Vous consultezShould online micro-lending be for profit or for philanthropy? DhanaX and Rang De[1] [1] We would like to thank the Banque Populaire of Bourgogne-Franche...
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AuteursArvind Ashta du même auteur

Djamchid Assadi du même auteur

The tale of two indian micro-lending websites

3 In early 2008, two sites went online. One was Rang De and the other was DhanaX. One started in January and the other in February. Both were based in South India. One started in Tamil Nadu (Chennai based) and the other started in Karnataka (Bangalore based). Both were initiated by youngsters. The co-founders of Rang De, Smita Ramakrishna and NK Ramakrishna (a wife and husband team), were in their early thirties and co-founders of DhanaX, Siva Cotipalli and Prashant Mishra, were in their late twenties. Both were in the business of online micro-lending, seeking to link small lenders with poor borrowers.

4 The major difference was that Rang De is a not-for-profit trust. DhanaX is a for-profit company. But both are innovative companies. Innovations in this age of online lending cannot just be classified in the traditional maps of incremental innovation (existing market, existing technology), architectural innovation (new markets for exisiting technology), disruptive information (new technology in existing markets) and radical information (new technology for new markets). The new web 2.0 technology has affected both existing and new markets and has introduced new paradigms of innovation such as democratized innovation (user to user), crowdsourcing (user to company), ecosystems or platforms (company to users) and recombinant innovation (company to company)[4] [4] SHUEN, A. (2008), Web 2. 0: A strategy guide, O’Reilly...
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Social innovation of web 2.0

5 Since both Rang De and Dhanax are operating in the web 2.0, it may be pertinent to explain these two paradigms of innovation: the traditional map and the web 2.0 classification of innovations. To explain the traditional paradigm, we take the example of ATMs (Automated Teller Machines) in the financial services industry. Recently, check scanners have been introduced by banks such as Wells Fargo, Bank of America and J.P. Morgan Chase. Similarly, HDFC Bank in India has reduced the average time customers spend making an ATM transaction by 40%, by personalizing their ATM transactions with their language preferences, fast cash amount, favorite transactions and receipt options. The technology already existed. It is used to service existing customers faster and better than competition. It can be termed incremental innovation. In a different example, ICICI bank in India has started using its ATMs to dispense not only cash, but also rail tickets. This is a case of Architectural innovation of using existing technology to service new markets. New Technology such as Voice Recognition and biometrics is, however, creating both disruptive and radical innovations. For example, Community Choice Credit Union, based in Michigan has begun installing ‘Personal Teller’ ATMs, with the added features of a video monitor, telephone-style handset, photo ID scanner, and cash and coin dispersal.

6 These ATMs enable customers to talk to, and see on a video monitor, a real-life credit union personal advisor outside of normal banking hours. This is a case of new technology disrupting existing markets to create new practices. As opposed to this, new technology is serving the poor illiterate customers and entering new market spaces. Union Bank, in India, has used technology to establish Village Knowledge Centres (VKCs), which have proved to be a success in the 198 centres where they have been set up. VKCs empower the local rural population by giving them information on various vital inputs such as weather, fertilizers, and prices of crops and can also mix in other topical information, such as cricket scores.[5] [5] All these examples are from Thefutureofbanking. org Team...
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7 The new paradigm of innovations described by Shuen (2008)[6] [6] Op. cit. ...
suite is rooted in the use of web 2.0 technology, although other information and communication technologies may avail of these practices. Democratized innovation permits user to user information flows such as file-sharing and also wikis. Crowdsourcing allows companies to get information from many users. Shuen provides the example of GoldCorp which gives a prize to geologists who spot the best places to dig for gold. Eco systems or platforms are spaces such as Linux allow millions of users to avail of some service. Finally, people are getting together to co-create service options that did not exist before. Shuen gives the example of Jajah which partners and revenue-shares with existing carriers. In this scheme Web 2.0 platforms of online lending should have created eco systems / platforms such as facebook to allow borrowers to meet lender. However, we have found that in fact this is not so[7] [7] See for example, ASHTA, A. , ASSADI, D. (2009), Do social...
suite. But before we go into this, we provide a brief introduction to microfinance.

Introduction to microfinance

8 Microfinance has existed for centuries with informal saving and credit systems such as Susu in Ghana, chit funds in India, tandas in Mexico, and arisan in Indonesia. The forerunners of formal microfinance institutions which we study were the “credit union” in the Western countries. Today’s microfinance movement has been an outgrowth of the cooperative banking movement started in the 19th century in Germany. The methods of using group savings for lending amongst them and making clients the shareholders have been used for well over a century in Western Europe. Some leading French banks such as Credit Agricole, Caisse d’Epargne and Banque Populaire were structured according to this mutual aid model. However, the predominance of the modern banking system imposed progressively the model of collateral loans, replaced microfinance and consequently excluded borrowers with poor credits records and small loan requests. The banks argued that they were confronted with unacceptably high risks of default and low margins, which hardly covered their transaction costs let alone their rate on return (EMN, 2007).

