6 ms·

How Zidisha Hides Its 20% Loss Rate From Lenders – And Why It Matters

17 points by modernmicro 13y ago

mcherm 13y ago
I notice the ongoing trend toward more transparency by Zidisha (for instance, the change the article describes in August of 2012 which started listing non-paying loans as a loss of principle). This is an excellent step. I want to see the whole story -- even if parts of it are ugly -- because that builds my trust that those running the system have taken the best possible options and are running things reliably. Apparently there is much more that could be achieved here -- better information about rescheduled loans, for instance. The trend is good; it should continue.
- mcherm 13y ago
  To clarify: I actually think that the article's main complaint (a large loan loss rate) may be ACCEPTABLE if it is made clear up-front. Zidisha is not a place for lenders to make huge profits. It is a place for lenders to support others making a difference for themselves. If the loan default rate can be lowered enough that it is covered by lending rates, then it could ALSO be a place where the lenders' money can support others over-and-over through repeated loans (and even be withdrawn by the lender at some point) -- and that would be GREAT. But it is not necessary: what is necessary is clear and honest communication.
  - jkurnia 13y ago
    I would agree with these statements: Zidisha is a platform for philanthropy. We're optimized for giving disadvantaged entrepreneurs in the world's poorest places the chance to improve their lives, not for storing financial assets. I think we make that distinction abundantly clear to prospective lenders. See for example our first FAQ for lenders, "Is Zidisha a safe place to store my savings?" (https://www.zidisha.org/microfinance/faq.html https://www.zidisha.org/microfinance/faq.html), or the first paragraph of our Trust and Security page (https://www.zidisha.org/index.php?p=123 https://www.zidisha.org/index.php?p=123). That said, repayment rates at Zidisha are increasing steadily as we continuously improve our lending model in response to experience. The 18% writeoff rate includes mostly loans that were issued over a year ago (which have had time to mature). Our credit risk control mechanisms have improved dramatically since that time, such that I think it's reasonable to expect that the value of lending funds can be maintained over time without erosion for the loans that are being issued today. That said, Zidisha is still not a safe place to store funds one cannot afford to lose, and we do not market it as such.
    - modernmicro 13y ago
      "Our credit risk control mechanisms have improved dramatically since that time, such that I think it's reasonable to expect that the value of lending funds can be maintained over time without erosion for the loans that are being issued today." To achieve that at the max interest rate you allow (~10% APR), you would need a 2.4% loan loss rate. That's an order of magnitude below where Zidisha is now. That would be an incredible achievement and I would gladly cover it as a huge story! Is Zidisha on track to deliver a 2.4% loan loss rate?
- jkurnia 13y ago
  I agree that the way we present information about rescheduled loans can be improved. We do not consider them to be in arrears, because at Zidisha borrowers have the flexibility to reschedule loans to repay either later or earlier than planned, and rescheduling does not necessarily indicate greater likelihood of default. When web development resources allow, we aim to improve our Statistics page to use a single metric to encompass both ended and current loans, and allow users to filter the data by date disbursed.
  - mcherm 13y ago
    > rescheduling does not necessarily indicate greater likelihood of default That is simply untrue. Look, I work for a credit card company, and we have a great deal of experience with evaluating customers and predicting risk of default. A customer choosing to reschedule a loan does not necessarily mean that they WILL go in default, but it is almost certainly an indicator that increases the probability that they will. I am not suggesting you should consider them in arrears (they aren't!) but that you should take payment rescheduling into account as a leading predictor of future default rates on cohorts of loans that have not yet reached default. > we aim to improve our Statistics page to use a single metric to encompass both ended and current loans... Depending on how well that metric is designed, that might actually LOSE information. > ...and allow users to filter the data by date disbursed. That will definitely be useful. In my experience, graphing key indicators (like default rate, repayment rate, loan profit, number of loans made, and leading indicators of default) by cohort (grouping by start date) is a really good way to view your data to determine whether changes in lending policy are having the intended effects. Since your policies have changed recently, this sort of view may prove very useful.
jkurnia 13y ago
