How Zidisha sidestepped banks and took microfinancing peer-to-peer

Microfinancing platform Zidisha is changing the way microlending works. By cutting out the middle man, they have drastically reduced interest rates for borrowers in the developing world.

This man started a computer training school in a Nairobi slum with a loan through Zidisha.
Image: Zidisha

Mien De Graeve calls from her busy restaurant in Burkina Faso. It's lunch hour, and the chatter behind her grows louder every minute. De Graeve had a dream of starting a small business and opened this restaurant several months ago after being inspired by the power of Zidisha, an organization she volunteers for.

Zidisha is a peer-to-peer microfinancing platform that directly connects lenders and borrowers and cuts out the middle man, which is the microfinance institutions (MFIs) that charge exorbitant interest rates to low-income entrepreneurs.

Zidisha wanted to expand to Burkina Faso, so she applied and moved there from Belgium. She knew she wouldn't earn a salary, but she wanted to commit fully to the idea of this new lending model that empowers local businesses in developing countries.

"Sometimes I think I have learned more from the Zidisha members," she said. "Of course I have ideas, but I am still a European in Africa. Through my work with Zidisha, I have learned the constraints and difficulties of entrepreneurs in Burkina Faso and learned a lot for my own business as well."

She had always dreamed of starting her own business in an African country, and fell in love with Burkina Faso during a trip in 2009. When she started with the organization, there were four Zidisha users in the country, and now there are more than 400. De Graeve knows many of them personally -- they are her customers, her friends, and her business contacts.

Purely as a volunteer, De Graeve has also helped launch Zidisha in Niger, which has been difficult because there is no one on the ground to help her. Only 25% of the population in Burkino Faso and Niger are literate, so they rely on volunteers like De Graeve to show them.

Most people were suspicious at first, as they were unsure about a system that brings them money through the internet. But De Graeve's presence helped show them how this platform could help legitimize their businesses.

"There's not many who decide to stay in a country and volunteer like me, but I guess for me it was an investment in my future. I know I wouldn't have had my restaurant right now if I wouldn't have been so committed to Zidisha."

Creating a new lending model

Julia Kurnia, the founder of Zidisha, got her start with one of Kiva's first field partners in Senegal, theSEM Fund. She spent the summer sleeping on the roof of a fisherman's hut. The partner was a local NGO with little money to spare, and Kurnia's job was to post loan applications on the Kiva site.

She took the handwritten applications, translated them, and uploaded them to the site. Most of the borrowers -- many of them women -- were illiterate and had no access to personal computing, so the roles of these volunteers were much needed. But because of the small size of the loans and the expense of the work they were doing with the microfinance institutions, the model was not sustainable.

"That's pretty much the story of microfinance worldwide," Kurnia said. "The average interest rate paid by microfinance borrowers is 40%, including Kiva field partners that are receiving capital for free. The model is so inefficient."

Kurnia returned to the US and developed grants for the government at the African Development Foundation, but continued to volunteer with the organizations in Senegal. She noticed how dramatically things were changing with the spread of mobile phones in Africa, particularly with business. The generation of 20-somethings in Africa entering the workforce were unable to promote their business idea even though, unlike their parents, they knew computers, understood social media, and were often well-educated.

"Kiva was kind of blind to this new evolution in the market," Kurnia said. "That's where the idea came from."

It was an idea to get rid of the middle man. The loan officers, banks, and microfinance institutions are the reason interest rates are so high. Because most microfinancing platforms rely on these third-party lenders and because working on the ground and transferring money is expensive, the average global interest rate is about 40%. The interest rate for Kiva, which has strong partnerships with MFIs but relies on them for loans, is about 35%. In some countries, it is between 50 and 80%, Kurnia said.

With peer-to-peer microlending, Kurnia knew borrowers and lenders could have a more efficient, direct relationship, and the process would be more transparent.

So Kurnia bootstrapped Zidisha with the savings from her day job. The organization has never had any donor backing, and still operates on a lean budget. They don't even have an office, but Kurnia is convinced they don't need one. It would only restrict them geographically, she said. It has about 60 volunteers all over the world.

Kurnia primarily decided to start Zidisha in Kenya because of the popularity of mobile-to-mobile payments. It grew slowly at first, but Zidisha eventually became part of startup accelerator Y Combinator to get a boost. In the four years it's been around, Zidisha has stimulated over $1.9 million in loans to fund 6,000 small businesses in Africa and Asia. There are about 12,000 users worldwide.

Borrowers write their own business proposal and upload a photo or connect via Facebook. They propose an interest rate and terms, and work it out with the lenders from there. By removing the MFIs, the average interest rate of Zidisha borrowers is between 5% and 9%.

At first glance, Zidisha is reminiscent of Kiva, but there are a few important differences. For one, the content posted on Zidisha is written by the users themselves. The borrowers are responsible for putting up coherent business plans, and they know that if they don't, they won't be funded. It's a very libertarian approach, and Kurnia wants the organization to be out of the way based on the principles of the model. Second, Kiva is micromanaged to make sure the loans are repaid nearly 100% of the time.

An example of a profile on Zidisha's website.
Image: Zidisha

De Graeve, who has been good friends with Kurnia since she applied for the volunteer position, said many people were motivated when they heard about the liberty of the system, but it took time for them to understand it was more effort on their end, so they became discouraged at first.

"I think Zidisha is really an exception of the spirit of development aid," she said. Instead of being given charity money, the Africans she came into contact with were pushed to succeed on their own, she said, and they really took hold of the idea of empowerment. Now, many of the users have become volunteer mentors to spread the word about Zidisha and its new microfinancing model.

Eventually, Kurnia wants Zidisha to be available in every developing country where they can legally lend. The main barrier is the lack of a universal payment system. For now, it is available in nine countries:

  • Benin
  • Kenya
  • Mali
  • Zambia
  • Burkina Faso
  • Indonesia
  • Niger
  • Guinea
  • Senegal

Kurnia imagines it growing into an eBay-style platform, where everything is based on performance and reputation. Beyond that, Zidisha creates conversations between people from across the world. Lenders and borrowers have created real friendships -- they share recipes, photos, and information about their cultures.

The main goal of Zidisha is to empower entrepreneurs to acquire the resources they need to improve their life. "A huge part of our character is being an eye opening experience for everyone involved," Kurnia said. "Lenders who have probably never been to Africa can experience life through the eyes of someone who earns a dollar or two a day, has no health insurance or savings, but still has the same concerns, like putting kids through school."

The future of microfinance

What's more is the empowerment that has come from Zidisha. Kurnia used to write grant proposals, and she said the reaction was completely different. People were often apologetic, almost ashamed of taking free money. But they repay a loan and receive a good reputation in their community and on the web for the world to see.

A huge part of our character is being an eye opening experience for everyone involved." Julia Kurnia, Zidisha founder

Kurnia is convinced Zidisha is just the tip of the iceberg. "It's inevitable that peer-to-peer lending across international walls is bringing windfalls to both sides," she said.

Although so many microfinance platforms have their hearts in the right place, the overall model is still problematic. That's why Zidisha is compelling. It is truly between the borrowers and lenders to decide what resources they have to offer, and that is a powerful thing.

However, Zidisha is solely based on the passion of volunteers. If Kurnia can scale it, the organization has the opportunity to give platforms like Kiva a run for its money. If it can't, it may be lost in the crowd. But that won't stop Kurnia from trying to improve the system.

"Technology is making geography irrelevant now," Kurnia excitedly said. "It's pushing that to its final frontier where people who were the most handicapped no longer have to be that way."

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