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How Zidisha (YC W14) Is Misleading the Public About Its Interest Rates

364 points by modernm 13y ago

pratyushag 13y ago
This makes YCombinator look bad. Did they know about this before investing in Zidisha? If not, maybe consulting the likes of GiveWell could be a good idea.
- onalark 13y ago
  GiveWell? Aren't those the guys that astroturfed MetaFilter a few years ago?
  - bmm6o 13y ago
    Yes, but that was before "growth hacking" was cool.
  - pratyushag 13y ago
    Yep. Although they apologized publicly for it and came out being a much stronger organization. Their apology (not half bad): http://www.givewell.org/about/shortcomings http://www.givewell.org/about/shortcomings Deceit in lending is not uncommon among microfinance organizations, but it's surprising to see it from a YC-backed company. I look forward to Zidisha's response, I'm sure they'll shed more light on it.
    - gohrt 13y ago
      Also, 6 years later, their apology is still posted and crosslinked on their website, years later, in an easily accessible/sharable URL. MeFi's analysis, which FWIW, notes that most of the offending activity was done under the founders' real first-names: http://mefiwiki.com/wiki/Givewell http://mefiwiki.com/wiki/Givewell (Where is AirBnB's apology for violating Craigslist's TOS with the spamming from "Jessica"?)
- cjbprime 13y ago
  GiveWell's written about microfinance before, fairly skeptically: http://blog.givewell.org/2009/10/23/6-myths-about-microfinance-charity-that-donors-can-do-without/ http://blog.givewell.org/2009/10/23/6-myths-about-microfinan... http://www.givewell.org/international/economic-empowerment/microfinance http://www.givewell.org/international/economic-empowerment/m...
bargl 13y ago
My knee jerk reaction to this is disgust. Which typically means that it deserves a lot more research and validation on my part. I thought Zidisha was a game changer and a website I could be proud to support. I didn't look at it as a way to invest but a way to support young entrepreneurs in other countries. Does anyone else see anything about this that is redeeming for Zidisha?
ska 13y ago
Looks like Zidisha is taking a page from the payday loan folks playbook, not exactly a desirable role model.
- unreal37 13y ago
  It doesn't look like that at all. Microlending loans are a bit different than the "go to the bank and borrow $100K" loans that we are all used to. The bank doesn't charge a fee, because they make $1000s on interest on that loan over it's lifetime and it covers it. Your bank won't lend you $50 as a loan. It's not worth it for them. But if you add in some reasonable fees (like $11 for credit check report), an $11 one-time fee on a $50 loan converted to APR looks huge! 500% APR! But it's only because the amounts we are talking about are so small. I think we need to look at this more carefully and not compare apples and oranges. Big loans and small loans are different things. (And payday loans are evil. But microlending is not the same as that.)
  - ska 13y ago
    I didn't mean that they were the same thing at all; the "page" they are borrowing is the hiding of fees and service charges behind the bold text of a "low rate". Your example is fine, by the way. Yes, that $50 is costing you 500% APR. And yes, that is exactly how you should think about it, and how they should advertise it. Anything else is problematic. It doesn't matter how the cost is arrived at, this is the cost to you of borrowing that money, and it is this entire cost that must be balanced against the value you will see from it, not any nominal rate. There is absolutely nothing wrong with doing the sort of loan they are talking about, and the costs may be perfectly reasonable too; certainly microlending is a different risk landscape that typical bank loans. However, the only ethical way to handle financial details like this is to always be as transparent as you can. Lots of sectors get this wrong, by the way -- payday loans are particularly egregious but the auto finance industry is pretty slimy on this too, in different ways. By the way, payday loans as an institution obviously meet a lot of market need that wasn't being addressed before them, or they wouldn't have popped up everywhere. I don't think they should be run out of town, but they should be honest about the costs.
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cpwright 13y ago
I've never even heard of a "flat rate" loan until now. For the average american it sounds very close to a fixed rate which we are more used to even though it is far different.
- pionar 13y ago
  Generally, in the US, where you see a flat rate is in the loan details, where it's usually, if you take the entire term to repay the loan, the overall interest paid is $X.
  - cpwright 13y ago
    As Wikipedia describes it that is not a flat rate loan. If I borrow $100,000 for 15 years at 5% it would cost me $183,389; and I expect to see that in the disclosure. But that is still a regular APR. A flat rate 5%, would mean that each year I pay 5% in interest on the $100,000; even though I've already paid off some of the principal. So I would end up paying $200,000 in total.
- aestra 13y ago
  Not at all. A fixed rate loan is one where the interest can't change in response to events. So if I borrow money for 30 years with a fixed rate loan at 5%, I will pay 5% the entirety of the loan even if inflation rises to 10% or I am late with a few payments. You can always refinance though, but that creates a different loan. A variable rate loan is one where interest can change. Credit cards are usually variable, so if I miss a payment your interest rate can go up or if you've been a customer for a long time and have a good history of paying on time your interest rate can go down. Mortgages with variable rates usually fix the rate for x years and then they reevaluate in x years. During the housing bubble, variable rate mortgages with were common.
  - cpwright 13y ago
    I understand a fixed loan and a variable loan, and those are what I'm used to considering when deciding whether to borrow money. I think the issue that the post brings up is that the target market for the microcredit borrowers consists of people used to flat rate loans, which is totally alien to the target market for lenders. I think the lenders will likely mentally map "flat rate" to the closest thing they are aware of, which is likely "fixed rate."
rdl 13y ago
I initially was a huge fan of Zidisha because of all the bullshit the microlending providers pull. Which is exactly like this. (fixed fees on small loans would be the main trick; stuff like flat-fee vs. declining balance APR is a bit more subtle.) I hope they post a response, and this turns out to be some kind of misunderstanding.
- rdl 13y ago
  And, in fact, based on the Zidisha founder's response above, it looks to me like this was a mix of some legitimate issues (which will be addressed), some misunderstanding by the modern microlending analyst, and some in a gray area I'm not really sure about. I do really appreciate the quality of analysis Modern Microlending did here. It's also great that Zidisha responded within hours with a pretty full and honest accounting. This is how this kind of thing is supposed to work, I think.
  - unreal37 13y ago
    I agree. The original analysis made some important points, and the response by Zidisha was great too.
- netcan 13y ago
  In their defence, APR is problematic. It's misleading in itself. APR is enforced to keep lenders from disguising the real costs of a loan using fees and such. It's an ethical advertising standard. But, disguising the real costs of a loan is not the only reason to use fees. Fees are also used because the lenders' costs are not just borrowing costs. There's a flat cost to processing a loan. That translates to a flat fee which can raise APR to seemingly horrendous rates. Basically, loans don't scale linearly. Maybe micro-finance should come up with it's own standard practice. People need to make some allowances though. 25% is not terrible in every context.
smackfu 13y ago
Interesting how important the length of the loan is. A 5% one-time fee on a 5 year loan may be acceptable. A 5% fee on a 6 week loan is massively higher than the actual interest charged.
- deleted 13y ago
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- jusben1369 13y ago
  Yes. I agree that the author seems to want to completely ignore the fact that it is a 1 time fee vs an interest rate.
- makomk 13y ago
  Except that unless I'm missing something the fee is 5% for every year or part-year the loan is outstanding, so it's a substantial proportion of the interest charged no matter the length of the loan.
akg_67 13y ago
Author of the article is confusing "borrower" facing data with "lender" facing data. Lender interest rate is what lender gets and not what borrower pays. 5% lender interest rate is correct because that is what lender gets. Lender doesn't get service fees and origination fee. It will be very confusing for lender if Zidisha published 25% borrower interest rate as lender may assume that they are getting 25% interest rate which will be incorrect. If Zidisha was telling borrowers that they pay 5% interest rate or telling lenders that they receive 25% interest rate then that will be misleading. Author needs to spend some time understanding the terminology and nuances of lending/debt market from both borrower and lender view. This is the most confusing aspect most people new to lending side face as they are only used to seeing borrower side. Lender side view is very different from borrower side view.