9 Since the 1970s, some of these methods have been brought to developing countries for lending to the poor, notably in Bolivia, Brazil and Bangladesh with interesting twists. One notable incentive scheme is the group lending scheme. In these group-lending schemes, the group stands as collateral for the borrower. There are many variants, with the Grameen bank model, the Self Help Group model, the village banking model, etc[8] [8] See ARMENDARIZ, MORDUCH (2005), The Economics of Microfinance,...
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10 The Microfinance market has been growing at an average rate of 30% per annum worldwide. Within India, the growth rates have been much higher as the movement has caught on in recent years. Thus, many MFIs are doubling their sizes every year. While many of the Microfinance institutions such as self help groups and ROSCA[9] [9] ROSCA stands for “Rotating Savings and Credit Associations”. ...
suites are totally informal arrangements and not counted in most statistics, some semi-formal and formal legal forms have come to the forefront. The semi-formal ones are not-for-profit associations as well as credit cooperatives and the formal ones are non bank finance companies and banks who have descended to enter this market. In fact, the market for lending to poor people already existed at high interest rates through informal moneylenders and microfinance institutions have essentially come in to lower these interest rates.[10] [10] ASHTA, A. (2009), Microcredit Capital Flows and Interest...
suite Appendix 1 provides an idea of the breakup of the formal and semi-formal institutions operating in the world. Out of the 487 institutions reported by MBB (18), the number of NGOs is reducing even during the brief three year period (2005-2007) in favour of Non Banking Financial Institutions (NBFI). The number of Banks, Credit Unions and Rural Banks is more or less the same in the three years. Although NGOs are still the leading form, NBFIs are catching up. The median Rural Bank has been expending microcredit for 22 years, while most others have a medium age of half as much (10 to 12 years). Banks are very large compared to other legal forms with median total assets of $ 230 million, followed by NBFIs and Credit unions, who are one tenth the size (median of $22 million and $20 million respectively). The median NGO has assets of only $ 7 million. It is evident also that NBFIs are more efficient than NGOs. The median employee numbers are 198 for a NBFI compared to 106 for an NGO, even though assets are three times as high. In any case, we can see that all charter types are growing fast, with 2007 growth rates of 36% to 74% for the sample used by the MicroBanking Bulletin (2009).

11 The success of the Microfinance movement is highlighted by a Nobel Prize to Muhammad Yunus and his bank, the Grameen bank, perhaps the most replicated model. Today, Bangladesh is the largest, most developed market for Microcredit. According to the thirty Bangladeshi MFIs reporting to the MIX[11] [11] MIX is the Microfinance Information Exchange which provides...
suite for 2007, there are almost 24 million borrowers representing 1.75 billion dollars in loans outstanding. The average loan outstanding is about $80 per person. Taking an average family size of five, probably 120 million people in Bangladesh are impacted by microcredit. However, some people are taking loans from more than one MFI. But, in any case, this is probably the only microcredit market nearing saturation. Initially limited to microcredit, today the microfinance label captures all kinds of financial services that are being extended to the poor, notably, credit, saving deposits, insurance and remittances.

Microfinance in India

12 The microfinance movement started later in India. Therefore, despite its huge population, the number of microfinance borrowers, according to the 75 Indian MFIs listed with the MIX for 2007 is about 10 Million borrowers, who have borrowed about $ 1.4 billion dollars. This means that the average loan size in India is $140, much higher than the loan size in Bangladesh. While this could reflect the fact that India is better off than Bangladesh, it could also reflect that Indian MFIs are not aiming at the poorest of the poor (less than $1 a day) but at the poor (less than $ 2 a day) or the near poor.

13 Appendix 2 provides the statistics for the largest MFIs in India report to the MIX database for 2008. In this sample, there are four Indian MFIs with more than a million borrowers each: SKS, Spandana, SHARE and Bandhan. The figures for 2007 are also presented. Although there are a couple of changes in the MFIs that figure in the top ten for the two years, some trends are visible. As can be seen, all the major MFIs are giving smaller loans to more borrowers in 2008 compared to 2007. In fact, the average loan size seems to have fallen from $143 to $99, a 31% decrease. On the other hand, the number of borrowers has almost doubled an increase of 77%. Combining these two effects, the loan portfolio has increased by about 23%, in line with global trends.[12] [12] To some extent, the difference in sample size between the...
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Background of some ethical questions in microfinance

14 A good setting for ethical questions is the billion dollars increase in capitalization by Compartamos, an MFI in Mexico[13] [13] See ROSENBERG, R. (2007), “CGAP Reflections on the Compartamos...
suite. This MFI was started an NGO in 1995 and converted to a for-profit company in 2000 with a share capital of about $ 6 million. In 2006, the book value of this share capital was $ 126 million (21 times) and in 2007 the firm offloaded 30% of its equity in a secondary IPO, which valued the company at $1.5 billion. The IPO was 13 times oversubscribed. Nevertheless, a number of papers questioned the ethics of using an NGO to create brand equity for the ultimate benefit of a few private shareholders. NGOs often benefit from donor funds as well as volunteer time.[14] [14] See ASHTA, A. , BUSH, M. (2008), Ethical Issues of NGO Principals...
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15 The free market lobby counters that these high interest rates would attract investors and competition, which would help expand the market much faster than donor capital to NGOs. Thus, existing borrowers may pay high interest rates, but the growth rates generated from these profits would be ploughed back to serve more poor borrowers[15] [15] To see how this discussion is influenced by Rawls ethics,...
suite. Moreover, competition would help in reducing the market interest rates, eventually.

