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

http://modernmicrocredit.blogspot.com/2014/04/can-zidisha-yc-w14-disrupt-billion.html

by modernmicro • 12 years ago

17 22 12 years ago

modernmicrocredit.blogspot.com

mcherm3• 12 years 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.

mcherm3• 12 years 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it could ALSO be a place where the lenders' money can support others over-and-over through repeated loans (and even be withdrawn by the lender at some point) -- and that would be GREAT.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.

jkurnia7• 12 years 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), or the first paragraph of our Trust and Security page (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.

jkurnia7• 12 years 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.

mcherm3• 12 years 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.

jkurnia7• 12 years 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/) 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)

"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)

"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)

More generally, our website code is open source (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...). Our operational procedure manual is published on the internet for anyone to see. (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

lutusp• 12 years ago

Who are you?

Wrong tack. I offer this advice -- post a list of the inaccurate, misleading, or otherwise non-objective claims made in the original article, point by point, in a dry editorial fashion, without anything resembling a personal attack. In other words, take the high road, ignore the source, focus on the facts.

Remember that anonymous comment is almost a religious principle, a civil right, among Internet bloggers. To question the right of anonymous comment is a non-starter as a debate tactic.

aurumpotest2• 12 years ago

lutusp is right - your comment comes across as aggressive and personally attacking, as if you did have something to hide. If you 'could write a long post explaining the many inaccuracies in this article', please do so! That way Modern Microcredit can edit their article if necessary to take it into account, and also, your lenders, who will undoubtably be reading the article, will see a polite and informative founder intent on setting the record straight rather than a quick-to-anger, quick-to-attack founder who doesn't bother to defend the company.

modernmicro5• 12 years ago

I'm a long-time observer of microfinance who is an active participant in most of the lending/crowdfunding platforms out there, including yours. I'm also a hacker, and am excited about the way that tech is being used in microfinance and crowdfunding. I think this stuff could have a big impact on the developing world, which is why I started this blog last month. I'm slowly working my way through the topics listed here, some of which I hope will be of interest to HN readers:

http://modernmicrocredit.blogspot.com/2014/03/modern-microcr...

Zidisha just happened to be the first topic I started with. My next article is going to be about revenue models in crowdfunding. Some companies are using some dark design patterns in their revenue models, and I plan to cover that as well:

http://modernmicrocredit.blogspot.com/2014/04/revenue-models...

As I mention in the introduction to my article, I wasn't planning on writing a followup on Zidisha. But then you responded to my last article by dramatically lowering your interest rates. So I wrote a followup covering what that meant for lenders.

Like I said in the article, Zidisha shows a lot of promise, and I very much want the concept to succeed. But to do that, I think you need to start being more transparent about the problem you have with high loan loss rates. I would love to see a long response from you regarding the article. I'd be happy to publish your response in the comments of my article, or even in the article itself. If you have any corrections, I'd be glad to publish those as well.

cjbprime• 12 years ago

Could you explain why you feel a need to post anonymously?

Thank you for writing the posts, I've enjoyed reading them. (And for what it's worth, I still feel positive about Zidisha's future after doing so.)

jkurnia7• 12 years ago

Thank you for responding here. I tried to post a response in your blog, but my comment was removed or not yet published.

jfarmer• 12 years ago

This is a bad response — tactically, not morally. It's incongruent with the tone if the original post, which feels objective and even-keeled. It may be inaccurate or even dishonest (I don't know), but replying like this can only help the person writing these articles.

Watch, "Founder of Zidisha refuses to answer basic factual questions about their business and instead is trying to redirect attention to me. This is what I'd expect from a predatory lender put on the defense. They still have time to be honest with their customers before it seems too suspicious, though."

What if they're actually squeaky clean and then do post all their own personal info on top of saying something like the above? What if they have a stellar reputation in this space? Now you're in a real pickle.