- misterjangles 13y ago
  I don't think he confuses the two - he talks about both in detail. The issue is with the concept if the flat interest rate combined with service fees and signup fees that make the advertised borrower rate misleading. But there is a likelihood that not everybody understands it. Journalists and bloggers just throw out the 5% figure without specifying what it means because it makes for a nice sounding blurb.
- pbhjpbhj 13y ago
  Zidisha could explicitly state the borrower and lender interest rates and give an average and spread for those rates when all fees are taken in to account. They could include APRs or AERs or whatever too. Zidisha is surely marketing themselves to lenders on the basis that they offer a good rate to borrowers, that's supposed to be a motivation to lenders to participate. Interestingly the Wikipedia page figures seem [at a glance] to say that in some countries less than 50% of loans are even repaid.
netcan 13y ago
I think microlending is loan sharking by another name, and that's a good thing. I'm not a libertarian but you still need to consider that outlawing something voluntarily or even just singling it out as a pariah has tricky effects. It often harms those who are ostensibly being protected. A few years ago Australian politicians started targeting 'payday loans' and other "predatory lenders." The upshot was that these weasels target vulnerable borrowers with 100%+ APR loans, who are ultimately harmed. 'Vulnerable' is hard to define or measure. Harm is virtually impossible. 'Predatory terms' (interest rates) were the only easy of defining and singling out these guys. Legally it seems to have been hard to target predatory lending so name-and-shame was the main tactic . A typical loan is a few hundred dollars payable in a few weeks. The ideal borrower goes down a revolving credit hole. For a class-minded political activist this screams evil. It's like the middle class debt trap, beefed up and tailored for the poor and/or dysfunctional. The marketing targets addicts, gamblers, welfare recipients, etc. The whole thing stinks to high heaven. The first thing that happened when all this negative attention came about is that banks got out of anything even similar to payday loans. No point in tarnishing their brand for a tiny unattractive business. The guys who stayed in business were the scummiest, the ones who didn't care about brand and didn't care about their business. It became like running a brothel, legal but unsavory. The industry boomed as more legitimate businesses ceded market share to the shadier players. Realistically, there are two facts that can't be wished away. High risk, low value loans are expensive to provide. People want/need payday loans and they will get them from whoever is giving them. It can't be done at non "predatory" APRs and it can't be shut down. If they had outright outlawed payday loans, then shady businesses would have given way to outright criminals, the leg breaking loanshark cliche. In comes micro-finance. Nobel peace prize winning, poverty alleviating, enlightened, woman emancipating microfinance. These ran with a lot of support. They attracted great people at far under-market salaries. Motivated employees with a mission and received outright donations from the public. Major banks created microfinance programs as a part of their corporate responsibility, goodwill project. These amount to a real and substantial summary. Annualized interest rates are still very high. Lower than payday loans and much lower than village lenders and loan sharks they displace but higher than the worst credit card. Two ends of the spectrum. One on the border region of legality below the decent folk morality threshold. The other, literally a charitable activity. Interesting to think about. Make something illegal and it runs as a criminal enterprise. Treat it as a predatory pariah and it behaves like a predatory pariah. Treat it as a charitable act, and it behaves that way. In no case does it go away.
devinmontgomery 13y ago
The way Zidisha markets its rates feels like a lot of services I see. It's how my phone bill, electric bill, almost all my bills work - hidden fees charged by everyone so you just assume you're going to be paying more than is quoted. They're following the status quo, are probably not intending to be evil, and are surely feeling the pressure to be 10x better. But I worked in the Philippines in college, and you want to know what would really blow their minds? Not screwing them over. Everybody else does that. 10x better is being honest. Given their alternatives, 25% isn't that bad. Initial adoption might be slow - they're so used to corruption and being bullshitted that they'll think it must be 25% plus something - but once word spreads that Zidisha is really just 25% and offers the most valuable commodity in places like this - honesty and transparency - it will blow up. And then you'll get more fraud, but that's challenge 2.0.
- SyneRyder 13y ago
  I was just about to say "surely there are honest alternatives in the Philippines below 25%", but I just checked my most recent Kiva loans in the Philippines, and the portfolio yield on my most recent ones range from 28% - 45%. Thanks for the reminder to check the Yield when lending.
jfasi 13y ago
While is commentary makes an excellent case for dishonesty on Zidisha's part, I wonder if some context is necessary. Looking beyond the dishonesty, this commentary talks about a 25 percent interest rate in the implicit context of the credit environment of a developed country. In that context, these practices and interest rates are extremely suspicious, morally dubious, and possibly illegal. This raises the question of why Zidisha is making these statements. To assume a developed-world business context excludes the possibility that these practices are accepted and commonplace in the markets Zidisha serves. I have no experience with those markets, but it's worth excluding this possibility before expressing distaste for these practices. Consider the following plausible scenario: Zidisha performs research into the market and discovers that these practices and rates are acceptable. One can even imagine they are preferable to the status quo. The issue is that Zidisha as a company has to generate press and justify its business to a developed-world audience whose gut reaction to such practices would make the company look like a pack of usurers, when in fact they could very well be doing a lot of good. To me, this communication seems a compromise response to this conflict: translate the numbers and practices as best you can into language and terms developed-world audiences understand. Perhaps the company took some liberties with labeling and conversions along the way, and if this is the case they would do well to be more conservative, but overall I give the benefit of the doubt that this communicate is the result of a tricky conflict of business environments rather than deception.
- potatolicious 13y ago
  > "is the result of a tricky conflict of business environments rather than deception." Can't it be both? Intentional misrepresentation in the pursuit of a worthwhile goal is still intentional misrepresentation. I look forward to seeing Zidisha's response, but as it is this looks highly intentional and highly deceptive. This ultimately comes down to the classic "do the ends justify the means" debate. It also leads to immediate suspicions of a slippery slope - if the founders of this startup are willfully misrepresenting the core nature of their business in furtherance of their goals, what else about them is negotiable?
  - unclebucknasty 13y ago
drawkbox 13y ago
So it is essentially a credit card rate.
- ZeroGravitas 13y ago
  A pretty good credit card rate. If you do a search for credit cards for people with poor/no credit history you'll see 35%-60% APR rates.
  - aestra 13y ago
    http://www.creditcards.com/bad-credit.php http://www.creditcards.com/bad-credit.php 30% seems to be common. When I got my first CC I just got a low limit ($600), not high interest.
    - ZeroGravitas 13y ago
      Coincidentally, that's the same link I googled for my figures. They have 2 at 30%, 6 at 35%, 1 at 40% and 1 at 60% and all of them need to approve you even at those levels, and may increase them for particularly bad risks (they market them as "representative" rates, so some percentage of people needs to get them I think). I'd guess the people who aren't savvy enough to go through a price comparison search also get stung at the high end of these rates too.
azundo 13y ago