16 Here are some alternative viewpoints on the ethics of high interest rates while lending to the poor. “I think if microcredit were to be perfectly ethical, the cost of the microloan to the client should be less than or equal to the cost of capital + 10 %. Cost of capital + 20% is I think okay based on some specific local circumstances. Beyond that I have a hard time in understanding how it is ethical”[16] [16] Opinion expressed in a discussion in the linkedin group...
suite (Bhalchander Vishwanath, Founder CEO of United Prosperity[17] [17] United Prosperity is the world’s first person to person...
suite). “I think the best market is the free market. Free market for lending and free market for information. If Microcredit loans really earn 28%+ interest rates and 98% repayment record, lets establish the real spreads and net income ratios over a reasonable period of time and disseminate that information widely. Investment will pour into the industry and competition will make sure that interest rates charged from micro-borrowers are contained. Imposing external and artificial pricing curbs are counterproductive in the long run and curb Investment. What would be useful however is good overall legislation/regulation backed by a good enforcement machine?”[18] [18] Opinion expressed in a discussion in the linkedin group...
suite (Shrikant Krishan, Executive Director at Citibank). “Dealing a lot with the consequences of loans - with frauds - I have a strong opinion that such kind of loans should be separated from normal banking products intended for profit and should be more of social responsibility kind (producing low or no profit) - at least in conditions of Russian credit market”[19] [19] Opinion expressed in a discussion of the linkedin group...
suite (Julia Suvorava, Head of Operational Risk Management at KMB Bank, Russia).

17 This pattern of starting MFIs as NGOs and later converting them to NBFIs and finally as banks, is not unique to Compartamos. As can be seen from Appendix 3, eight of the top ten Indian MFIs (except for SKDRDP and BISWA) are NFBIs. These eight are much younger than the two NGOs. Moreover, the top four started as societies and later became for-profit NBFIs. A fifth, Grama Vidiyal, started as a Trust and then converted to NBFI. The other three started directly as for-profits. The most remarkable is the tenth, Equitas, which started in 2007 and within a year has reached the top ten. Therefore, half of the top ten Indian MFIs have evaded the ethical issue of converting from a NGO to a for-profit, either because they continue to be societies or trusts, or because they started right off as for-profits. The other half is concerned with the ethical debate since they converted from NGOs to NBFIs.

18 The other question which essentially keeps recurring in Microfinance is one of sustainability of the Microfinance institutions which requires high interest rates versus the help to poor people which should require low interest rates.[20] [20] See ASHTA, A. , HUDON, M. (2009), To Whom Should We Be Fair?...
suite Global interest rates in microfinance are estimated at an average of 28% per annum, and institutions like Compartamos charging 100% per annum are considered outliers. This 28% is due to transaction costs being spread over small loan sizes. The essential question is whether these interest rates should be capped through usury legislation[21] [21] See MEWS, C. J. , ABRAHAM, I. (2007), Usury and Just Compensation;...
suite. The free market lobbyists argue for removing any caps to allow microfinance to grow. However, it is not certain that taking out usury limits will usher in a growth of microfinance[22] [22] ASHTA, A. , ATTUEL-MENDES, L. , DITTER, J. -G. (2008), Another...
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19 A third question is related to the transparency of interest rates. Flat interest rates of 10% on initial balance are effectively almost equal to an effective interest rate of 20% per annum. Therefore, one provides the impression to poor illiterate people that they are paying 10% while the shrewd finance man knows he is making about 20%[23] [23] See ATTUEL-MENDES, L. , ASHTA, A. (2009), The truth, but...
suite. Also, upfront processing fees are often excluded from the interest rate calculations presented in documents. However, the above statement needs to be qualified. The lender can make 20% on the 10% loan only if he can continuously find some other borrowers for the money that is reimbursed. The more the delay in turning over the money, the more the chance that the lending institution will effectively earn little more than the 10% at which the borrower is provided funds.

20 A fourth ethical question is sometimes raised. Are subsidized interest rates really ethical because they crowd out private operators? This question begs the issue. Just as private operators are often financed by a number of investors; public operators are financed by public investors and public subsidy providers which in turn are financed by all the public together, providing taxes and subsidies through their elected representatives. Donors and socially responsible investors make a rational choice while giving their funds as to the kind of society they want to live in. Therefore, if we believe in the free use of a person’s money, there is nothing unethical if subsidies and donor funds lower interest rates to a level where profit minded individuals choose not to enter the market place.

21 Progressively microfinance gave birth to some avatars. Person-to-person, also called peer-to-peer, P2P or social lending is arguably the most famous of them. The name alludes to transactions which are directly realized between individual lenders and borrowers. This model has experienced its fastest growth on the Internet.

Research method of studying cases

22 The inquiry in this research is whether the lucrative and not-for-profit status conduct to different business models, in particular different services rendered to target customers. To investigate the possible directions that MFIs might take from the inception of the model explained previously, we consider the cases of two different approaches in the context of India, the biggest microfinance market: DhanaX which is a for-profit company and Rang De whose status is not-for-profit.