My advice: don't pick fights your opponents benefit more from having. :)

jkurnia7• 12 years ago

Thanks for this advice. I've edited my original comment to focus on the content of the article.

modernmicro5• 12 years ago

The microlending websites you mentioned have much higher repayment rates, so that there's a much smaller amount of portfolio actually at risk:

* Kiva: 98.95% repayment [1]

* United Prosperity: 97.8% repayment [2]

* Vittana: 95%+ [3]

* Kiva Zip: 88.8% [4]

* Zidisha: 74.19% [5]

I noticed that Zidisha doesn't publicize its low repayment rate (and the correspondingly high loss rate) very broadly - for example, on your frontpage. If you did, your forums probably wouldn't be filled with comments like these:

"The long-posted 98% repayment rate left me with a bitter taste. I feel both deceived and stupid." - mewesten

"I think you will not care at all when zidisha folds and you will not care at all at all the lenders loosing all their money. You will pat yourself on the back at all the money given to borrowers and what good work you did giving away other peoples money. Is it legal what you are doing? These are funds provided by members of the public it is not your money." - Russell

"If the model is to be sustainable, lenders must surely be made to feel that their interests are taken into account. They may choose to act as if they are in fact not lenders at all but givers - but that is not your advertised model, and would soon run into the sand in any case." - Wiredfox

"Your vision for Zidisha as a marketplace like ebay was a surprise for me to read in the forum. There is no clear explanation of this on Zidisha’s website. The impression I have had from the website is that Zidisha is just like Kiva and the others, except for the comments and low interest. It never occurred to me that no one was reviewing the business loan applications. I assumed Zidisha was somehow doing this." - Evelyn

These are your own lenders talking.

I think that if you explored some of the ideas I mentioned (e.g. featuring the repayment rate and loan loss rate on the frontpage, and adding a mission statement to the frontpage as well), you would see less angry lenders like the above.

[1] http://www.kiva.org/about/stats

[2] http://www.unitedprosperity.org/us/risk_factors

[3] http://blog.vittana.org/scale-plan

[4] https://zip.kiva.org/

[5] https://www.zidisha.org/index.php?p=43

jkurnia7• 12 years ago

"The microlending websites you mentioned have much higher repayment rates, so that there's a much smaller amount of portfolio actually at risk."

There is a big difference between the repayment rates for ended, and portfolio at risk for currently outstanding loans. In order to have a complete picture, lenders should know the performance of currently outstanding loans as well as ended ones. Zidisha is the only microlending website I know of that provides statistics on the performance of the currently outstanding loan portfolio.

Even our statistics for ended loans are not defined in the same way as other websites. For example, I understand that Kiva expresses its repayment rate as 100% minus the writeoff rate, including as repaid loans amounts not yet repaid, but not yet written off. (http://www.kivafriends.org/index.php?topic=5791.0)

More importantly, I understand that Kiva allows field partners to cover repayments not actually made by the borrowers and report these amounts as paid on the Kiva website. (http://blog.givewell.org/2009/10/13/kiva-repayment-data/) These amounts are repaid in that lenders do receive the funds back, and I am not accusing Kiva of dishonesty. But the fact remains that substantially less than 98.95% of Kiva loans are repaid by the borrowers themselves.

I have lived with many low-income households in developing countries, and in my experience, cash availability of households without formal jobs, insurance, savings or social safety nets is not only limited, but highly irregular. It is simply not realistic to provide people under these circumstances enough capital to change their lives, and expect its repayment to obey a predetermined schedule with 98.9 percent accuracy. That is why I am skeptical of such high published repayment rates.

Zidisha's published rates are lower, but they do accurately reflect the repayment performance of the borrowers themselves. Comparing them with the statistics of intermediated microlending websites is misleading, because they are not measuring the same thing.

I have not managed to find information on how Kiva Zip's repayment rate is defined, so cannot comment on it.

jsun• 12 years ago

Seems like you guys kinda just threw in the towel and said "fuck it, its for philanthropy"

Here's a better answer - Lending Club and Prosper both lost their shirts when they first entered the market, and now they are both making their investors money. It just takes time and, more importantly, data.

modernmicro5• 12 years ago

I noticed you just removed your Portfolio At Risk statistics completely (unless it was moved elsewhere)?

https://www.zidisha.org/index.php?p=43

The statistics page was also changed to only show lending statistics for loans disbursed in the last three months. As a result, new visitors will see the write off rate stated as 0%. These loans haven't had time to be written off, so that write off rate is always going to be 0%.

Meanwhile your all time write off rate is still 18.66%. That should be the statistic displayed to new visitors, not 0%.

aurumpotest2• 12 years 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.

jkurnia7• 12 years ago

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

sara125• 12 years 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.

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

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