Feb 7, 2019
In mid Dec 2018, Julia indicated that the Credit Risk (CR) fee would be made non-refundable. It was to be reduced as well. However, when I checked top 8 loans on Browse Projects page just now, sorted by Repayment Rate, I found that;
- average CR fee is 23%
- average loan term is 3.25 months
(See the table below for details)
So Zidisha does not charge interest but it is effectively charging high cost (very high cost if annualized) under a different name. I understand that this CR fee is used to repay defaulted loans to lenders. But that's done only if lenders request and there is a lifetime limit for that. So any good borrower is paying off defaulted loans!
If CR fee is going to stay this high, I think it should be made refundable again. If borrower defaults, there is some recovery. If borrower pays off loan fully, they get back the CR fee which is effectively their collateral.
Do I somehow have incorrect understanding of the fee structure? Would like to hear your (Julia as well as other lenders) thoughts about this. Thanks.
Num On Time Repayments Amount Requested Loan Term Credit Risk (CR) Payment CR percentage
1 169 / 98% $2,221.00 5 mo $666.47 30%
2 119 / 98% $2,763.00 5 mo $552.60 20%
3 74 / 95% $1,685.00 5 mo $505.72 30%
4 51 / 92% $372.00 1.5 mo $70.70 19%
5 4 / 100% $72.00 1 mo $21.68 30%
6 73 / 75% $732.00 4 mo $146.46 20%
7 19 / 89% $138.00 0.5 mo $20.70 15%
8 138 / 96% $834.00 4 mo $166.93 20%
Fitri Fauziyah, Christian Golo, Kusi Obodum, Joost, Mercy Cheptoo, Litstrea, Samuel Quainoo, Careen Lukalaba, Bonsu George and Idayat Lateef like this.
Feb 7, 2019
I agree that we want to keep costs to borrowers as low as possible and we are constantly striving to do so. The risk payments are not set arbitrarily, but instead are set to the minimum necessary to cover the expected defaults. If a given category of loan has an expected default rate of 30%, then we must set the risk payment rate at close to that level in order to remain financially sustainable over the long term.
Making the fees non refundable did allow us to reduce them, as if they were refundable, we would need to increase the fee rate in order to compensate for the portion that is expected to be refunded.
Unfortunately, a high on-time repayment track record is no guarantee that a loan will repay. Most loans that default previously had high on-time repayment rates. That is why even these loans must carry risk fees in order for the lending program to be financially sustainable.
Thanks for the quick response.
I understand that making the CR fee refundable will not build sufficient funds to take care of all defaults. But then is it possible to keep track of the CR fee that a borrower has paid in over time? The idea being the more the borrower has paid in, the lesser the CR will get for him/her. There will be a point when current loan is equal to, or even less than, the total CR fee that the borrower paid in previously. At that point the CR fee will still not go away altogether but will at least reduce to 5 or 10%.
Borrower will thus start with high CR fee that can be 30% or even higher, but then know that high OTP score WILL get this down. This will still help build up funds to handle defaults but will not result in a punishing load on all borrowers, all the time.
Daniel Malului, Fitri Fauziyah, Martin Gachie, Christian Golo, Dauda Moro, Kusi Obodum, Joost, Peggy Rose Appiah, Mercy Cheptoo, Beatrice Mirekua, Maggie and Morwenna, Sean Sullivan, Ahmednoor Ibrahim, Purity Gacheru, Samuel Quainoo, Chinonso Ugwuegbu, Wesley Yegon and Bonsu George like this.
Maggie and Morwenna
Feb 16, 2019
Has there been a reply this this question anywhere?
Mar 2, 2019
The risk payment percentage generally does decrease with a longer track record of on-time repayments. However, we can't use payments from past loans to offset the credit risk of new loans, because risk payments are not siloed for each borrower, but rather pooled across the whole loan portfolio. (If we didn't pool risk payments, then the risk payment rate would have to be 100% to offset the 100% loss to each individual loan default.)
If for example we make ten loans, each with a 20% likelihood of defaulting, and each of them has a 20% risk payment, then what likely happens is that eight of the loans will repay in full and two will default in full. The risk payments of the eight that repaid in full, in addition to those of the loans that defaulted, would be needed in order to offset the default losses. This is why, at each loan cycle, the full intake of risk payments are used to offset defaults and cannot be saved to offset losses at later loan cycles.
I can reiterate that risk payment levels are set at the level that we expect, given past trends, will be just sufficient to offset losses to defaults. We are working to reduce fee rates by 1) reducing default rates for all risk categories and 2) measuring risk more accurately for each loan application. This is something that takes time and multiple iterations to get right, and we are doing our best to improve at each loan cycle.
BSM likes this.
Mar 6, 2019
I didnt realize that the loans are handled as pools and are not held in individual accounts. And yes, I have seen enough examples of borrowers with excellent track record having suddenly stumbled. More often than not, they provide updates and make the lenders aware of their difficulties. But there are enough cases where you just don't hear anything and wonder if the whole idea was to take out a large loan and just get off Zidisha platform for good :-(
Will it be possible to offer "individualized loan account" as an option to borrowers? You have mentioned above that for such siloed accounts, risk payment rate will have to be 100%. That seems daunting at first look but I ran models around that idea and it seems to be a practical idea. Its not something that I can easily explain here but if I can walk you over the Excel spreadsheet, I can explain better and also go through multiple scenarios quickly.