23 As a research method, case study focuses on a special matter to understand the complex real-life aspects or adds new insights to what is already familiar[24] [24] PATTON, M. (1987), How to Use Qualitative Methods in Evaluation,...
suite. Case studies, based on qualitative approach, scrutinize a limited number of situations or phenomena within their real-life context to explore and find out foundations and relationships[25] [25] YIN, R. Y. (1993), Application of case study research, London,...
suite. Case study research generally poses questions which begin with “how” or “why”[26] [26] ANDERSON, G. (1993), Fundamentals of Educational Research,...
suite for exploratory, descriptive and explanatory purposes[27] [27] YIN, R. Y. (1993), Application of case study research, London,...
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24 To answer these questions, the selection of exemplary and typical cases is crucial. If many cases are selected, then each case should be treated individually. The underlying principle for selection is replication logic and not sampling logic[28] [28] YIN, R. Y. (1994, 2nd ed), Case study research:...
suite; relevance rather than representativeness[29] [29] STAKE, R. (1995), The art of case research, Thousand Oaks,...
suite. In other words, a “purposeful sampling” rather than a “random sampling”[30] [30] PATTON M. Q. (1990), Qualitative Evaluation and Research...
suite is considered in order to represent “multiple experiments” and not “multiple respondents”. In fact, the insights generated have more to do with the information-richness of the selected cases than with the sample size.

25 Cases’ data are generally qualitative, but it may also be quantitative. Cross-case examination and literature review helps ensure external validity. This research method resides within the interpretive paradigms rather than the positivist paradigm[31] [31] PERRY, C. et al. (1999), Realism’s Role among Scientific...
suite. It is not based on an experiment that shows that A directly causes B, as a match directly causes gunpowder to explode. Here, selected cases explore the peculiarities of specific social phenomena. The tactics used in analysis include matrices of categories, flow charts, tabulating frequency of events, and in particular, cross-case analysis[32] [32] MILES, M. B. (1994), Qualitative Data Analysis – An Expanded...
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Online lending models

26 In the last few years, since 2005, we have seen the development of online lending models. One stream of online lending models is commercial. This includes Zopa which started in 2005 and Prosper and Lending club, and a host of other newcomers. These are domestic platforms since they do not want to get into questions of international law and related risk. They bring all small lenders and borrowers together, not necessarily poor borrowers. The interest rates are set through auction mechanisms[33] [33] See ASHTA, A. , ASSADI, D. (2009), Do Social Cause and Social...
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27 Their initial promise was to lower interest rates to borrowers and increase returns to lenders compared to what commercial banks were promising. However, often these rates could be higher than commercial lending rates because the risk of the borrower is either not known because he has no credit history or its too high and the banks are not willing to lend to them at any rate. All these companies are run on a for-profit basis. As opposed to this commercial lending model, there are other online lending sites specialised in lending to the poor. The first of these, Kiva, also started in 2005. It was followed by Microplace and MyC4, who had distinctive product offerings, and more recently by Rang De, DhanaX, Babyloan and Wokai, who are all along the Kiva lines, but with minor differences, as can be seen in Appendix 4 and explained below.

28 The basic model of the Kiva intermediary model, illustrated in Figure 1, is that small lenders lend to Kiva. Kiva lends to MFIs. These MFIs then lend to poor people. Thus the MFIs are using Kiva as a financing agency. Kiva is actually providing a service to small lenders who want to participate directly in the microfinance movement. In the Kiva model, there is no interest given by Kiva to the lender and no interest charged by Kiva to the MFI. However, the MFI charges normal interest rates to the poor borrower. Kiva is a not-forprofit.

29 The Microplace model, illustrated in figure 2, is a bit different because Microplace is really a for-profit broker of other security issuers of Microfinance investment Bonds. These security issuers lend to MFIs, just as Kiva does. However, they use Microplace as an agent to get investors to buy their bonds.

30 MyC4, a for-profit firm, has distinguished its product offering from Kiva by indicating that it’s in the upper end of the microfinance market and the lower end of the small business financing market, mostly in Africa. Babyloan is a Kiva clone, operating in France and its basic language is French, thus offering it a protected niche from Kiva. However, unlike Kiva, Babyloan is a for-profit company. As can be seen from the brief description above, the online microlending place is a mix of for-profit and not-for profit models, depending on the ideology of their founders. In addition to online lending, other online microfinance players are entering the market.

KIVA: Movement of funds

KIVA: Movement of funds

Microplace: Movement of funds

Microplace: Movement of funds

31 Wokai, another not-for-profit, is also directed at a specific market of US residents aiming funds for microfinance in China. However, for the moment, it is funded by donors rather than lenders. The donors get a one-time tax advantage and although Wokai can recalculate their money to other borrowers once the first ones pay back, the donors don’t get their money back.

32 United Prosperity is a not for profit which takes funds from residents in the developed world and then uses these to provide guarantees to banks for loans the bank’s correspondent in India gives to the poor borrowers. This permits the Indian bank to multiply the total amount lent to the borrower.