Dear Modern Microcredit, I am surprised that you find Zidisha to be insufficiently transparent. Zidisha has room for improvement in many respects, but we've always considered transparency to be a strong point of our platform. We have more detailed statistics on repayment rates, trends in repayment performance over time, and risk levels in currently outstanding loans than any other microlending website I know. For example, Kiva, Kiva Zip, United Prosperity, and other well-known microlending websites do not even publish Portfolio At Risk statistics. Since Zidisha is a direct P2P model, our repayment rate is not inflated by "phantom payments" reported by local intermediary partners. (http://blog.givewell.org/2009/10/13/kiva-repayment-data/ http://blog.givewell.org/2009/10/13/kiva-repayment-data/) When we report a repayment as having been made, that means the borrower truly did make that payment. We make it very clear to prospective lenders that lending through Zidisha is risky. Here are some excerpts from our website: "Zidisha is a low-cost nonprofit community managed by volunteers. Our purpose is to connect individuals in marginalized countries with the chance to improve their lives through affordable loans. We are not a financial institution or an investment service, and Zidisha is not a safe place to store your savings or financial assets. We recommend you treat lending through Zidisha as a philanthropic activity, and that you not lend any funds that you cannot afford to lose." (first paragraph, Trust and Security, https://www.zidisha.org/index.php?p=123 https://www.zidisha.org/index.php?p=123) "Is Zidisha a safe place to store my savings? No. Zidisha is a platform for philanthropy, not a replacement for traditional savings accounts or financial investments. Zidisha loans are highly risky, and direct person-to-person lending across international borders is such a new endeavor that expected losses cannot be predicted with sufficient accuracy to make Zidisha loans a safe way to store funds you cannot afford to lose. We recommend that you treat Zidisha loans simply as a way to help others, and that you lend no more than you would normally be prepared to give away to charity." (Lender FAQ number one, https://www.zidisha.org/microfinance/faq.html https://www.zidisha.org/microfinance/faq.html) "The principal purpose of Zidisha's lenders in funding loans is to improve the lives of these entrepreneurs, and not to make a profitable financial investment. Lending to entrepreneurs through Zidisha involves a meaningful risk of loss of your principal lent. In addition, you are very likely to lose money in real terms on any loan you fund, even if it is repaid by the borrower, as a result of currency exchange rate changes, PayPal fees applied to uploading credit to your lender account, inflation and other factors affecting the value of principal and interest payments made by a borrower. Accordingly, we recommend that you consider lending through Zidisha to be a philanthropic activity, and you should not lend more money through Zidisha than you are prepared to lose." (Terms of Use, https://www.zidisha.org/index.php?p=5 https://www.zidisha.org/index.php?p=5) More generally, our website code is open source (https://github.com/Zidisha/zidisha https://github.com/Zidisha/zidisha), and conversations among our volunteer staff take place in public in Zidisha's forum. (https://www.zidisha.org/forum/categories/volunteer-conversat... https://www.zidisha.org/forum/categories/volunteer-conversat...). Our operational procedure manual is published on the internet for anyone to see. (https://sites.google.com/a/zidisha.org/zidisha-staff/ https://sites.google.com/a/zidisha.org/zidisha-staff/) If anything, we are transparent to an extreme. I do agree that Zidisha loans are not viable as a purely financial investment. Financial investment is not the purpose of our platform. And that is exactly what we are communicating to prospective lenders. Best regards, Julia Kurnia Director, Zidisha
aurumpotest 13y ago
FYI jkurnia, when I load the site, it loads in French, as I'm currently in a French-speaking country. When I click to change to English in the footer, it reloads the page, still in French. Chrome 33.
- jkurnia 13y ago
  Thank you for letting me know. We'll aim to repair that as soon as possible.
sara125 13y ago
The thing that bothers me the most about all this deception is that at the end of the day, lenders will not only lose their money, but they won't be maximizing the the donation they will eventually be making (not of choice) via Zidisha. Kurnia wrote in Huffington Post that she doesn't believe in handouts. Yet, why should I as a donor give to Zidisha instead of an organization like GiveDirectly which has proven its impact in the most rigorous way possible? Zidisha will always come back to silly jargon like transparency or handouts instead of facing the real truth: admit your platform is not primarily a lending platform and then lets have a real comparison between donations made on Zidisha and cash transfers made through GiveDirectly. I believe Zidisha is a good experiment, but to succeed, it needs to start answering real questions.