It sure is a tough nut to crack! I know I tend to put on a "borrower's hat" more often and raise questions about fees/expenses etc all the time. The details you provide help me understand overall picture. Thank you for that.
Fitri Fauziyah, Dauda Moro, Arnold Adero, Gideon Kiprotich, Joost and Maggie and Morwenna like this.
Maggie and Morwenna
Mar 11, 2019
I appreciate the greater transparency. Can anyone explain how the Zidisha model differs from, for example, Kiva's model where you loan to a microfinance organisation who pool the loan money and repayments such that you're effectively lending to the organisation not the individual (which I'm fine with, not criticising the model). It seems Zidisha is kind of doing the same thing, which is packaging risk across the whole pool and using that to determine fees/costs. I would love to be educated on this matter as it's not something I easily understand. Many thanks.
Christian Golo, Dauda Moro and Joost like this.
Mar 11, 2019
The thing that stood out to me with Zidisha is you only have to trust Zidisha (and whoever they're using for payment processing). Where with Kiva you have to trust them and all the organizations closer to the borrowers (I think called field partners) to get the money to the borrowers, not charge too high interest, or skim money etc.
With Kiva the loan has already been issued prior to posting the borrower's story. They're asking for donations weeks after the borrower has already received funds. This is substantially different from Zidisha, where the borrower posts the request and if funded to their satisfaction, can accept or not accept the loan. I may be missing important details but this is how I understood it from researching and reading blogs.
Fitri Fauziyah and Joost like this.
Mar 11, 2019
Maggie and Morwenna,
I don't think that by pooling risks across borrowers, Zidisha becomes like Kiva. Here is my understanding - I am sure Julia will correct as needed.
Kiva partners with a field organization which secures a collateral before providing loan to borrower, at quite high interest rate.
- Collateral covers defaults. If loan is paid off fully, collateral is released to borrower. So collateral is handled per individual borrower.
- Interest covers administrative costs of field organization
Zidisha does have country liaisons and volunteer mentors but there is no collateral or interest rate. There is flat 5% fee for everyone and a variable credit risk payment fee.
- Credit risk payment fee covers defaults. If loan is repaid fully, credit risk payment is added to a general fund which is used to cover other/future defaults. This is needed since credit risk payment is upto 35% of loan amount. So credit risk payment is not handled per individual borrower.
- Country liaisons and volunteer mentors are not paid
So pooling across borrowers is being used only to ensure that credit risk payment need not be 100%.
With all its warts, I still continue to rate Zidisha over Kiva. Main reason being as SeanS points below, when you contribute to Kiva loan requests, its post fact. Not here. So loan made through Kiva probably is more secure than Zidisha. I dont know - I would love to hear from someone who has been / is on Kiva as well. But as much as I get disappointed when loan is defaulted and you hear absolutely nothing from the borrower, I get amply offset by people like Endang, Hagan Golo, Mimin, Purity, Ann Gichuki, MercyC, JoscahN, DorothyY, MiriamB - just to name a few - who are a pleasure to work with and most importantly, are real live friends at the other ends and not just some loan number.
I hope the borrowers are reading this thread as well. And a hearty shout out to all the borrowers who use the platform responsibly and give a reason for lenders like me to stick around - THANKS!
Laurie, Daniel Malului, Endang Rusmiati, Fitri Fauziyah, Christian Golo and Joost like this.
Mar 13, 2019
Just a quick update:
Please view the Team page: www.zidisha.org/team
The Zidisha Team Staff currently is only two people:
the Director (Julia) and the CTO (Rodrigo).
Zidisha hasn't had any "Country Liaisons" in a while (since earlier this year).
It's my understanding that there's more automation now, so there currently are only "Volunteer Mentors" (who, of course, are experienced borrowers) and online "Community Moderators" (some are borrowers, some are lenders) who all familiarize themselves with how Zidisha currently work (by reading the FAQs and the Announcements & other sections of the Forum) and who then respond accordingly to inquiries in the Forum (whenever they want to, as there isn't any time requirement at all).
The long list of duties which "Country Liaisons" used to do now mostly are automated tasks, and the remainder currently only Julia and/or Rodrigo handle (in addition to the programming and bug fixes which, of course, they also do for the platform).
Fitri Fauziyah, Christian Golo and Joost like this.
Maggie and Morwenna
Feb 24, 2019
Hi Zidisha, please can there be a response to Joshi's post above of 7 Feb, or direct me to where it has been answered elsewhere please.
Endang Rusmiati, Fitri Fauziyah, Christian Golo, Joost and Bonsu George like this.
Mar 2, 2019
Same questions and suggestions as Joshi here. It would be great to get answers from Zidisha on this. Everyone understands it's a work in progress, but the costs highlighted by Joshi are really high and a bit worrying (for people who see Zidisha as a very interesting experiment in order to find alternatives to traditional microfinance).
Thanks a lot!
Christian Golo, Dauda Moro, Kusi Obodum, Joost, Peggy Rose Appiah and Purity Gacheru like this.
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