DhanaX and Rang De: online micro-lending in India

33 None of these models operated in India since the Indian government did not allow foreigners to lend directly to Indian borrowers, including MFIs. Depending on the perspective, we could say that the founders of DhanaX and Rang De therefore found, to their advantage, a protected domestic market of over a billion people. At least 30 million of this market had access to internet and were potential lenders, since internet access was strongly correlated to buying power and education. Alternatively, we could say that seeing the government blockage to inflow of funds, DhanaX and Rang De decided to enter and help the poor. Both are copying the basic Kiva lending model in India, a country whose foreign exchange laws do not allow Kiva to enter the market. These companies can attract funds only from Indian citizens, living in India or abroad.

Governance

34 Siva Cotipalli and Prashant Mishra decided that they would like to have a sustainable for-profit model right from the beginning. Their idea was to use market based incentives to finance the poor and include them into the market, as advocated by C.K. Prahalad’s bottom of the pyramid model.[34] [34] See PRAHALAD, C. K. (2006), The Fortune at the Bottom of...
suite They started DhanaX. However, they did not have the capital required to be a bank or a non-banking financial company and chose, instead to be a service provider. As a result, they hold the money for lenders to be given to borrowers in an agreement which is directly between lenders and borrowers. Although they would have liked a social mission of going to the extreme poor in remote areas, a for-profit model required tapping urban and semi-urban models with high population density and lower transaction costs. Their first lending site has been Bangalore. They have followed this up with Ahmedabad.

35 Smita and NK Ramakrishna decided, instead, to stick with the not-for-profit route, because the mission of helping the poor and message it conveyed to society was more important for them[35] [35] The emails of N. K. Ram capture this in a footnote: “Let’s...
suite. For this, they chose to be a Trust. The Rang De website is an Escrow Agent. An escrow account is an account established by a broker for the purpose of holding funds on behalf of the broker’s principal or some other person until the consummation or termination of a transaction. For the moment, there is no evidence of either DhanaX or Rang De shifting its mission from NGO to for-profit or vice-versa.

Risk of non-reimbursement

36 The success of microfinance is based on repayment rates of about 98% thanks to group lending and other incentive based contracts. However, this is not strictly comparable with the lower rates or reimbursement of bank loans because banks take collateral, while MFIs usually do not. Therefore, if a bank is not paid back, it can recover most of the balance outstanding. However, if an MFI is not paid back, it loses the unpaid balance, unless the group pays for the defaulter.

37 Since Rang De is an Escrow Agent, legally speaking, it’s the social investor who lends the money to the borrower directly and both Rang De and the Field partner are not liable for non-repayment by the borrower. “While Rang De follows the model of an Escrow agent, at the grassroots level, the money is being lent to members of joint liability groups and self help groups. In both cases the group leaders sign as a co-applicant on the application form thus forming a group guarantee model. However, we do not guarantee the money because there could be cases of natural calamity and disasters, in which case there is no recourse” (N. K. Ram, co-founder of Rang De)[36] [36] Private correspondence with us, quoted with permission. ...
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38 DhanaX, however, guarantees the principal will be repaid. There is a double level of guarantee. Firstly, the borrowers are self help groups who take loans under joint/group guarantee. So, even if a single borrower doesn’t repay because of some reason, the rest of the group will compensate for them. Group lending methodology globally has a repayment of more than 98%. Secondly, DhanaX stands as a guarantor for the principal amount. “In the event of default, the guarantor on behalf of the lender will take all necessary action against the borrower to recover the money for a period of 60 days. If it is not able to do so, the guarantor will repay the lender his outstanding principal provided the lender transfers the ownership of future repayments collected if any to the guarantor.” “The above excerpt has been taken from the standard loan agreement that every lender has to sign. Note that the term guarantor here refers to DhanaX”.[37] [37] https:/ / www. DhanaX. com/ Legal/ security last accessed on Oct...
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Interest rates

39 Interest rates in Microfinance in India vary from 11% to 30%, depending on the social or profit mission of the MFI, as can be seen in Appendix 5 for the top 10 MFIs. Interest rates charged by the two websites, DhanaX and Rang De reflect their mission.

40 Siva and Prashant wanted to position DhanaX as an online commercial lender such as Zopa and Prosper. However, borrowing on the internet had not taken off in India, while microfinance had. Moreover, Siva wanted to keep in contact with self Help Groups and help the poor. In the end, they compromised and came up with a local domestic online lending model. They offer high rates to lenders of 14%. This is more than the lenders would get from banks. The borrowers pay even higher rates of 24% or 25%.[38] [38] https:/ / www. DhanaX. com/ FAQs/ about#q6 consulted on Oct 28,...
suite This is lower than interest rates charged by money lenders and comparable to what other MFIs are charging. Of the 10% spread, DhanaX fees amount to 7.5%[39] [39] https:/ / www. DhanaX. com/ uploads/ Economics. pdf undated paper...
suite. The rest is paid to people who do verification checks on lenders to insure that it is not money-laundering. DhanaX justifies its own commission for checking the credit worthiness of the borrowers.

