Zidisha - A new way to give to charity AND make money

[slothpomba]

I came across this website called Zidisha.

Many of you may be familiar with the microfinance site called Kiva, it is pretty much like that with a (good) twist.

Microfinance is giving small loans to people in developing countries. It does not go to the poorest of the poor because they cannot afford to pay back the loans. Whilst this seems bad or uncharitable, by loaning to the middle class to start and run businesses, you are injecting money into the economy. These businesses provide people with meaningful jobs and in time lessen the need for the existence of aid. Teach a man to fish.

With Kiva, you loan the money to Kiva. They send the money to a local finance company, who then lends your money onto the borrower. The local finance companies often add huge interest rates, sometimes bordering on the insane like 30 or 40%.

Kiva Operates like this: You -> Kiva -> Local intermediary -> Borrower

With Zidisha, you are loaning your money direct to the borrower. Instead of a local intermediary collecting (often huge) interest, you receive the interest instead. The maximum interest rate on Zidisha is around 12%, with a borrowing fee (to pay for credit checks, converting currencies, etc) of 5%. That comes to a maximum of 17%. Compared to the high interest rate of Kiva, it is nothing. You can also choose what interest you would like (to the maximum the borrower set), it could even be 0%!.

You may feel bad for gaining interest. That is your choice. The best savings account offer 4-5%. However, for those of us not in USA, you have to convert your money to US dollars, pay paypal fees and then they lend the money to the borrower in their currency (say 200 Kenyan shillings, NOT in US dollars). Therefore, if the Kenyan shilling suddenly becomes worth more or less US dollars in exchange rates, you get more or less back. The interest rates help buffer this and help ensure you get your full loan back; you may even make a little. Of course, you can choose to keep this or you can keep re-loaning your repayments and the extra interest you make as well to help as many people as possible. Even if you are profiting, most of us aren't millionaires, most of us don't have very much money at all, especially compared to the local finance companies who would normally profit off this under Kiva (not that profit is all bad).

Kiva has recently started up a direct lending service like Zidisha (guess who was first) but it seems to lend only to people in the USA right now. There are certainly other countries more deserving of our help.

I think it's a really great idea and worth checking out, you might even make a few bucks on the side too.

Thoughts?

[nacho]

It seems though, like any other investment there is no guarantee that you will get your money back at all.

Say the borrower flat out refuses to pay you back, what options do you have?
It seems like a good initiative, but is there more on the risks involved?

[slothpomba]

It seems though, like any other investment there is no guarantee that you will get your money back at all.

Say the borrower flat out refuses to pay you back, what options do you have?
It seems like a good initiative, but is there more on the risks involved?

Well most investments (excluding the strongest ones like bonds and insured bank accounts) are risky to a degree, pretty much like gambling (bit smarter though). On their website they make the point you shouldn't give more than you can afford and whilst there is a decent potential to make money, it still is an act of charity too.

According to their stats page, only 2% of loans are totally written off.

75% of loans are paid back exactly on time. I've seen a fair few actually paid back early as well. About 15% of loans are rescheduled to a different time period (if they cannot pay back immediately) but they still are paid back in full. Where they are simply very late [90+ days] and don't reschedule or anything, thats only ~2% of the time.

So, there is only about a 2% chance (distinct from the 2% mentioned above, the numbers are coincidental) of actually losing your money. Many of the written off loans i have seen as well, the borrower has paid a significant portion back (say 50%) and bounced on the rest. Again though, this seems relatively rare.

There is also a currency risk as well. The loans are denominated in their local currency. So, they're not being loaned 500 USD, they're being loaned 20 000 Kenyan Shillings. Zidisha takes money from lenders in USD though ( a lot of the lenders/donators are from USA). So, say they put up a loan for 500 USD and you put in 50 USD or 10% of the total debt. At the time, that might be 22 000 Shillings, so, you are entilted to 10% of their payment in shillings which is then converted into USD. So, in theory, the value of their local currency could fall or rise compared to when you lent them the money, you still get 10% of the loan back but when converted back into USD, it might be higher or lower than the 50 USD you originally put in.

Of course, while a currency can fall in value, so can it rise. I assume unless there are huge fluctuations, it'll mostly smooth out from month to month. They recommend you loan in multiple countries with different currencies (Kenya has Kenyan Shillings and Senegal has Francs), so, you hedge your currencies in the hope it averages out the fluctuations.

Including paypal fees and factoring in paypals currency conversion (according to them 1 Aussie dollar is worth less than 1 usd, so, we get something like 99.4 cents), there is about 4% taken up there. So, to donate 10 on the website,  i would need to pay 10.4 (the .40 being eaten up in conversions and paypal fees). This is just all a very rough calculation though. The highest loans i've seen are ~12-13%. So, even if we take away the 4% from paypal, we still have about 8% left, leaving out considerations about currency fluctuations. I get about ~4.5% for my savings account so its double that and you're helping people too.

This is all the very businessy side of it though. Of course, its still somewhat charity (even though both of you conceivably profit), some people would give just for the sake of it but it is nice to know you can get your money back as well.

[spectroscopy]

have you done this yourself for long?

[slothpomba]

have you done this yourself for long?

Not very long. Maybe a month or two and i only have like ~50-60 bucks on there. Might see just how it pans out first.