17 points by modernmicro 13y ago

I notice the ongoing trend toward more transparency by Zidisha (for instance, the change the article describes in August of 2012 which started listing non-paying loans as a loss of principle). This is an excellent step. I want to see the whole story -- even if parts of it are ugly -- because that builds my trust that those running the system have taken the best possible options and are running things reliably. Apparently there is much more that could be achieved here -- better information about rescheduled loans, for instance. The trend is good; it should continue.

mcherm 13y ago
To clarify: I actually think that the article's main complaint (a large loan loss rate) may be ACCEPTABLE if it is made clear up-front. Zidisha is not a place for lenders to make huge profits. It is a place for lenders to support others making a difference for themselves. If the loan default rate can be lowered enough that it is covered by lending rates, then it could ALSO be a place where the lenders' money can support others over-and-over through repeated loans (and even be withdrawn by the lender at some point) -- and that would be GREAT. But it is not necessary: what is necessary is clear and honest communication.
- jkurnia 13y ago
  I would agree with these statements: Zidisha is a platform for philanthropy. We're optimized for giving disadvantaged entrepreneurs in the world's poorest places the chance to improve their lives, not for storing financial assets. I think we make that distinction abundantly clear to prospective lenders. See for example our first FAQ for lenders, "Is Zidisha a safe place to store my savings?" (https://www.zidisha.org/microfinance/faq.html https://www.zidisha.org/microfinance/faq.html), or the first paragraph of our Trust and Security page (https://www.zidisha.org/index.php?p=123 https://www.zidisha.org/index.php?p=123). That said, repayment rates at Zidisha are increasing steadily as we continuously improve our lending model in response to experience. The 18% writeoff rate includes mostly loans that were issued over a year ago (which have had time to mature). Our credit risk control mechanisms have improved dramatically since that time, such that I think it's reasonable to expect that the value of lending funds can be maintained over time without erosion for the loans that are being issued today. That said, Zidisha is still not a safe place to store funds one cannot afford to lose, and we do not market it as such.
  - modernmicro 13y ago
    "Our credit risk control mechanisms have improved dramatically since that time, such that I think it's reasonable to expect that the value of lending funds can be maintained over time without erosion for the loans that are being issued today." To achieve that at the max interest rate you allow (~10% APR), you would need a 2.4% loan loss rate. That's an order of magnitude below where Zidisha is now. That would be an incredible achievement and I would gladly cover it as a huge story! Is Zidisha on track to deliver a 2.4% loan loss rate?
jkurnia 13y ago
I agree that the way we present information about rescheduled loans can be improved. We do not consider them to be in arrears, because at Zidisha borrowers have the flexibility to reschedule loans to repay either later or earlier than planned, and rescheduling does not necessarily indicate greater likelihood of default. When web development resources allow, we aim to improve our Statistics page to use a single metric to encompass both ended and current loans, and allow users to filter the data by date disbursed.
- mcherm 13y ago
  > rescheduling does not necessarily indicate greater likelihood of default That is simply untrue. Look, I work for a credit card company, and we have a great deal of experience with evaluating customers and predicting risk of default. A customer choosing to reschedule a loan does not necessarily mean that they WILL go in default, but it is almost certainly an indicator that increases the probability that they will. I am not suggesting you should consider them in arrears (they aren't!) but that you should take payment rescheduling into account as a leading predictor of future default rates on cohorts of loans that have not yet reached default. > we aim to improve our Statistics page to use a single metric to encompass both ended and current loans... Depending on how well that metric is designed, that might actually LOSE information. > ...and allow users to filter the data by date disbursed. That will definitely be useful. In my experience, graphing key indicators (like default rate, repayment rate, loan profit, number of loans made, and leading indicators of default) by cohort (grouping by start date) is a really good way to view your data to determine whether changes in lending policy are having the intended effects. Since your policies have changed recently, this sort of view may prove very useful.