41 Rang De offers much lower rates to its online lenders. Since it is an NGO, it is appealing to social investors who want to get a minimum return to keep in with inflation, but would essentially like to help poor people in a responsible manner by giving loans rather than donations. Rang De’s website indicates the following information on its interest rate policy:[40] [40]http:/ / Rang De. org/ faq. htm#50 consulted on Oct. 28, 2009. ...
suite The borrower pays an interest rate of 8.5% flat p.a. (16% APR) the breakup of the 8.5% flat p.a. (16% APR) interest is as follows:

• 5% is for the field partner
• 2%(3.5% APY) is the financial return for the social investor
• 1% is for Rang De to cover its operational costs.
• 0.5% goes to a contingency fund that is maintained by Rang De to repay social investors in case a borrower dies or defaults on a loan.

Transparency

42 Often, banks and lending organizations like to understate their loan terms by using a flat rate on the initial amount lent and ignoring repayments. What this means is that repayments do not lead to lowering of interest payments. Therefore, effectively the borrower is paying higher interest rates. Therefore, governments often impose transparency regulation or “Truth in lending” which requires lenders to disclose the annual percentage rate or the effective annual rate. Some borrowers, nevertheless manage to use other ways to raise interest rates such as asking for a cash deposit of, say, 10% of the loan amount, thus implying that the loan disbursed is only 90% of the stated amount. Appendix 5 indicates which of the top ten MFIs indicate flat rates on their websites. They also indicate the equivalent by declining balance method. However, some of them include a processing fee or a cash deposit and do not account for these in the effective annual rate calculation.

43 Both Rang De and DhanaX seem to be particularly vigilant on the transparency question and prefer to indicate the annual percentage rate (APR) or the Effective Annual Rate (EAR). Rang De indicates that it is using APR. Annual percentage rate is a method of finding interest rates by using simple interest rate. Effective Annual Rate uses compounding to find the exact interest rate. The methods should give the same result if the loan was for exactly one year.

Outreach

44 Rang De is transparent also on its annual report and financial report being available online. Anyone can check how it is doing. However, being an escrow agent, Rang De’s financial report does not seem to provide an idea of the movement of funds. Nevertheless, Rang De’s annual report for 2008-09 fills up this void and indicates that in the first 18 months (till July 2009), 1018 entrepreneurs had been funded and Rs. 60 lakhs have been disbursed (about $ 150,000). This means that the average loan size is a little less than $150, comparable to what we would expect from Indian MFIs. Moreover, Rang De is no longer operating in its home State but has expanded to eight States, with 12 MFIs as field partners. About 260 lenders have invested through Rang De. This means that an average investor lends about $ 600.

45 DhanaX launched its operations in February 2008. In the first 18 months of operations, DhanaX had given out Rs. 1 crore in loans (Rs. 10 million or about $250,000). This translates into about 1000 loans of $ 250 each (if the average loan size is Rs. 10,000). Thus, the DhanaX borrower seems to be a bit richer than that of Rang De. This would be consistent with their respective missions. Since Karnataka and Andhra Pradesh are the most saturated States in terms of competition among MFIs, DhanaX has proceeded to Ahmedabad in Gujarat, another rich State. But this also means travelling expenses for SHG verification and credit appraisal.

Concluding remarks

46 Table 1 summarises our findings for the two Web sites.

Table 1 - Summary of Findings

47 For both Rand De and DhanaX, scaling up needs a huge increase in both infrastructure as well as operating costs. Both operators are caught with constraints on both the borrowing side and the lending side. On the borrowing side, they need to be able to quickly find and evaluate borrowers. On the lending side, the concept of social lending has not yet caught on in India, where people have always been hankering for more, owing to a legacy of poverty. Therefore, it will take some time for the common Joe to start giving, since he himself has not got enough. Secondly, the family and friends come first, another cultural legacy of social inter-dependence in poor countries. These relationships do not need a website. Thirdly, there is a strong need to leave something for the future generations of offspring and their descendants. The culture of not spoiling the children by giving too much, has not yet come in. Therefore, the social lending is limited to the very upper middle classes or lower rich classes: usually highly educated individuals.

48 This is not the case with Kiva, MyC4 and Babyloan who are all appealing to the small middle class lender in developed countries to directly lend and make a difference in people’s lives.

Future research directions

49 Here are some directions for future research.

50 What are the total operating costs of Kiva versus the Indian domestic online lenders? Is there a social cost benefit analysis done of Kiva which takes donor funds and volunteers. Would such an analysis indicate higher costs for Rang De than Dhanax?

51 Why do lenders really want to lend? How do members come online, how are they identified, and how are Info/online security matters handled?

52 How are MFI partners identified by DhanaX and Rang De. It is clear that big Indian MFIs do not need the paltry amount of funding that DhanaX and Rang De can provide. So these operators have to look for smaller MFIs for whom their funding is valuable. The process of selecting MFIs by Kiva, for example, is based on the following[41] [41]http:/ / www. kiva. org/ about/ pic, click on “How to become...
suite:

• Serve at least 1,000 active borrowers with microfinance services
• Have a history (at least 2-3 years) of lending to poor, excluded, and/ or vulnerable people for the purpose of alleviating poverty or reducing vulnerability
• Be registered as a legal entity in its country of operation
• Have at least 1 year of financial audits
• We also prefer an MFI have a profile on the MIX Market (www.mix-market.org).