Solving the credit problem for the developing world is a very challenging undertaking with huge potential rewards, which is why this is so disappointing. Organizations like this should not be not-for-profits. I don't believe that a business with such misrepresentation would have lasted this long without being called out. Hiding behind the not-for-profit label in markets where for-profits should be operating does nothing but distort the market and lull consumers/lenders into a false sense of do-gooding. These are financial markets and so we need to find effective market actors instead of not-for-profits that can unfairly compete due to their status. By using the not-for-profit label and misrepresenting interest rates, Zidisha is also painting the picture (whether they intend to or not) that businesses in this space are exploitative and that Zidisha is good. Micro-loans are expensive loans! Businesses have to charge a lot for them to be economical, but access to credit for high-turnover businesses can make a huge a difference if it makes sense for the business. What is really needed in the space isn't necessarily a lending platform, but more data and better techniques to lend. It's tough to vet entrepreneurs cheaply and at scale, but something I hope we will continue to get better at. There is a ton of money in the impact investing sector right now that could do a lot of good through market channels but lending in the developing world is still just too expensive and too risky. I'll close with another misleading statement from the October 2012 interview that the author of the blog post didn't discuss: ... the total rate paid from the borrower’s perspective averages 8.40%. Note that this is not much above the average rate of inflation in the borrowers’ countries. The problem here is that this statement assumes a stable currency against the US dollar. While 8.40% may be close to the inflation rate, for many of these countries an additional several percentage points of currency devaluation against the US dollar will raise the effective interest rate in local currency. I would love to understand how Zidisha deals with the challenge of currency fluctuations, especially when educating its borrowers. I hope the takeaway from this is not that micro credit and lending in the developing world is bad and exploitative - just that it is expensive and nobody is that great at it yet. I'm disappointed in Zidisha's misrepresentation but I hope it makes it clear that this isn't a solved problem that greed and bad business practice is getting in the way of. It's an extremely difficult, unsolved problem that we need more smart people working on to solve.
pg_is_a_butt 13y ago
paul graham is responsible for this company
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- pdpi 13y ago
  > I couldn't help but feel that s/he was glossing over some perfectly legitimate reasons why you would want to charge using a flat interest rate instead of using an APR in order to fit the post's narrative. They might have all the legitimate reasons in the world to want to use the flat rate. But none of them detract from the fact that the rest of the industry uses one metric to describe their products, and they come in and use a different metric that's easy to confuse with the usual one and looks a ton better. That lies somewhere between not very transparent and outright scummy.
  - unreal37 13y ago
    Using APR on a maximum $50 3-month loan IS misleading. To compare that to a home mortgage hides all sorts of fees that the lender is able to cover because of the profits they make from interest. At the small scale, those fees have to be paid by the borrower, making APR a poor metric.
jkurnia 13y ago
Dear all, I'm the director of Zidisha, and have just posted this response to the blog post. I'd be happy to respond to questions here. Dear Modern Microcredit, I'm sorry that you found our website information misleading. I'd like to address your points here: 1. Interest rate diagram: As we do apply a 5% transaction fee, I agree that the diagram showing a range of 0% to 15% is incorrect. A volunteer had donated the diagram to us years ago, and we did not scrutinize it sufficiently before using it in our website. We have now removed the diagram until it can be adjusted to reflect the 5% minimum cost. 2. Registration Fee: This is approximately $12 paid when a borrower first joins Zidisha, and provides lifetime membership. We do not include it in the interest cost calculation because it covers the unlimited number of loans that borrower may receive over the course of many years. 3. Zidisha service fee: This is a flat 5% of the loan amount per year the loan is held. Most Zidisha loans are held for less than a year, so it is usually less than 5% of the loan amount. For example, the 5% fee for $50 loan held for three months would be 1.25%, or about 63 cents. That is hardly exorbitant. 4. Interest offered to lenders: We allow borrowers to offer any interest rate they choose to lenders, from 0% up to a maximum of 25% of the value of the loan per year the loan is held. In practice, the highest rates are usually offered by first-time borrowers who have not yet established track records with Zidisha (much as new eBay sellers offer the first few items at a discount). 5. Using a collection of randomly selected loans as a proxy for average cost to Zidisha borrowers is misleading. First-time Zidisha loans are overrepresented in this measure, because they are smaller and repaid more quickly, and are therefore more numerous than the larger subsequent loans taken by established borrowers. Since first-time loans pay the highest annualized interest (because they are held for a short time), using them as an example overstates the average cost of Zidisha loans. Our statistics correct for this by using a weighted average based on dollar amounts rather than single loans. 6. We use flat rates not in order to deceive, but simply because they are more intuitive to borrowers and lenders than APR. The vast majority of our borrowers are used to flat rates being quoted by local lenders, and when they tell us they want to borrow $100 at 10% interest, they mean that they wish to repay $110. If we wanted to distort our data to appeal to lenders, it would make more sense to use APR, as the higher quoted rates would make lending through Zidisha seem more profitable. In fact, our intent is simply to make the cost easy to understand for everyone. For extra clarity, we provide extensive explanation of APR vs. flat rates, and display the exact dollar amounts borrowers pay for each loan in the loan profile pages. I don't see how this can be construed as hiding information. Using APR in Zidisha's situation would mean sacrificing a measure that the majority of our members understand easily for theoretical precision. 7. You imply that Zidisha does not in fact lower the cost of microloans in developing countries. That is not true. Even the $50 loan you cited above, which chose to offer to lenders the maximum interest rate we allow at Zidisha, ended up costing the borrower only $1.73 in interest and fees. I would be surprised if any other lender would offer an online applicant with no credit history a short-term loan at such rates. Zidisha's cost savings to borrowers have been independently analyzed. Below is an excerpt from a study published by microfinance analyst Daniel Rozas. (Note that the average interest borrowers have opted to pay lenders has increased from 2-3% at the time of this study to about 5-6% currently, but this does not invalidate the conclusion that Zidisha's rates are substantially lower than what has hitherto been available.) Zidisha’s interest rates are remarkably low, ranging between 7-8% annually (quoted flat), of which 2-3% is charged by lenders and 5% is levied by Zidisha to fund its operations. An additional fee of some $10-20 is charged for initial registration (but not for subsequent loans). This is far below the local prevailing rates – MFTransparency places similarly-sized loans (50,000 KES) at about 35% APR (Zidisha’s loans are 15-18% APR). And it’s all the more noteworthy, considering that Zidisha’s borrowers are largely in rural areas, where credit tends to be more expensive. The key to the low rates rests on Zidisha’s avoidance of costly staff and operations on the ground, and its ability to leverage low-cost funds from socially-motivated lenders. (from http://www.financialaccess.org/blog/2011/07/microfinance-without-mfi-zidisha-tests-boundaries-microlending-methodology http://www.financialaccess.org/blog/2011/07/microfinance-wit...) I'd be happy to provide further information as desired.
pistle 13y ago
People don't seek out micro-loans to establish sustainable, value magnetizing ventures. They take micro-loans to get through today, tonight, and next week. All micro-lenders I've investigated long enough turned out to be charity-arbitrage. "You got a guilty feeling? I've got some pictures and stories that will make you feel good. You can just click the (your) pain away." They do just enough to keep selling the narrative and sucking the life out of their believers/volunteers while gold-plate-lining someone's ever heavier pockets. I don't feel charitable if I expect interest to be paid to me or my "emissaries."
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dsugarman 13y ago
question to the OP: Aside from believing the information is misleading, do you believe that Zidisha is still improving microlending?