jkurnia 13y ago

Dear Modern Microcredit, I am surprised that you find Zidisha to be insufficiently transparent. Zidisha has room for improvement in many respects, but we've always considered transparency to be a strong point of our platform. We have more detailed statistics on repayment rates, trends in repayment performance over time, and risk levels in currently outstanding loans than any other microlending website I know. For example, Kiva, Kiva Zip, United Prosperity, and other well-known microlending websites do not even publish Portfolio At Risk statistics. Since Zidisha is a direct P2P model, our repayment rate is not inflated by "phantom payments" reported by local intermediary partners. (http://blog.givewell.org/2009/10/13/kiva-repayment-data/ http://blog.givewell.org/2009/10/13/kiva-repayment-data/) When we report a repayment as having been made, that means the borrower truly did make that payment. We make it very clear to prospective lenders that lending through Zidisha is risky. Here are some excerpts from our website: "Zidisha is a low-cost nonprofit community managed by volunteers. Our purpose is to connect individuals in marginalized countries with the chance to improve their lives through affordable loans. We are not a financial institution or an investment service, and Zidisha is not a safe place to store your savings or financial assets. We recommend you treat lending through Zidisha as a philanthropic activity, and that you not lend any funds that you cannot afford to lose." (first paragraph, Trust and Security, https://www.zidisha.org/index.php?p=123 https://www.zidisha.org/index.php?p=123) "Is Zidisha a safe place to store my savings? No. Zidisha is a platform for philanthropy, not a replacement for traditional savings accounts or financial investments. Zidisha loans are highly risky, and direct person-to-person lending across international borders is such a new endeavor that expected losses cannot be predicted with sufficient accuracy to make Zidisha loans a safe way to store funds you cannot afford to lose. We recommend that you treat Zidisha loans simply as a way to help others, and that you lend no more than you would normally be prepared to give away to charity." (Lender FAQ number one, https://www.zidisha.org/microfinance/faq.html https://www.zidisha.org/microfinance/faq.html) "The principal purpose of Zidisha's lenders in funding loans is to improve the lives of these entrepreneurs, and not to make a profitable financial investment. Lending to entrepreneurs through Zidisha involves a meaningful risk of loss of your principal lent. In addition, you are very likely to lose money in real terms on any loan you fund, even if it is repaid by the borrower, as a result of currency exchange rate changes, PayPal fees applied to uploading credit to your lender account, inflation and other factors affecting the value of principal and interest payments made by a borrower. Accordingly, we recommend that you consider lending through Zidisha to be a philanthropic activity, and you should not lend more money through Zidisha than you are prepared to lose." (Terms of Use, https://www.zidisha.org/index.php?p=5 https://www.zidisha.org/index.php?p=5) More generally, our website code is open source (https://github.com/Zidisha/zidisha https://github.com/Zidisha/zidisha), and conversations among our volunteer staff take place in public in Zidisha's forum. (https://www.zidisha.org/forum/categories/volunteer-conversat... https://www.zidisha.org/forum/categories/volunteer-conversat...). Our operational procedure manual is published on the internet for anyone to see. (https://sites.google.com/a/zidisha.org/zidisha-staff/ https://sites.google.com/a/zidisha.org/zidisha-staff/) If anything, we are transparent to an extreme. I do agree that Zidisha loans are not viable as a purely financial investment. Financial investment is not the purpose of our platform. And that is exactly what we are communicating to prospective lenders. Best regards, Julia Kurnia Director, Zidisha

aurumpotest 13y ago

FYI jkurnia, when I load the site, it loads in French, as I'm currently in a French-speaking country. When I click to change to English in the footer, it reloads the page, still in French. Chrome 33.

jkurnia 13y ago
Thank you for letting me know. We'll aim to repair that as soon as possible.

sara125 13y ago

The thing that bothers me the most about all this deception is that at the end of the day, lenders will not only lose their money, but they won't be maximizing the the donation they will eventually be making (not of choice) via Zidisha. Kurnia wrote in Huffington Post that she doesn't believe in handouts. Yet, why should I as a donor give to Zidisha instead of an organization like GiveDirectly which has proven its impact in the most rigorous way possible? Zidisha will always come back to silly jargon like transparency or handouts instead of facing the real truth: admit your platform is not primarily a lending platform and then lets have a real comparison between donations made on Zidisha and cash transfers made through GiveDirectly. I believe Zidisha is a good experiment, but to succeed, it needs to start answering real questions.