How are Escrow Accounts maintained and what is their legal status? Is DhanaX also a Defacto Escrow Agent? Can a private limited company be an Escrow agent in India or is this limited to NGOs? How do real Funds Transfers happen - between lenders and the MFI, and between the latter and its borrowers? How are funds returned to lenders if required or real time basis? How can online models boost savings of the poor people and provide other financial services to the poor? How can cultural changes be initiated in the Indian environment? What are privacy protection regulations for all the photographs of borrowers on the websites? Are borrowers aware that their MFI is forwarding their photograph and profile to Kiva or Dhanax or Rang De? What permission is taken?

53 All these questions could be useful to understand the strategies required to scale up. Since DhanaX and Rang De aim to serve the same social cause, a final axis of research suggested here will consist of analyzing and comparing the social impacts of the two websites in terms of poverty alleviation.

Annexe

Interest rates charged by different MFIs in India (October 2009)

Interest Rate On flat basis Effective annual rate/declining balance Source (consulted on Oct 28, 2009) SKS 12.5% to 15% flat 25.6 — 30.2% http://www.sksindia.com/products.htm Spandana Not discolosed SHARE 23.6% http://www.sharemicrofin.com/resouces.html Bandhan 12.50% flat + 1% processing + 10% deposit 23.56% + + http://www.bandhanmf.com/faqs.html Asmitha 12.50% - 15.00% 23.60% - 28.13% http://www.asmithamicrofin.com/inside/product/ptable.html SKDRDP 11% to 11.25% http://www.skdrdpindia.org/Systems.htm BASIX 15%, 18%, 21% & 24% + a 10% cash deposit http://69.89.31.196/~basixind/images/BasixAR2009Final.pdfp. 66 Grama Vidiyal Not disclosed BISWA 20% http://www.biswa.org/en/index.php?option=com_docman&task=cat_view&gid=45&Itemid=65, Annual report 2008, p. 17 Equitas 27.5% to 28.5% http://equitas.in/ProFea_LoanProductsSummary.html

Notes

[ 1] We would like to thank the Banque Populaire of Bourgogne-Franche Comté for financing the Microfinance Chair held by Arvind Ashta. Our thanks to N.K. Ram and Siva Cotipalli, founders of the two online lending site, and to Bhalchander Vishwanath and Shrikant Krishan for reviewing the paper. Our thanks to the participants at the University Meets Microfinance workshop held in Berlin on the 6th of November 2009 for their animated comments on a presentation of this paper.

[ 2] BUGHIN, J., CHUL, M., JOHNSON, B. (2008), The Next Step in Open Innovation, McKinsey Quarterly, June.

[ 3] LAVILLE, J.-L, GARDIN, L, LEVESQUE, B, NYSSENS, M. (2007), L’économie solidaire : Une perspective internationale, Paris, Hachette.

[ 4] SHUEN, A. (2008), Web 2.0: A strategy guide, O’Reilly Media Inc., Sebastopol, CA.

[ 5] All these examples are from Thefutureofbanking.org Team (2010), “Ten examples of why the humble ATM=innovation in 2010” available at http://www.thefutureofbanking.org/openaccess/node/103

[ 6] Op.cit.

[ 7] See for example, ASHTA, A., ASSADI, D. (2009), Do social cause and social technology meet? Impact of web 2.0 technologies on peer-to-peer lending transactions in general and microfinance in particular. The First European Research Conference on Microfinance, Brussels or ASSADI, D., ASHTA, A. (2009), How do people trust on peer-to-peer lending websites? Analysis of the impacts of the web 2.0 technologies and intermediation roles, in Advances in technology and innovation in marketing (GERA, R., ed.), 49-69, MacMillan Publishers India Ltd, Delhi.

[ 8] See ARMENDARIZ, MORDUCH (2005), The Economics of Microfinance, MIT Press.

[ 9] ROSCA stands for “Rotating Savings and Credit Associations”.

[ 10] ASHTA, A. (2009), Microcredit Capital Flows and Interest Rates: An Alternative Explanation, Journal of Economic Issues (M.E. Sharpe Inc.), 43 (3), 661-683.

[ 11] MIX is the Microfinance Information Exchange which provides information based on voluntary data from about over 1300 MFIs.

[ 12] To some extent, the difference in sample size between the two years may indicate that 2008 figures are not yet available for larger MFIs (KAS and Cashpore MC), thus reducing the apparent growth rate.

[ 13] See ROSENBERG, R. (2007), “CGAP Reflections on the Compartamos Initial Public Offering: A Case Study on Microfinance Interest Rates and Profits”, Washington D.C.: CGAP Focus Note 42, June.

[ 14] See ASHTA, A., BUSH, M. (2008), Ethical Issues of NGO Principals in Sustainability, Outreach and Impact of Microfinace: Lessons in Governance from the Banco Compartamos’ IPO. Available at SSRN: http://ssrn.com/abstract=1093665).

[ 15] To see how this discussion is influenced by Rawls ethics, see HUDON, M., ASHTA, A. (2009), Microfinance Interest Rates dynamics: Are fair prices derived from Rawls’ basic principles of justice?, 2nd International Workshop on Microfinance Management and Governance, Kristiansand, Norway, 31 Aug-1Sept.

