According to the World Vision, one of the best ways to help people in developing countries is to facilitate access to self-employment and in turn, a secure future. However, for those who have not been lucky enough to get assistance from such charities, gaining access to a small loan to start a business is difficult. Microfinance was established to fill the gap left by traditional banks, for whom it wasn’t profitable to serve such a market.
However, microfinance lenders work through intermediary parties to communicate with lenders, create loan applications, and collect repayments, leading to high operating costs that in turn, lead to interest rates of between 30 to 40 percent, enough to virtually eliminate a borrower’s profits. This is where US startup Zidisha comes in, a non-profit microfinance lending platform founded in 2009 that bypasses intermediaries in order to help borrowers keep as much of their profits as they can.
Founder Julia Kurnia came up with the idea through her experience working with one of Kiva’s field partners for two years in the mid 2000s. She worked raising money through Kiva to fund loans in rural Senegal. Though the organisation worked hard to keep costs down, it couldn’t get its overheads below 30 percent of the value of the loans.
“We would have had to charge over 30 percent interest just to cover our operating costs, self-defeating because this can be enough to wipe out a borrower’s profit margins,” Kurnia said.
“Today’s young adults in the urban slums of Africa, Asia, and Latin America are nearly as impoverished as previous generations, but unlike their parents, they’re on Facebook and use the internet comfortably. They don’t need to pay an intermediary 35 percent interest to transact with online lenders on their behalf.”
Borrowers pay a one-time fee when joining the platform, and a service fee of five percent for each loan they take out. Kurnia said that because Zidisha is essentially software, these fees easily cover the “marginal” cost of making a loan: mostly money transfer fees and automated SMS charges.
Lenders on the platform make payments into Zidisha’s bank account through a credit card or PayPal. From there, Zidisha transfers the funds to each borrower country, where it then users mobile phone payment services such as M-PESA to transfer the payment to a borrower’s mobile phone.
The mobile payment services have online interfaces, allowing Zidisha to manage transactions from the US without any local intermediaries. Through this method, borrowers don’t need to have a bank account. They can just withdraw funds from a mobile payment service centre, and use the same service to send repayments back to Zidisha.
Borrowers and lenders can also communicate directly through the platform, helping lenders see how their money is being used and how it’s helping, which can encourage them to lend again. Borrowers’ identities are verified through methods including the checking of national identity numbers, asking for the telephone numbers of referees, and the linking of active social media accounts to profiles. Lenders can also check a borrower’s repayment history to see whether they have been on time with repayments. Zidisha also offers flexible repayment options in order to account for a week or month when a borrower may have another big bill to pay.
Kurnia self-funded the development of the startup from 2009 to 2012. With the small cost of making loans covered by the five percent service fee, major costs such as website development and maintenance are funded by optional tips donated by lenders. Volunteers from around the world collaborate to conduct operations, from registering loan repayments to answering emails and checking new borrower applications.
Zidisha took part in Y Combinator last year, one of a handful non-profits to be accepted into the program. Kurnia said the program was “transformative” for the platform.
“Most of my background is in managing international aid and microfinance programs, and I wasn’t a technical founder. After YC, we became much more like a tech startup: I learned to program, and we rewrote our codebase from scratch to handle high volumes and provide a modern interface for our users,” she said.
Most importantly, she said, YC helped Zidisha transition from an intensive manual vetting and repayment follow up system, which couldn’t scale easily, to an automated fraud detection and credit risk control system.
Since graduating from YC, the platform has tripled its monthly loan funding and improved its repayment performance. There are almost 25,000 total members on the platform, with 618 projects currently live. Over 18,000 projects have been funded, with more than $4 million raised.
Kurnia’s goals are to expand Zidisha into more countries, and reach the point where it’s funding $1 million per month. She also hopes to make the platform a better-known alternative to traditional charities.
She said, “Our ultimate goal is to make access to crowdfunding at Zidisha almost universal in developing countries, so that responsible, motivated people are no longer blocked by geographic location from accessing the resources they need to build better lives.”
Image: Ndeye Bineta Sarr of Senegal, who used a loan from Zidisha to buy an electric sewing machine, rent a boutique workshop, hire an employee, and establish a working capital fund. Source: Provided.