GFK_of_xmaspast 13y ago
Well I for one am shocked that usurers are engaging in usury.
azth 13y ago
Unfortunately, just another usury-based company entering the market. What a way to exacerbate the already worsening economic situation.
- pbhjpbhj 13y ago
  Surely not just a usury-based company but instead one exacting usurious repayments by lending other peoples money. Truly champions of capitalism.
  - azth 13y ago
    Couldn't have said it better myself :)
jkurnia 13y ago
Dear all, Although I do not agree with Modern Microcredit's allegations that we are intentionally misleading, the discussion that has resulted is a useful one. As I see it, we have a several options: 1. The status quo: Continue to quote flat interest rates in our website along with an explanation of the calculation in a modal box, and display the dollar amounts paid for each loan for extra clarity. 2. Transition from a flat rate methodology to APR. This would be more in line with the standard used in most lenders' countries, but would be more difficult to understand for borrowers. (It would also require a rewriting of much of our website. Zidihsa has only one web developer, so implementing this option would probably have to wait until have more programming resources.) 3. Continue to use flat rates as the basis for calculating the cost of Zidisha loans, but display the equivalent APR rates along with them. Perhaps Microfinance Transparency could help us develop a tool to facilitate this. 4. Continue to use flat rates, but use the term "fee" instead of "interest." This would be easy to implement and could help lenders avoid mistaking our flat rates for APR, but makes cost comparison with loans in borrowers' countries less straightforward. Zidisha has little value without transparency, and those who have commented here obviously care deeply about it. I'd welcome everyone's advice on which option Zidisha should adopt, or alternative proposals.
- unclebucknasty 13y ago
  >2. Transition from a flat rate methodology to APR. This would be more in line with the standard used in most lenders' countries, but would be more difficult to understand for borrowers This statement implies bad-thinking with regard to borrower clarity and understanding. As is well-known and obvious, flat-rate pricing actually obfuscates the true costs. So, to say that it helps borrowers understand is to say that it purposely gives them a false sense that they understand when they actually do not. Again, this is obvious, and anyone who understands APR and its purpose must make this admission. And, if one makes this admission and still continues to promote flat-rates as somehow clearer to borrowers, then he/she must also admit that he/she is now willfully misleading borrowers for whatever purpose ("simplicity", self-interest, or otherwise).
  - dragonwriter 13y ago
rajacombinator 13y ago
I think the blogger misinterpreted the "lender interest rate" to mean "borrower interest rate." However, the markup/hidden fees do look extremely shady.
nwenzel 13y ago
Question for the OP: Who profits from the service? Who profits more by "misleading" borrowers, lenders, and/or donors? If the OP is uncovering exorbitant fees, someone must be getting rich. I'd like to know what happens when you follow the money. If no one is getting rich, is that evidence of an honest service trying to make the world better for those born someplace other than the developed world?
jediknight 13y ago
se flag blog post? New blog with only one other entry? Something smells rotten in Denmark.
shehi 13y ago
Hi All, I have benefited from zidisha loans. Currently am on my third loan >>https://www.zidisha.org/microfinance/loan/Shehi/4590.html https://www.zidisha.org/microfinance/loan/Shehi/4590.html . The interest rate is in two parts: one part 5% fixed (transaction cost) and the second is flexible ( set by borrower when applying for a loan. For example my loans average at 13-15% annual interest. Zidisha loans help and are affordable compared to kiva intermediadies like Milango microfinance ( about 29% plus mandatory monthly savings) & SMEP microfinance. Thank you
mfheretic 13y ago
[I posted this on the MMC website, should have posted here! Mildly edited to relfect context here] I get bogged down in such interest rate debates, so decided to put my money where my mouth is and lend on Zidisha - MY loans, MY transactions, MY calculations. I uploaded $1000. 18 months later (in fact slightly less as I did this in two batches of $500, minor detail) my cash + pending loans + outstanding capital is $1006. For all practical purposes let's say I am at break-even. I made some money in interest, however calculated, and I lost some money in defaults, late payments and foreign exchange losses. Overall these cancelled out (in fact I am $6 up). My average interest rate that I charged, weighted by the amount I bid, was 4.4% (flat per year I believe). I had a few late payments, one outright default, and I have no idea how much forex losses cost me. To repeat, this all largely cancelled out. I then looked at the average interest rates as stated by Zidisha only for the clients I had lent to. These were 9.31%, but included the 5% fee that Zidisha charged, so it appeared that the average investor was charging 4.31%, marginally lower than me. Indeed, I lent to a few people who were unwilling to pay any interest, and sure enough their stated rate was 5% - the Zidisha fee alone. So, in terms of Zidisha claiming the average LENDER interest rate is 5.3% seems reasonable from my personal lending experience (40 loans to date). I agree that flat rates are inferior. I wish Zidisha would stop this practice. And it is a fair rule of thumb to double them to get a real APR. There is a fragment of truth in the claim that borrowers understand flat interest rates better than APRs, as these are still common in some countries (where they have not yet been outlawed). Claiming the world was flat a few centuries ago was acceptable and commonly accepted, although wrong! I agree with the author that converting to APRs would be better. But, I also agree that the one-off fee for a credit check, in this lending model, does seem reasonable. But I concede that this is a debatable point. So, excluding this one-off fee, it does appear that the loans I have personally done have an APR of about 20% (9.31% x 2). What's more, by me charging 4.4% (flat, equivelent to 9% APR), this has covered forex losses and defaults over an 18 month period, almost perfectly (by coincidence). I don't lend on Zidisha to make money, but if I can protect my capital, that is fine by me. This is what most other P2Ps will try to offer. MyC4 offers a net return, Kiva is generally break-even. What fascinates me about Zidisha is that there is no intermediary, and the rates do genuinely seem lower. I accept this might not be the case for a first time client on a $50 loan having to pay $12 for the credit check. The one-off fee is the source of the problem. But where do we draw the line - what about the bus fare to get to the office? The cost of completing the forms? The opportunity cost of time in completing the Zidisha process? Yes, there are entry costs to join Zidisha, as there are in many services. Indeed, one could argue these present a barrier to entry to dissuade non-serious potential borrowers. Do not mis-understand me, I am a fanatic for transparent pricing in microfinance. In fact, I should also add that there is an additional fee which I (i.e. from a lender perspective) have to incur that wipes out my measly $6 profit - the PayPal fee, which was $34 in my case. So, in fact, I lost $28. But, a rate of 20%, or 25%, or 30%, is alas pretty reasonable, particularly in Africa. I agree that Zidisha should adopt APRs as soon as possible, but I would be hesitant to describe this as deceptive. There is no pre-funding, at least they make an effort to state the interest rate, which some P2Ps don't even attempt. I do hover the mouse over the blue buttoms and was aware that this is flat, and I know how to interpret this, but I may not be typical. But compare this to Kiva, whose greatest effort to explain an interest rate is to state the self-reported, unverified portfolio yield of the bank as copied from the MixMarket often years out of date, and this is not even a good proxy of the APR in my opinion. I did a blog post a year or so ago comparing the stated portfolio yields reported by Kiva compared to the actual APRs calculated by Chuck Waterfield, and the divergence is staggering. Is Zidisha perfect, no? Is it an interesting development, challenging the status quo of the current P2P market? In my opinion, yes. There is scope for improvement, and I hope they constantly remain aware of this, but so far I find this a promising venture. It will be interesting to see how it scales up. Hugh Sinclair, author/consultant www.microfinancetransparency.com
jkurnia 13y ago
Dear all, Thanks in part to this debate, we have opted to reduce the interest Zidisha borrowers may offer to lenders. You may view the full announcement and discussion here: https://news.ycombinator.com/item?id=7558816 https://news.ycombinator.com/item?id=7558816