[enwiabe]

This sounds like an amazing idea. I sometimes wonder how on earth I would have managed to secure the capital required to make ATAR Notes what it is today if I'd been born in a developing country and tried to do this for that schooling system. I've led a truly privileged life to be able to do what I'm doing now, and this sort of angel investing is exactly how I'd like to give back. Investing in the developing world's businesses is possibly the best way to let them grow.

To me, a lost loan wouldn't be great, but certainly a risk I'd be willing to take. If it doesn't get paid back it's a donation, but the 98% of the time it does come back, I'll have helped start a successful business and will make me want to loan to more people. This would be a great way to earn your interest rather than just hoard all of your money away in a bank account.

[Fyrefly]

I think it's important to think of these as "donations" not "investments".

I donated $20 to a guy in Kenya and $20 to a woman in Senegal. If these loans are repaid, then I plan to feed these funds back into new loans in the future. In this sense, this money has the potential to be a donation that keeps on giving. If not then I guess I'll just leave it at that and consider it a normal, once-off donation.

[slothpomba]

This sounds like an amazing idea. I sometimes wonder how on earth I would have managed to secure the capital required to make ATAR Notes what it is today if I'd been born in a developing country and tried to do this for that schooling system. I've led a truly privileged life to be able to do what I'm doing now, and this sort of angel investing is exactly how I'd like to give back. Investing in the developing world's businesses is possibly the best way to let them grow.

To me, a lost loan wouldn't be great, but certainly a risk I'd be willing to take. If it doesn't get paid back it's a donation, but the 98% of the time it does come back, I'll have helped start a successful business and will make me want to loan to more people. This would be a great way to earn your interest rather than just hoard all of your money away in a bank account.

Yeah, definitely. Not just to start up a business as well but also to expand them. It seems to be the utmost of frustration to have a decent businesses going but not enough capital to make it even greater (after-all, you need to live off your profits). So, you have guys who have a cybercafe with one or two computers but can't really get another few in easily enough, the fact they can't is turning away customers as well. Plenty of other examples of that as well, fabric shops that can't get enough capital in to buy even better fabric that'll sell way better as well.

I'm actually surprised it is only around 2%. They are very cautious though. They do credit checks and things like that. You can only loan half as much as the biggest loan you can prove you have taken out in the past. So, the applicants still need some kind of credit history and someone to vouch for them. I guess it's good in two ways, it also proves the loan won't be crippling for them or anything.  As far as im aware, there is actually a significant backlog of applicants. As they've grown, they've found the demand from applicants is increasingly exceeding the supply of members with money willing to loan. The average member might loan maybe..40-200 bucks over their entire time on the website. The average loan is around 500. These keep popping up all the time too. So, they can afford to be choosy.

I think it's important to think of these as "donations" not "investments".

I donated $20 to a guy in Kenya and $20 to a woman in Senegal. If these loans are repaid, then I plan to feed these funds back into new loans in the future. In this sense, this money has the potential to be a donation that keeps on giving. If not then I guess I'll just leave it at that and consider it a normal, once-off donation.

Unleashing the accountant within hey?

Of course, it's worth reading their business statement and things like that too (which im sure you did anyway). A fair few of them talk about their incomes and expenses.

I prefer to spread my cash out a bit more, i have maybe 50-60 bucks on there spread around 10 people. That way, if for some reason someone is late or defaults, it only impacts ~1/10th of the cash i have one there. Helps manage the currency spread as well.

It really does have a great potential to be a gift that keeps giving though, especially since the repayments are monthly and every month some money is freed up again to pass on to yet another person.

[Fyrefly]

Unleashing the accountant within hey?

Of course, it's worth reading their business statement and things like that too (which im sure you did anyway). A fair few of them talk about their incomes and expenses.

I prefer to spread my cash out a bit more, i have maybe 50-60 bucks on there spread around 10 people. That way, if for some reason someone is late or defaults, it only impacts ~1/10th of the cash i have one there. Helps manage the currency spread as well.

It really does have a great potential to be a gift that keeps giving though, especially since the repayments are monthly and every month some money is freed up again to pass on to yet another person.

Yeah,  but the transaction cost kind of outweighs the benefit of hedging the risk. Transaction cost of 70 cents --> $20 = 3.5% transaction cost; $10 = 7% transaction cost. When you're only getting an average of about 7% return on the loans, completely excluding currency risk, it's really not economically viable to do such small transactions.

[slothpomba]

Yeah,  but the transaction cost kind of outweighs the benefit of hedging the risk. Transaction cost of 70 cents --> $20 = 3.5% transaction cost; $10 = 7% transaction cost. When you're only getting an average of about 7% return on the loans, completely excluding currency risk, it's really not economically viable to do such small transactions.

Not sure what you mean here? You can put like 50 bucks into your Zidisha account in one hit and distribute it however you like.  You can split it 2 ways or 10.

As far as i know, the transaction cost is 3.5% no matter how much you put in either.

[Fyrefly]

Not sure what you mean here? You can put like 50 bucks into your Zidisha account in one hit and distribute it however you like.  You can split it 2 ways or 10.

As far as i know, the transaction cost is 3.5% no matter how much you put in either.

Ah okay... I didn't put it into an account first; I paid directly via PayPal.