[ 16] Opinion expressed in a discussion in the linkedin group “Online Lending and Microfinance” available at http://www.linkedin.com/groupAnswers?discussionID=8902304&commentID=7810442&trk=iew_disc&viewQuestionAndAnswers=&gid=2288812 and quoted with permission.

[ 17] United Prosperity is the world’s first person to person loan guaranteeing website.

[ 18] Opinion expressed in a discussion in the linkedin group “Online Lending and Microfinance” available at http://www.linkedin.com/groupAnswers?discussionID=8902304&commentID=7810442&trk=iew_disc&viewQuestionAndAnswers=&gid=2288812 and quoted with permission.

[ 19] Opinion expressed in a discussion of the linkedin group Top World Leaders available at http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers&discussionID=8901903&gid=1266657&commentID=7805627&trk=iew_disc and quoted with permission.

[ 20] See ASHTA, A., HUDON, M. (2009), To Whom Should We Be Fair? Ethical Issues in Balancing Stakeholder Interests from Banco Compartamos Case Study. CEB (Centre Emile Bernheim - Solvay Brussels School of Economics and Management), Working Paper 09/036/2009. Available at SSRN: http://ssrn.com/abstract=1470643

[ 21] See MEWS, C. J., ABRAHAM, I. (2007), Usury and Just Compensation; Religious and Financial Ethics in Historical Perspective, Journal of Business Ethics, 72, 1-15; ATTUEL-MENDES, L., ASHTA, A. (2008), French Usury Legislation And The Development Of Credit Availability For Microenterprise, Global Journal of Business Research, 2 (2), 123-137and ASHTA, ATTUEL-MENDES, DITTER (2008) for the debate on usury legislation.

[ 22] ASHTA, A., ATTUEL-MENDES, L., DITTER, J.-G. (2008), Another “French Paradox”: Explaining why interest rates to microenterprises did not increase with the change in French usury legislation, European Microfinance Week, Luxembourg, Nov. 12-14.

[ 23] See ATTUEL-MENDES, L., ASHTA, A. (2009), The truth, but not always the Whole Truth in Lending Laws, 5th International Finance Conference, Hammamet (Tunisia), 12-14 March for a comparison of transparency legislation in different countries.

[ 24] PATTON, M. (1987), How to Use Qualitative Methods in Evaluation, California, Sage Publications.

[ 25] YIN, R. Y. (1993), Application of case study research, London, Sage Publications.

[ 26] ANDERSON, G. (1993), Fundamentals of Educational Research, London, Falmer Press, 152-160.

[ 27] YIN, R. Y. (1993), Application of case study research, London, Sage Publications.

[ 28] YIN, R. Y. (1994, 2nd ed), Case study research: Design and methods, London, Sage Publications, 45-50.

[ 29] STAKE, R. (1995), The art of case research, Thousand Oaks, CA, Sage Publications.

[ 30] PATTON M. Q. (1990), Qualitative Evaluation and Research Methods, Sage, Newbury, CA.

[ 31] PERRY, C. et al. (1999), Realism’s Role among Scientific paradigms in Marketing Research, Irish Marketing Review, 12 (2), 16-23.

[ 32] MILES, M. B. (1994), Qualitative Data Analysis – An Expanded Sourcebook, Sage, Newbury Park

[ 33] See ASHTA, A., ASSADI, D. (2009), Do Social Cause and Social Technology Meet? Impact of Web 2.0 Technologies on peer-to-peer lending transactions in general and microfinance in particular, First European Research Conference on Microfinance, Brussels, 2-4 June, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1281373

[ 34] See PRAHALAD, C. K. (2006), The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits Upper Saddle River NJ, The Wharton School Publishing.

[ 35] The emails of N. K. Ram capture this in a footnote: “Let’s knock out poverty in India. Become a social investor today! Log on to RangDe.Org.”

[ 36] Private correspondence with us, quoted with permission.

[ 37] https://www.DhanaX.com/Legal/security last accessed on Oct 28, 2009, italics as on the website.

[ 38] https://www.DhanaX.com/FAQs/about#q6 consulted on Oct 28, 2009.

[ 39] https://www.DhanaX.com/uploads/Economics.pdf undated paper without reference… (believed to be Economic Times, according to DhanaX link.)

[ 40] http://Rang De.org/faq.htm#50 consulted on Oct. 28, 2009.

[ 41] http://www.kiva.org/about/pic, click on “How to become a field partner” last accessed on Nov. 11, 2009.

Résumé

PLAN DE L'ARTICLE

• The tale of two indian micro-lending websites
• Social innovation of web 2.0
• Introduction to microfinance
• Microfinance in India
• Background of some ethical questions in microfinance
• Research method of studying cases
• Online lending models
• DhanaX and Rang De: online micro-lending in India
  • Governance
  • Risk of non-reimbursement
  • Interest rates
  • Transparency
  • Outreach
• Concluding remarks
• Future research directions
• Annexe

Arvind Ashta et Djamchid Assadi « Should online micro-lending be for profit or for philanthropy? DhanaX and Rang De », Journal of Innovation Economics 2/2010 (n° 6), p. 123-146.
URL : www.cairn.info/revue-journal-of-innovation-economics-2010-2-page-123.htm.
DOI : 10.3917/jie.006.0123.