Microlending, baby.

Tomorrow is my first day of work. I’ll be meeting with Zidisha’s borrowers who, I think, live mostly in Dakar. This includes introducing myself, making some sort of write-up/film about their lives for the Zidisha site and making sure they know how to communicate with the lenders. Maybe this is a good to explain how Zidisha fits into microlending. To be honest, this is probably more than anyone who is reading this (probably just you, mom) cares to know, but it’s the real reason I’m here - so be a pal and read on.

Microlending is loosely defined as small business loans to entrepreneurs in developing countries. Traditionally, someone in the US or Europe will go on Kiva.org (I choose this as an example because it’s the most popular portal for microlending) and find a small-business owner who needs to scale up their operations. Typically these are people that own the factors of production of their own business but aren’t making much (a small thread store, selling fish, etc…). Each loan will have a goal amount, a proposed payback date, personal information, etc… Importantly, they’ll write how this loan will help get them from point A to point B. For example, here is a copy-paste of one I found on the Kiva site - The loan will allow Mathew’s business to be more productive, create more revenue, create local jobs, etc…:

“Mathew is a 30-year-old married man who is blessed with a two-year-old child. He has been running a cafeteria for five years and employs three people. His business is located near an open-air market and therefore he has many customers. He mainly prepares beef stew in his cafeteria but also makes other types of food.

Mathew has requested a loan of Kes 80,000 to buy timber and nails for renovating his business premise, chairs for his cafeteria, and three bulls to slaughter. He dreams of having a butcher shop and a restaurant in the future.”

Often, a loan will be composed of the money from several lenders. When the loan is repaid in full (and it almost always is – this is what allowed Muhammed Yunus and the Grameen bank win the Nobel Peace Prize in ’06 for developing the system) the lender will have the option to recollect the borrower’s payment or continually reinvest their funds to be recycled among other entrepreneurs with similar stories. The more successful a microlending institution is, the larger their pool of loan-able money is to be passed around among qualifying entrepreneurs.

When someone loans to Mathew (who’s in Kenya), they are loaning to the institution which later loans to Mathew. In cases where people are found through Kiva, another link in the supply chain is added – You > Kiva > Institution > Matthew. The more times the money changes hands, the larger the interest rate will probably be for Mathew. After all, the institution has to stay afloat somehow; Kiva has to stay afloat somehow. Because of this, a big criticism of microlending is that the interest rates on loans can be pretty exploitive – sometimes 30-40%. Even though the success rates on these loans are extraordinary, that’s expensive money. Especially when the goal is to make money accessible to some of the world’s most marginalized people.

Enter Zidisha. Zidisha is able to decrease the interest rates borrowers must pay to the low teen%’s and even as low as 8%. They use the P2P (peer-to-peer) model to connect borrower and lender directly rather than using a longer chain of people to facilitate the transaction. Because Zidisha uses this approach, they sacrifice certain roles that were traditionally played by the middle institution. For example, under the traditional model, the institution would facilitate communication between lender/borrower and they would do some sort of credit-assessment to make sure the individual can pay back on time. Zidisha loans to people who have already completed microfinance loans and understand the system and have access to technology (even at a very basic level, like text-messaging capability) to be responsible for their own communication with their lender. It rewards entrepreneurs who satisfy these conditions with the option to borrow money at low rates.

Also, as Zidisha lenders realize that repeat borrowers are less of a risk (because they’ve been around the block), borrowers are able to get future loans through Zidisha at lower and lower rates as Zidisha can provide proof that they are less and less of a risk to lenders.

In effect, this P2P model has never really been executed like this. Prosper.com offers a similar service but differs on a couple key points. This is a huge reason why I was so excited to work with Zidisha; they are really plowing new ground in microlending. My job out here is to allow the borrowers (there’s only three or four of them right now) to understand the P2P model and encourage them to keep the communication lines open with the lenders and to share information relevant to the lending process. Remember, under the traditional model, a lot of this was being done for them. After I’ve met with each borrower, I’ll be looking to put new ones on the site and refine the Zidisha approach in general, but we’ll worry about that when it comes.

Meeting with these borrowers, and creating new ones, is going to mean trekking all over urban and rural Senegal to help and find them, tripping over goats in the street, wondering what the hell I just ate, wondering if it’s going to give me any of the diseases the doctors in Illinois warned me of, and getting a hell of a tan. I’ll be doing it all in French, too which is a little intimidating but I’ve been doing just fine.

I hope to get a lot accomplished, but I almost expect to be disappointed with my progress. Like I said it the last post, this place moves slowly. It’s totally charming and I wouldn’t want it to be any other way. No one ever has to be anywhere else, so what does it matter?