364 points by modernm 13y ago

This makes YCombinator look bad. Did they know about this before investing in Zidisha? If not, maybe consulting the likes of GiveWell could be a good idea.

onalark 13y ago
GiveWell? Aren't those the guys that astroturfed MetaFilter a few years ago?
- bmm6o 13y ago
  Yes, but that was before "growth hacking" was cool.
- pratyushag 13y ago
  Yep. Although they apologized publicly for it and came out being a much stronger organization. Their apology (not half bad): http://www.givewell.org/about/shortcomings http://www.givewell.org/about/shortcomings Deceit in lending is not uncommon among microfinance organizations, but it's surprising to see it from a YC-backed company. I look forward to Zidisha's response, I'm sure they'll shed more light on it.
  - gohrt 13y ago
    Also, 6 years later, their apology is still posted and crosslinked on their website, years later, in an easily accessible/sharable URL. MeFi's analysis, which FWIW, notes that most of the offending activity was done under the founders' real first-names: http://mefiwiki.com/wiki/Givewell http://mefiwiki.com/wiki/Givewell (Where is AirBnB's apology for violating Craigslist's TOS with the spamming from "Jessica"?)
cjbprime 13y ago
GiveWell's written about microfinance before, fairly skeptically: http://blog.givewell.org/2009/10/23/6-myths-about-microfinance-charity-that-donors-can-do-without/ http://blog.givewell.org/2009/10/23/6-myths-about-microfinan... http://www.givewell.org/international/economic-empowerment/microfinance http://www.givewell.org/international/economic-empowerment/m...

bargl 13y ago

My knee jerk reaction to this is disgust. Which typically means that it deserves a lot more research and validation on my part. I thought Zidisha was a game changer and a website I could be proud to support. I didn't look at it as a way to invest but a way to support young entrepreneurs in other countries. Does anyone else see anything about this that is redeeming for Zidisha?

ska 13y ago

Looks like Zidisha is taking a page from the payday loan folks playbook, not exactly a desirable role model.

unreal37 13y ago
It doesn't look like that at all. Microlending loans are a bit different than the "go to the bank and borrow $100K" loans that we are all used to. The bank doesn't charge a fee, because they make $1000s on interest on that loan over it's lifetime and it covers it. Your bank won't lend you $50 as a loan. It's not worth it for them. But if you add in some reasonable fees (like $11 for credit check report), an $11 one-time fee on a $50 loan converted to APR looks huge! 500% APR! But it's only because the amounts we are talking about are so small. I think we need to look at this more carefully and not compare apples and oranges. Big loans and small loans are different things. (And payday loans are evil. But microlending is not the same as that.)
- ska 13y ago
  I didn't mean that they were the same thing at all; the "page" they are borrowing is the hiding of fees and service charges behind the bold text of a "low rate". Your example is fine, by the way. Yes, that $50 is costing you 500% APR. And yes, that is exactly how you should think about it, and how they should advertise it. Anything else is problematic. It doesn't matter how the cost is arrived at, this is the cost to you of borrowing that money, and it is this entire cost that must be balanced against the value you will see from it, not any nominal rate. There is absolutely nothing wrong with doing the sort of loan they are talking about, and the costs may be perfectly reasonable too; certainly microlending is a different risk landscape that typical bank loans. However, the only ethical way to handle financial details like this is to always be as transparent as you can. Lots of sectors get this wrong, by the way -- payday loans are particularly egregious but the auto finance industry is pretty slimy on this too, in different ways. By the way, payday loans as an institution obviously meet a lot of market need that wasn't being addressed before them, or they wouldn't have popped up everywhere. I don't think they should be run out of town, but they should be honest about the costs.

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cpwright 13y ago

I've never even heard of a "flat rate" loan until now. For the average american it sounds very close to a fixed rate which we are more used to even though it is far different.

pionar 13y ago
Generally, in the US, where you see a flat rate is in the loan details, where it's usually, if you take the entire term to repay the loan, the overall interest paid is $X.
- cpwright 13y ago
  As Wikipedia describes it that is not a flat rate loan. If I borrow $100,000 for 15 years at 5% it would cost me $183,389; and I expect to see that in the disclosure. But that is still a regular APR. A flat rate 5%, would mean that each year I pay 5% in interest on the $100,000; even though I've already paid off some of the principal. So I would end up paying $200,000 in total.
aestra 13y ago
Not at all. A fixed rate loan is one where the interest can't change in response to events. So if I borrow money for 30 years with a fixed rate loan at 5%, I will pay 5% the entirety of the loan even if inflation rises to 10% or I am late with a few payments. You can always refinance though, but that creates a different loan. A variable rate loan is one where interest can change. Credit cards are usually variable, so if I miss a payment your interest rate can go up or if you've been a customer for a long time and have a good history of paying on time your interest rate can go down. Mortgages with variable rates usually fix the rate for x years and then they reevaluate in x years. During the housing bubble, variable rate mortgages with were common.
- cpwright 13y ago
  I understand a fixed loan and a variable loan, and those are what I'm used to considering when deciding whether to borrow money. I think the issue that the post brings up is that the target market for the microcredit borrowers consists of people used to flat rate loans, which is totally alien to the target market for lenders. I think the lenders will likely mentally map "flat rate" to the closest thing they are aware of, which is likely "fixed rate."

rdl 13y ago

I initially was a huge fan of Zidisha because of all the bullshit the microlending providers pull. Which is exactly like this. (fixed fees on small loans would be the main trick; stuff like flat-fee vs. declining balance APR is a bit more subtle.) I hope they post a response, and this turns out to be some kind of misunderstanding.

rdl 13y ago
And, in fact, based on the Zidisha founder's response above, it looks to me like this was a mix of some legitimate issues (which will be addressed), some misunderstanding by the modern microlending analyst, and some in a gray area I'm not really sure about. I do really appreciate the quality of analysis Modern Microlending did here. It's also great that Zidisha responded within hours with a pretty full and honest accounting. This is how this kind of thing is supposed to work, I think.
- unreal37 13y ago
  I agree. The original analysis made some important points, and the response by Zidisha was great too.
netcan 13y ago
In their defence, APR is problematic. It's misleading in itself. APR is enforced to keep lenders from disguising the real costs of a loan using fees and such. It's an ethical advertising standard. But, disguising the real costs of a loan is not the only reason to use fees. Fees are also used because the lenders' costs are not just borrowing costs. There's a flat cost to processing a loan. That translates to a flat fee which can raise APR to seemingly horrendous rates. Basically, loans don't scale linearly. Maybe micro-finance should come up with it's own standard practice. People need to make some allowances though. 25% is not terrible in every context.

smackfu 13y ago

Interesting how important the length of the loan is. A 5% one-time fee on a 5 year loan may be acceptable. A 5% fee on a 6 week loan is massively higher than the actual interest charged.

