Sunday, August 2, 2015

Success In Anything Takes Risk In Something

While we enjoy the hot summer months I am excited to see the involvement with One Thought Away Investing warming up (at the beginning stages we have a dozen lenders and have lent $571). As I have said before, each fire starts with a spark and I am grateful for the support of these individuals being part of lighting the first match. Being the first to take a step into the uncertain is not always easy and brings us to our thought for August: Success in anything takes risk in something.


When speaking to these first lenders the questions arose of how certain it is those borrowing the money will pay their loan back and how are they are held accountable. These are valid questions I appreciate since they display a level of seriousness being shown in lending responsibly. In fact, the situation allowing micro-lending to be a viable option is that traditional banking systems in these developing areas can be characterized by ultra-high interest rates (up to 40%) on repayments. Rates this high create a much larger risk to borrowers who already feel the weight of financial insecurity (in comparison, loans lent on Zidisha have an average interest rate of 3.5%). The current repayment breakdown of the portfolio of $1.35 million of loans lent on Zidisha is as follows:

  • 87.9% of loans have been repaid, or are being repaid on time
  • 8.3% of loans have overdue payments
  • 3.8% of loans have been written off. A lender can reclaim the money they have lent through the Zidisha Members Loan Fund for default loans (more details here).
One might jump to the fact that there is a portion borrowers with overdue payments and loans that have been written off. My response is this is normal with any investing concept because the nature of risk; the reality in life is best laid plans do not work out 100% of the time. I share this openly because how relatively low these default rates are if you compare them to other borrower groups we may be more familiar with. Student default rates in the U.S. were reported to be at 13.7% in Fall 2014, which was actually a decline from previous reports [1]. Despite this fact, millions will still enter college this coming fall and spend thousands of dollars to do so willingly with the thought it will pay off in the end. With this in mind I argue the repayment risk of providing one micro-loan is low not only to the lender who risks a relatively small amount of collateral (e.g. a $20 loan), but also based on the fact that the borrowers have an incentive to pay it off (they achieve their investment goal and it builds their credibility for future larger loans).

When considering your next risk whether it be making a micro-loan (click here), or in some other area of your life remember the thought: success in anything takes risk in something. As a parting shot take a look at this example of a man part Tar Heel, part Bull, part G.O.A.T. who took life by the horns and understood this thought.

https://www.youtube.com/watch?v=JA7G7AV-LT8

Positive thought sparks positive action,

Miles

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