[I posted this on the MMC website, should have posted here! Mildly edited to relfect context here]

I get bogged down in such interest rate debates, so decided to put my money where my mouth is and lend on Zidisha - MY loans, MY transactions, MY calculations. I uploaded $1000. 18 months later (in fact slightly less as I did this in two batches of $500, minor detail) my cash + pending loans + outstanding capital is $1006. For all practical purposes let's say I am at break-even. I made some money in interest, however calculated, and I lost some money in defaults, late payments and foreign exchange losses. Overall these cancelled out (in fact I am $6 up). My average interest rate that I charged, weighted by the amount I bid, was 4.4% (flat per year I believe). I had a few late payments, one outright default, and I have no idea how much forex losses cost me. To repeat, this all largely cancelled out.

I then looked at the average interest rates as stated by Zidisha only for the clients I had lent to. These were 9.31%, but included the 5% fee that Zidisha charged, so it appeared that the average investor was charging 4.31%, marginally lower than me. Indeed, I lent to a few people who were unwilling to pay any interest, and sure enough their stated rate was 5% - the Zidisha fee alone. So, in terms of Zidisha claiming the average LENDER interest rate is 5.3% seems reasonable from my personal lending experience (40 loans to date).

I agree that flat rates are inferior. I wish Zidisha would stop this practice. And it is a fair rule of thumb to double them to get a real APR. There is a fragment of truth in the claim that borrowers understand flat interest rates better than APRs, as these are still common in some countries (where they have not yet been outlawed). Claiming the world was flat a few centuries ago was acceptable and commonly accepted, although wrong! I agree with the author that converting to APRs would be better. But, I also agree that the one-off fee for a credit check, in this lending model, does seem reasonable. But I concede that this is a debatable point.

So, excluding this one-off fee, it does appear that the loans I have personally done have an APR of about 20% (9.31% x 2). What's more, by me charging 4.4% (flat, equivelent to 9% APR), this has covered forex losses and defaults over an 18 month period, almost perfectly (by coincidence). I don't lend on Zidisha to make money, but if I can protect my capital, that is fine by me. This is what most other P2Ps will try to offer. MyC4 offers a net return, Kiva is generally break-even. What fascinates me about Zidisha is that there is no intermediary, and the rates do genuinely seem lower. I accept this might not be the case for a first time client on a $50 loan having to pay $12 for the credit check. The one-off fee is the source of the problem. But where do we draw the line - what about the bus fare to get to the office? The cost of completing the forms? The opportunity cost of time in completing the Zidisha process? Yes, there are entry costs to join Zidisha, as there are in many services. Indeed, one could argue these present a barrier to entry to dissuade non-serious potential borrowers.

Do not mis-understand me, I am a fanatic for transparent pricing in microfinance.

In fact, I should also add that there is an additional fee which I (i.e. from a lender perspective) have to incur that wipes out my measly $6 profit - the PayPal fee, which was $34 in my case. So, in fact, I lost $28. But, a rate of 20%, or 25%, or 30%, is alas pretty reasonable, particularly in Africa. I agree that Zidisha should adopt APRs as soon as possible, but I would be hesitant to describe this as deceptive. There is no pre-funding, at least they make an effort to state the interest rate, which some P2Ps don't even attempt. I do hover the mouse over the blue buttoms and was aware that this is flat, and I know how to interpret this, but I may not be typical. But compare this to Kiva, whose greatest effort to explain an interest rate is to state the self-reported, unverified portfolio yield of the bank as copied from the MixMarket often years out of date, and this is not even a good proxy of the APR in my opinion. I did a blog post a year or so ago comparing the stated portfolio yields reported by Kiva compared to the actual APRs calculated by Chuck Waterfield, and the divergence is staggering. Is Zidisha perfect, no? Is it an interesting development, challenging the status quo of the current P2P market? In my opinion, yes. There is scope for improvement, and I hope they constantly remain aware of this, but so far I find this a promising venture. It will be interesting to see how it scales up.

Hugh Sinclair, author/consultant
www.microfinancetransparency.com