspiration for Zidisha. The intent was to reduce the high charges to the entrepreneur inherent in the Kiva model by eliminating field partner organizations and connecting lenders and borrowers directly. This had not been feasible at the time Kiva was founded, due to low internet penetration in developing countries then. (See https://www.huffpost.com/entry/the-story-of-zidisha-dram_b_9... for more background.)
I felt weird about kiva. I didn't really need the money repaid. I wanted to basically donate. Anyway I think I profited after a few years if I remember correctly. Anyway I cashed out and ended up donating the money elsewhere.
Is there still an opportunity to get paid back, rather than keeping it in the system?
I love the idea of the loan continuing through the system for myself (I don't personally need the payback), but I'd imagine there would be some funders / loaners that would like the original system of getting paid back. Is that still a possibility?
I am sending this to a few friends that are really excited about African entrepreneurship (myself included). Great idea!
At the moment, we are offering both Pay It Forward projects and traditional loans (where lenders are repaid) to our existing lenders, and showing only the new Pay It Forward projects to new users who sign up. This makes things easier to understand for new users and helps us gather clear feedback on the Pay It Forward concept.
Cool project! Will definitely 'invest' some money.
However, are the repayments by the entrepreneurs also required to pay the 5% service fee? This new pay it forward models seems mostly to be a way to keep all the money in the system and slowly make it yours via the 5% fee. I don't see what the benefit of this model is towards the lender. Or am I misunderstanding it?
The fee is paid by the entrepreneurs as a percentage of each project funded. It covers the cost of transferring funds (credit card and other payment transfer fees, Fx margin we pay when transferring funds internationally) and administering the platform (web hosting, phone and SMS communications with entrepreneurs, etc). At our current scale we are just breaking even with our operating costs covered by the 5% fee.
The 5% fee does not take away from the loan funds, which are kept separate from operating costs and fees.
For comparison, most traditional microlending programs charge over 20% in fees and interest, and comparable unsecured small business loans in the markets we serve are much more expensive, or not available at all. Since the entrepreneurs are acquiring assets and operating capital they could not otherwise afford and which continue to generate profits after the loan is repaid, the value to them is normally far higher than the 5% cost of the loan.
Here is an aggregator of project updates posted by the entrepreneurs, which gives an idea of the impact of the loans: https://www.zidisha.org/project-updates
Projects Funded: 274,507
Amount Lent: $18,723,792
Total Members: 411,728
The loans outstanding are about $1 million, and delinquency rate ranges between 15 and 25% depending on the cohort measured.
Lenders are about half in the US, 40% in Europe, and the rest elsewhere.
Are people really paying it forward? Early data suggest that repayment rates are higher than for loans, and this is expected given that borrowers are more directly involved in the allocation of repaid funds. For loans ended thus far the average optional extra amount paid has been around 20%, enough to offset expected defaults. We won't have statistically robust data on this for several months, as the larger loans take longer to repay.
Very cool, it's exciting to see where the 'Pay It Forward' goes.
What is the 'incentive' for entrepreneurs to pick particular projects and perhaps pick successful projects?
Is there any money reward or point based 'karma' or can it strengthen their ability to get future loans or is it community/networking building. Or just human nature?
That's an interesting idea. Currently there is no financial incentive to pick successful projects, because the entrepreneurs don't receive the repayments personally. We may add something like this in the future.
From my experience, most people in developing country communities such as our entrepreneurs' routinely act altruistically and give away a much higher percentage of their resources than in industrialized societies.
As a former economics student, I've been constantly surprised by the extent to which simple altruism motivates behavior at Zidisha. The original Zidisha concept was a marketplace based on financial incentives (including interest for the lenders), but most of our users didn't want that.
> The original Zidisha concept was a marketplace based on financial incentives (including interest for the lenders), but most of our users didn't want that.
Cheers, that's really interesting.
I agree altruism is enough to get people to choose what they think are good or worthwhile projects. The fact they donate extra really surprised me. (It would be interesting to see who they invest in vs people who don't add extra, probably a publishable paper :) )
Financial incentives can be difficult because safe is not necessarily the best and networking is possibly undervalued, equally altruism is also not always the best.
I think it's all exciting stuff. It's good to see new microfinance models on the ground it's sorely needed.
Our model has gone through several iterations over the years, and I thought HN might be interested in our latest one! It’s called “Pay it Forward” and the key idea is that entrepreneurs fund new projects by other entrepreneurs instead of repaying lenders directly. Some background on why we arrived at this iteration:
With our traditional microloans, when the borrower repaid their loan, the money went back to the lenders, who then would choose new projects to fund with it. The problem was that funds often went unused for long periods, because many lenders don’t have the time to choose new projects each time repayments come in. We built an automated relending tool to try to address this, but it lacks the ability to vet projects for quality or to provide the human connection that manual lending does. Normally, the lending process involves messaging, photo sharing, and so on, between lenders and entrepreneurs, which is more meaningful for everybody.
The users who typically spend the most time on our platform are the entrepreneurs. Access to loans is often a life-changing opportunity for them, and many choose to give back to the community by serving as Volunteer Mentors - a role that involves vetting new applicants, conducting orientations of new members via WhatsApp, and mentoring newer members as they grow their businesses. They are often best placed to know who is most trustworthy and which projects are good investments. Many have expressed interest in "graduating" from a borrower to a lender on the platform, but up until now we had no mechanism for the entrepreneurs to fund loans. So we’ve built one!
In the new system, projects must be repaid, just like traditional loans. But instead of repaying lenders, the entrepreneurs allocate the repayments to other projects on the platform. The original lenders can track the follow-on projects that are funded by their chosen entrepreneurs, so they get to see how their impact continues to multiply as funds are recycled over and over.
Unlike loans, Pay It Forward projects have no fees or interest other than a 5% service fee to cover money transfer and operating costs. (First-time participants who don't have an invite from an existing member also pay a one-time fee of about $10, which covers the cost of a background check and lifetime membership.) Once projects are repaid, the entrepreneurs can choose to deposit an extra amount of between 0 and 25% of the amount raised to fund other projects in the platform. Their next project fundraising amount limit is then increased by the extra amount they chose to deposit, plus a matching increase from us. (For example, an entrepreneur who raises $100 can choose to repay the $100 then contribute an extra up to $25 to the community. If they contribute an extra $25, then their next fundraising amount is $150.) This enables financial sustainability and growth of the project funding capital, without burdening any entrepreneur who prefers not to make extra payments.
We have opened the Pay It Forward product to the community after a period of beta testing. Early data suggest that repayment performance will be the same or better than that of our traditional loans. Thus far, the majority of entrepreneurs have opted to make some extra payment into the community at the conclusion of their projects.
This is a departure from the traditional P2P lending concept and we're not aware of a similar model being tried elsewhere. I'm very interested to hear your ideas and feedback in the thread, and you are always welcome to contact me at julia@zidisha.org!