Traditional microfinance has not done enough to advance economic opportunities for the world's poorest communities. A major reason is that most microfinance institutions charge exorbitant interest rates -- 30 to 50 percent is typical -- in order to generate profits, or simply to cover the costs of managing small loans in the traditional, staff-intensive way. The borrowers whose profit margins fall below these rates may actually end up poorer as a result of taking a loan from these institutions.
What does this mean in human terms? According to a recent survey of microfinance borrowers in Ghana published by the Center for Financial Inclusion, 18 percent of borrowers reduced their food intake in order to repay microfinance debts that had not proven sufficiently profitable, and 5 percent resorted to taking their children out of school in order to repay microfinance loans. These statistics illustrate the reality that while overpriced microfinance loans help some people, they may actually harm others.
What if small-scale entrepreneurs in emerging markets could bypass overpriced local lenders and source business growth capital directly from the international crowdfunding market? Zidisha Microfinance, the world's first crowdfunding platform to cut out intermediaries and connect individual web users and entrepreneurs across the international wealth divide, offers an early glimpse of how this can work.
Internet-savvy small business owners from Bali to Burkina Faso use Zidisha Microfinance to raise capital in the form of microloans directly from individual Web users worldwide. They negotiate credit terms and chat with their financial backers using village smartphones and solar-powered laptops. Their repayment rate? Over 98 percent.
Our most important contribution has been to eliminate the local intermediary institutions that have traditionally managed loans on the ground for microlending sites such as Kiva or Microplace. Instead of paying interest to intermediaries, Zidisha entrepreneurs (who must pass a thorough background check) post their own loan applications online, offering any interest rate they consider reasonable. Web users then bid to fund the business plans they find compelling, at or below the offered rates. Lenders are repaid in monthly installments and can withdraw the capital or allow the financial and social returns to compound by recycling it into new businesses. The entrepreneurs who repay on time and communicate well establish a solid public track record through eBay-style "feedback ratings," which becomes the basis for progressively larger rounds of financing.
In almost three years of operation, Zidisha entreprenurs have maintained a 98-percent repayment rate for the hundreds of loans they've financed through our platform, disproving the notion that disadvantaged people in developing countries need to be supervised by expensive local bureaucracies in order to ensure that they participate responsibly in a lending community. Along the way, the entrepreneurs have transformed their prospects for a better quality of life, earning profits that have financed children's education, life-saving medical care for parents, new homes, and countless other benefits that are impossible to quantify.
Our intent is that other financial services in emerging markets will adopt and further improve upon the concepts introduced by Zidisha Microfinance, and that marginalized entrepreneurs worldwide will get a better deal as a result.