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jusben1369 13y ago
Yes. I agree that the author seems to want to completely ignore the fact that it is a 1 time fee vs an interest rate.
makomk 13y ago
Except that unless I'm missing something the fee is 5% for every year or part-year the loan is outstanding, so it's a substantial proportion of the interest charged no matter the length of the loan.

akg_67 13y ago

Author of the article is confusing "borrower" facing data with "lender" facing data. Lender interest rate is what lender gets and not what borrower pays. 5% lender interest rate is correct because that is what lender gets. Lender doesn't get service fees and origination fee. It will be very confusing for lender if Zidisha published 25% borrower interest rate as lender may assume that they are getting 25% interest rate which will be incorrect. If Zidisha was telling borrowers that they pay 5% interest rate or telling lenders that they receive 25% interest rate then that will be misleading. Author needs to spend some time understanding the terminology and nuances of lending/debt market from both borrower and lender view. This is the most confusing aspect most people new to lending side face as they are only used to seeing borrower side. Lender side view is very different from borrower side view.

misterjangles 13y ago
I don't think he confuses the two - he talks about both in detail. The issue is with the concept if the flat interest rate combined with service fees and signup fees that make the advertised borrower rate misleading. But there is a likelihood that not everybody understands it. Journalists and bloggers just throw out the 5% figure without specifying what it means because it makes for a nice sounding blurb.
pbhjpbhj 13y ago
Zidisha could explicitly state the borrower and lender interest rates and give an average and spread for those rates when all fees are taken in to account. They could include APRs or AERs or whatever too. Zidisha is surely marketing themselves to lenders on the basis that they offer a good rate to borrowers, that's supposed to be a motivation to lenders to participate. Interestingly the Wikipedia page figures seem [at a glance] to say that in some countries less than 50% of loans are even repaid.

netcan 13y ago

I think microlending is loan sharking by another name, and that's a good thing. I'm not a libertarian but you still need to consider that outlawing something voluntarily or even just singling it out as a pariah has tricky effects. It often harms those who are ostensibly being protected. A few years ago Australian politicians started targeting 'payday loans' and other "predatory lenders." The upshot was that these weasels target vulnerable borrowers with 100%+ APR loans, who are ultimately harmed. 'Vulnerable' is hard to define or measure. Harm is virtually impossible. 'Predatory terms' (interest rates) were the only easy of defining and singling out these guys. Legally it seems to have been hard to target predatory lending so name-and-shame was the main tactic . A typical loan is a few hundred dollars payable in a few weeks. The ideal borrower goes down a revolving credit hole. For a class-minded political activist this screams evil. It's like the middle class debt trap, beefed up and tailored for the poor and/or dysfunctional. The marketing targets addicts, gamblers, welfare recipients, etc. The whole thing stinks to high heaven. The first thing that happened when all this negative attention came about is that banks got out of anything even similar to payday loans. No point in tarnishing their brand for a tiny unattractive business. The guys who stayed in business were the scummiest, the ones who didn't care about brand and didn't care about their business. It became like running a brothel, legal but unsavory. The industry boomed as more legitimate businesses ceded market share to the shadier players. Realistically, there are two facts that can't be wished away. High risk, low value loans are expensive to provide. People want/need payday loans and they will get them from whoever is giving them. It can't be done at non "predatory" APRs and it can't be shut down. If they had outright outlawed payday loans, then shady businesses would have given way to outright criminals, the leg breaking loanshark cliche. In comes micro-finance. Nobel peace prize winning, poverty alleviating, enlightened, woman emancipating microfinance. These ran with a lot of support. They attracted great people at far under-market salaries. Motivated employees with a mission and received outright donations from the public. Major banks created microfinance programs as a part of their corporate responsibility, goodwill project. These amount to a real and substantial summary. Annualized interest rates are still very high. Lower than payday loans and much lower than village lenders and loan sharks they displace but higher than the worst credit card. Two ends of the spectrum. One on the border region of legality below the decent folk morality threshold. The other, literally a charitable activity. Interesting to think about. Make something illegal and it runs as a criminal enterprise. Treat it as a predatory pariah and it behaves like a predatory pariah. Treat it as a charitable act, and it behaves that way. In no case does it go away.

devinmontgomery 13y ago

The way Zidisha markets its rates feels like a lot of services I see. It's how my phone bill, electric bill, almost all my bills work - hidden fees charged by everyone so you just assume you're going to be paying more than is quoted. They're following the status quo, are probably not intending to be evil, and are surely feeling the pressure to be 10x better. But I worked in the Philippines in college, and you want to know what would really blow their minds? Not screwing them over. Everybody else does that. 10x better is being honest. Given their alternatives, 25% isn't that bad. Initial adoption might be slow - they're so used to corruption and being bullshitted that they'll think it must be 25% plus something - but once word spreads that Zidisha is really just 25% and offers the most valuable commodity in places like this - honesty and transparency - it will blow up. And then you'll get more fraud, but that's challenge 2.0.

SyneRyder 13y ago
I was just about to say "surely there are honest alternatives in the Philippines below 25%", but I just checked my most recent Kiva loans in the Philippines, and the portfolio yield on my most recent ones range from 28% - 45%. Thanks for the reminder to check the Yield when lending.

jfasi 13y ago

While is commentary makes an excellent case for dishonesty on Zidisha's part, I wonder if some context is necessary. Looking beyond the dishonesty, this commentary talks about a 25 percent interest rate in the implicit context of the credit environment of a developed country. In that context, these practices and interest rates are extremely suspicious, morally dubious, and possibly illegal. This raises the question of why Zidisha is making these statements. To assume a developed-world business context excludes the possibility that these practices are accepted and commonplace in the markets Zidisha serves. I have no experience with those markets, but it's worth excluding this possibility before expressing distaste for these practices. Consider the following plausible scenario: Zidisha performs research into the market and discovers that these practices and rates are acceptable. One can even imagine they are preferable to the status quo. The issue is that Zidisha as a company has to generate press and justify its business to a developed-world audience whose gut reaction to such practices would make the company look like a pack of usurers, when in fact they could very well be doing a lot of good. To me, this communication seems a compromise response to this conflict: translate the numbers and practices as best you can into language and terms developed-world audiences understand. Perhaps the company took some liberties with labeling and conversions along the way, and if this is the case they would do well to be more conservative, but overall I give the benefit of the doubt that this communicate is the result of a tricky conflict of business environments rather than deception.

potatolicious 13y ago
> "is the result of a tricky conflict of business environments rather than deception." Can't it be both? Intentional misrepresentation in the pursuit of a worthwhile goal is still intentional misrepresentation. I look forward to seeing Zidisha's response, but as it is this looks highly intentional and highly deceptive. This ultimately comes down to the classic "do the ends justify the means" debate. It also leads to immediate suspicions of a slippery slope - if the founders of this startup are willfully misrepresenting the core nature of their business in furtherance of their goals, what else about them is negotiable?
- unclebucknasty 13y ago

drawkbox 13y ago

So it is essentially a credit card rate.

