How Zidisha (YC W14) Is Misleading the Public About Its Interest Rates
Dear all,<p>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.<p>Dear Modern Microcredit,<p>I'm sorry that you found our website information misleading.  I'd like to address your points here:<p>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.<p>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.<p>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.<p>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).<p>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.<p>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.<p>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.<p>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.)<p>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 <a href="http://www.financialaccess.org/blog/2011/07/microfinance-without-mfi-zidisha-tests-boundaries-microlending-methodology" rel="nofollow">http://www.financialaccess.org/blog/2011/07/microfinance-wit...</a>)<p>I'd be happy to provide further information as desired.