ZeroGravitas 13y ago
A pretty good credit card rate. If you do a search for credit cards for people with poor/no credit history you'll see 35%-60% APR rates.
- aestra 13y ago
  http://www.creditcards.com/bad-credit.php http://www.creditcards.com/bad-credit.php 30% seems to be common. When I got my first CC I just got a low limit ($600), not high interest.
  - ZeroGravitas 13y ago
    Coincidentally, that's the same link I googled for my figures. They have 2 at 30%, 6 at 35%, 1 at 40% and 1 at 60% and all of them need to approve you even at those levels, and may increase them for particularly bad risks (they market them as "representative" rates, so some percentage of people needs to get them I think). I'd guess the people who aren't savvy enough to go through a price comparison search also get stung at the high end of these rates too.

azundo 13y ago

Solving the credit problem for the developing world is a very challenging undertaking with huge potential rewards, which is why this is so disappointing. Organizations like this should not be not-for-profits. I don't believe that a business with such misrepresentation would have lasted this long without being called out. Hiding behind the not-for-profit label in markets where for-profits should be operating does nothing but distort the market and lull consumers/lenders into a false sense of do-gooding. These are financial markets and so we need to find effective market actors instead of not-for-profits that can unfairly compete due to their status. By using the not-for-profit label and misrepresenting interest rates, Zidisha is also painting the picture (whether they intend to or not) that businesses in this space are exploitative and that Zidisha is good. Micro-loans are expensive loans! Businesses have to charge a lot for them to be economical, but access to credit for high-turnover businesses can make a huge a difference if it makes sense for the business. What is really needed in the space isn't necessarily a lending platform, but more data and better techniques to lend. It's tough to vet entrepreneurs cheaply and at scale, but something I hope we will continue to get better at. There is a ton of money in the impact investing sector right now that could do a lot of good through market channels but lending in the developing world is still just too expensive and too risky. I'll close with another misleading statement from the October 2012 interview that the author of the blog post didn't discuss: ... the total rate paid from the borrower’s perspective averages 8.40%. Note that this is not much above the average rate of inflation in the borrowers’ countries. The problem here is that this statement assumes a stable currency against the US dollar. While 8.40% may be close to the inflation rate, for many of these countries an additional several percentage points of currency devaluation against the US dollar will raise the effective interest rate in local currency. I would love to understand how Zidisha deals with the challenge of currency fluctuations, especially when educating its borrowers. I hope the takeaway from this is not that micro credit and lending in the developing world is bad and exploitative - just that it is expensive and nobody is that great at it yet. I'm disappointed in Zidisha's misrepresentation but I hope it makes it clear that this isn't a solved problem that greed and bad business practice is getting in the way of. It's an extremely difficult, unsolved problem that we need more smart people working on to solve.

pg_is_a_butt 13y ago

paul graham is responsible for this company

deleted 13y ago

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pdpi 13y ago
> I couldn't help but feel that s/he was glossing over some perfectly legitimate reasons why you would want to charge using a flat interest rate instead of using an APR in order to fit the post's narrative. They might have all the legitimate reasons in the world to want to use the flat rate. But none of them detract from the fact that the rest of the industry uses one metric to describe their products, and they come in and use a different metric that's easy to confuse with the usual one and looks a ton better. That lies somewhere between not very transparent and outright scummy.
- unreal37 13y ago
  Using APR on a maximum $50 3-month loan IS misleading. To compare that to a home mortgage hides all sorts of fees that the lender is able to cover because of the profits they make from interest. At the small scale, those fees have to be paid by the borrower, making APR a poor metric.

jkurnia 13y ago

Dear all, I'm the director of Zidisha, and have just posted this response to the blog post. I'd be happy to respond to questions here. Dear Modern Microcredit, I'm sorry that you found our website information misleading. I'd like to address your points here: 1. Interest rate diagram: As we do apply a 5% transaction fee, I agree that the diagram showing a range of 0% to 15% is incorrect. A volunteer had donated the diagram to us years ago, and we did not scrutinize it sufficiently before using it in our website. We have now removed the diagram until it can be adjusted to reflect the 5% minimum cost. 2. Registration Fee: This is approximately $12 paid when a borrower first joins Zidisha, and provides lifetime membership. We do not include it in the interest cost calculation because it covers the unlimited number of loans that borrower may receive over the course of many years. 3. Zidisha service fee: This is a flat 5% of the loan amount per year the loan is held. Most Zidisha loans are held for less than a year, so it is usually less than 5% of the loan amount. For example, the 5% fee for $50 loan held for three months would be 1.25%, or about 63 cents. That is hardly exorbitant. 4. Interest offered to lenders: We allow borrowers to offer any interest rate they choose to lenders, from 0% up to a maximum of 25% of the value of the loan per year the loan is held. In practice, the highest rates are usually offered by first-time borrowers who have not yet established track records with Zidisha (much as new eBay sellers offer the first few items at a discount). 5. Using a collection of randomly selected loans as a proxy for average cost to Zidisha borrowers is misleading. First-time Zidisha loans are overrepresented in this measure, because they are smaller and repaid more quickly, and are therefore more numerous than the larger subsequent loans taken by established borrowers. Since first-time loans pay the highest annualized interest (because they are held for a short time), using them as an example overstates the average cost of Zidisha loans. Our statistics correct for this by using a weighted average based on dollar amounts rather than single loans. 6. We use flat rates not in order to deceive, but simply because they are more intuitive to borrowers and lenders than APR. The vast majority of our borrowers are used to flat rates being quoted by local lenders, and when they tell us they want to borrow $100 at 10% interest, they mean that they wish to repay $110. If we wanted to distort our data to appeal to lenders, it would make more sense to use APR, as the higher quoted rates would make lending through Zidisha seem more profitable. In fact, our intent is simply to make the cost easy to understand for everyone. For extra clarity, we provide extensive explanation of APR vs. flat rates, and display the exact dollar amounts borrowers pay for each loan in the loan profile pages. I don't see how this can be construed as hiding information. Using APR in Zidisha's situation would mean sacrificing a measure that the majority of our members understand easily for theoretical precision. 7. You imply that Zidisha does not in fact lower the cost of microloans in developing countries. That is not true. Even the $50 loan you cited above, which chose to offer to lenders the maximum interest rate we allow at Zidisha, ended up costing the borrower only $1.73 in interest and fees. I would be surprised if any other lender would offer an online applicant with no credit history a short-term loan at such rates. Zidisha's cost savings to borrowers have been independently analyzed. Below is an excerpt from a study published by microfinance analyst Daniel Rozas. (Note that the average interest borrowers have opted to pay lenders has increased from 2-3% at the time of this study to about 5-6% currently, but this does not invalidate the conclusion that Zidisha's rates are substantially lower than what has hitherto been available.) Zidisha’s interest rates are remarkably low, ranging between 7-8% annually (quoted flat), of which 2-3% is charged by lenders and 5% is levied by Zidisha to fund its operations. An additional fee of some $10-20 is charged for initial registration (but not for subsequent loans). This is far below the local prevailing rates – MFTransparency places similarly-sized loans (50,000 KES) at about 35% APR (Zidisha’s loans are 15-18% APR). And it’s all the more noteworthy, considering that Zidisha’s borrowers are largely in rural areas, where credit tends to be more expensive. The key to the low rates rests on Zidisha’s avoidance of costly staff and operations on the ground, and its ability to leverage low-cost funds from socially-motivated lenders. (from http://www.financialaccess.org/blog/2011/07/microfinance-without-mfi-zidisha-tests-boundaries-microlending-methodology http://www.financialaccess.org/blog/2011/07/microfinance-wit...) I'd be happy to provide further information as desired.

pistle 13y ago

People don't seek out micro-loans to establish sustainable, value magnetizing ventures. They take micro-loans to get through today, tonight, and next week. All micro-lenders I've investigated long enough turned out to be charity-arbitrage. "You got a guilty feeling? I've got some pictures and stories that will make you feel good. You can just click the (your) pain away." They do just enough to keep selling the narrative and sucking the life out of their believers/volunteers while gold-plate-lining someone's ever heavier pockets. I don't feel charitable if I expect interest to be paid to me or my "emissaries."

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dsugarman 13y ago

question to the OP: Aside from believing the information is misleading, do you believe that Zidisha is still improving microlending?

GFK_of_xmaspast 13y ago

Well I for one am shocked that usurers are engaging in usury.

azth 13y ago

Unfortunately, just another usury-based company entering the market. What a way to exacerbate the already worsening economic situation.

pbhjpbhj 13y ago
Surely not just a usury-based company but instead one exacting usurious repayments by lending other peoples money. Truly champions of capitalism.
- azth 13y ago
  Couldn't have said it better myself :)

jkurnia 13y ago

Dear all, Although I do not agree with Modern Microcredit's allegations that we are intentionally misleading, the discussion that has resulted is a useful one. As I see it, we have a several options: 1. The status quo: Continue to quote flat interest rates in our website along with an explanation of the calculation in a modal box, and display the dollar amounts paid for each loan for extra clarity. 2. Transition from a flat rate methodology to APR. This would be more in line with the standard used in most lenders' countries, but would be more difficult to understand for borrowers. (It would also require a rewriting of much of our website. Zidihsa has only one web developer, so implementing this option would probably have to wait until have more programming resources.) 3. Continue to use flat rates as the basis for calculating the cost of Zidisha loans, but display the equivalent APR rates along with them. Perhaps Microfinance Transparency could help us develop a tool to facilitate this. 4. Continue to use flat rates, but use the term "fee" instead of "interest." This would be easy to implement and could help lenders avoid mistaking our flat rates for APR, but makes cost comparison with loans in borrowers' countries less straightforward. Zidisha has little value without transparency, and those who have commented here obviously care deeply about it. I'd welcome everyone's advice on which option Zidisha should adopt, or alternative proposals.

unclebucknasty 13y ago
>2. Transition from a flat rate methodology to APR. This would be more in line with the standard used in most lenders' countries, but would be more difficult to understand for borrowers This statement implies bad-thinking with regard to borrower clarity and understanding. As is well-known and obvious, flat-rate pricing actually obfuscates the true costs. So, to say that it helps borrowers understand is to say that it purposely gives them a false sense that they understand when they actually do not. Again, this is obvious, and anyone who understands APR and its purpose must make this admission. And, if one makes this admission and still continues to promote flat-rates as somehow clearer to borrowers, then he/she must also admit that he/she is now willfully misleading borrowers for whatever purpose ("simplicity", self-interest, or otherwise).
- dragonwriter 13y ago

rajacombinator 13y ago

I think the blogger misinterpreted the "lender interest rate" to mean "borrower interest rate." However, the markup/hidden fees do look extremely shady.

nwenzel 13y ago

Question for the OP: Who profits from the service? Who profits more by "misleading" borrowers, lenders, and/or donors? If the OP is uncovering exorbitant fees, someone must be getting rich. I'd like to know what happens when you follow the money. If no one is getting rich, is that evidence of an honest service trying to make the world better for those born someplace other than the developed world?

jediknight 13y ago

se flag blog post? New blog with only one other entry? Something smells rotten in Denmark.

shehi 13y ago

Hi All, I have benefited from zidisha loans. Currently am on my third loan >>https://www.zidisha.org/microfinance/loan/Shehi/4590.html https://www.zidisha.org/microfinance/loan/Shehi/4590.html . The interest rate is in two parts: one part 5% fixed (transaction cost) and the second is flexible ( set by borrower when applying for a loan. For example my loans average at 13-15% annual interest. Zidisha loans help and are affordable compared to kiva intermediadies like Milango microfinance ( about 29% plus mandatory monthly savings) & SMEP microfinance. Thank you

mfheretic 13y ago

[I posted this on the MMC website, should have posted here! Mildly edited to relfect context here] I get bogged down in such interest rate debates, so decided to put my money where my mouth is and lend on Zidisha - MY loans, MY transactions, MY calculations. I uploaded $1000. 18 months later (in fact slightly less as I did this in two batches of $500, minor detail) my cash + pending loans + outstanding capital is $1006. For all practical purposes let's say I am at break-even. I made some money in interest, however calculated, and I lost some money in defaults, late payments and foreign exchange losses. Overall these cancelled out (in fact I am $6 up). My average interest rate that I charged, weighted by the amount I bid, was 4.4% (flat per year I believe). I had a few late payments, one outright default, and I have no idea how much forex losses cost me. To repeat, this all largely cancelled out. I then looked at the average interest rates as stated by Zidisha only for the clients I had lent to. These were 9.31%, but included the 5% fee that Zidisha charged, so it appeared that the average investor was charging 4.31%, marginally lower than me. Indeed, I lent to a few people who were unwilling to pay any interest, and sure enough their stated rate was 5% - the Zidisha fee alone. So, in terms of Zidisha claiming the average LENDER interest rate is 5.3% seems reasonable from my personal lending experience (40 loans to date). I agree that flat rates are inferior. I wish Zidisha would stop this practice. And it is a fair rule of thumb to double them to get a real APR. There is a fragment of truth in the claim that borrowers understand flat interest rates better than APRs, as these are still common in some countries (where they have not yet been outlawed). Claiming the world was flat a few centuries ago was acceptable and commonly accepted, although wrong! I agree with the author that converting to APRs would be better. But, I also agree that the one-off fee for a credit check, in this lending model, does seem reasonable. But I concede that this is a debatable point. So, excluding this one-off fee, it does appear that the loans I have personally done have an APR of about 20% (9.31% x 2). What's more, by me charging 4.4% (flat, equivelent to 9% APR), this has covered forex losses and defaults over an 18 month period, almost perfectly (by coincidence). I don't lend on Zidisha to make money, but if I can protect my capital, that is fine by me. This is what most other P2Ps will try to offer. MyC4 offers a net return, Kiva is generally break-even. What fascinates me about Zidisha is that there is no intermediary, and the rates do genuinely seem lower. I accept this might not be the case for a first time client on a $50 loan having to pay $12 for the credit check. The one-off fee is the source of the problem. But where do we draw the line - what about the bus fare to get to the office? The cost of completing the forms? The opportunity cost of time in completing the Zidisha process? Yes, there are entry costs to join Zidisha, as there are in many services. Indeed, one could argue these present a barrier to entry to dissuade non-serious potential borrowers. Do not mis-understand me, I am a fanatic for transparent pricing in microfinance. In fact, I should also add that there is an additional fee which I (i.e. from a lender perspective) have to incur that wipes out my measly $6 profit - the PayPal fee, which was $34 in my case. So, in fact, I lost $28. But, a rate of 20%, or 25%, or 30%, is alas pretty reasonable, particularly in Africa. I agree that Zidisha should adopt APRs as soon as possible, but I would be hesitant to describe this as deceptive. There is no pre-funding, at least they make an effort to state the interest rate, which some P2Ps don't even attempt. I do hover the mouse over the blue buttoms and was aware that this is flat, and I know how to interpret this, but I may not be typical. But compare this to Kiva, whose greatest effort to explain an interest rate is to state the self-reported, unverified portfolio yield of the bank as copied from the MixMarket often years out of date, and this is not even a good proxy of the APR in my opinion. I did a blog post a year or so ago comparing the stated portfolio yields reported by Kiva compared to the actual APRs calculated by Chuck Waterfield, and the divergence is staggering. Is Zidisha perfect, no? Is it an interesting development, challenging the status quo of the current P2P market? In my opinion, yes. There is scope for improvement, and I hope they constantly remain aware of this, but so far I find this a promising venture. It will be interesting to see how it scales up. Hugh Sinclair, author/consultant www.microfinancetransparency.com

jkurnia 13y ago

Dear all, Thanks in part to this debate, we have opted to reduce the interest Zidisha borrowers may offer to lenders. You may view the full announcement and discussion here: https://news.ycombinator.com/item?id=7558816 https://news.ycombinator.com/item?id=7558816