Should Online Micro-Lending Be For Profit or For Philanthropy

SHOULD ONLINE MICRO-LENDING BE FOR PROFIT OR FOR
PHILANTHROPY? DHANAX AND RANG DE
Arvind Ashta et Djamchid Assadi
De Boeck Supérieur | « Journal of Innovation Economics & Management »
2010/2 n° 6 | pages 123 à 146
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SHOULD ONLINE
MICRO-LENDING BE FOR PROFIT
OR FOR PHILANTHROPY?
DHANAX AND RANG DE 1
Arvind ASHTA
Burgundy School of Business (Groupe ESC Dijon-Bourgogne), CEREN
Arvind.Ashta@escdijon.eu
Djamchid ASSADI
Burgundy School of Business (Groupe ESC Dijon-Bourgogne), CEREN
djamchid.assadi@escdijon.eu

Social innovation usually refers to two different denotations: One is rela-
ted to social processes of innovation such as open source methods 2; the other
refers to improvement of the everyday life, meeting social needs of all kinds
and finally strengthening of civil society 3. While this paper deals with the
two mentioned approaches of social innovation, the focus mainly remains on
innovation with a social purpose such as microcredit and voluntary entre-
preneurship.
The literature on innovation often privileges innovation which derives
from the different aspects of an offering: product, price, distribution and
communication; this paper holds that there is a considerable potential of
innovation in adapting and implementing conventional products and servi-
ces to specific markets with social traits such as individual with problems of
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 works-
hop 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, McKin-
sey Quarterly, June.
3. LAVILLE, J.-L, GARDIN, L, LEVESQUE, B, NYSSENS, M. (2007), L’économie solidaire :
Une perspective internationale, Paris, Hachette.
n° 6 – Journal of Innovation Economics 2010/2 123

Arvind ASHTA, Djamchid ASSADI
insolvency. The paper explores and compares two different approaches to

poverty alleviation.
THE TALE OF TWO INDIAN MICRO-LENDING

WEBSITES
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 Dha-
naX, 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.

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), architectu-
ral innovation (new markets for exisiting technology), disruptive informa-
tion (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 com-
pany), ecosystems or platforms (company to users) and recombinant innova-
tion (company to company) 4.
SOCIAL INNOVATION OF WEB 2.0

Since both Rang De and Dhanax are operating in the web 2.0, it may be per-
tinent 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 introdu-
ced 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 tran-
4. SHUEN, A. (2008), Web 2.0: A strategy guide, O’Reilly Media Inc., Sebastopol, CA.
124 Journal of Innovation Economics 2010/2 – n° 6

Should online micro-lending be for profit or for philanthropy?
sactions and receipt options. The technology already existed. It is used to

service existing customers faster and better than competition. It can be ter-
med 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 bio-
metrics 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 moni-
tor, telephone-style handset, photo ID scanner, and cash and coin dispersal.
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 practi-
ces. As opposed to this, new technology is serving the poor illiterate custo-
mers 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
The new paradigm of innovations described by Shuen (2008)6 is rooted
in the use of web 2.0 technology, although other information and communi-
cation 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. But before
we go into this, we provide a brief introduction to microfinance.
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/open-
access/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.,

INTRODUCTION TO MICROFINANCE
Microfinance has existed for centuries with informal saving and credit sys-
tems such as Susu in Ghana, chit funds in India, tandas in Mexico, and ari-
san in Indonesia. The forerunners of formal microfinance institutions which
we study were the “credit union” in the Western countries. Today’s microfi-
nance movement has been an outgrowth of the cooperative banking move-
ment 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).
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.
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 ROSCA9s 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 com-
panies and banks who have descended to enter this market. In fact, the mar-
ket for lending to poor people already existed at high interest rates through
informal moneylenders and microfinance institutions have essentially come
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 inno-
vation 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”.

in to lower these interest rates. 10 Appendix 1 provides an idea of the break-

up 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 Ban-
king 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 mil-
lion. 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).
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 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 ser-
vices that are being extended to the poor, notably, credit, saving deposits,
insurance and remittances.
MICROFINANCE IN INDIA
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,
10. ASHTA, A. (2009), Microcredit Capital Flows and Interest Rates: An Alternative Explana-
tion, Journal of Economic Issues (M.E. Sharpe Inc.), 43 (3), 661-683.
11. MIX is the Microfinance Information Exchange which provides information based on volun-
tary data from about over 1300 MFIs.

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.
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 chan-
ges 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 num-
ber of borrowers has almost doubled an increase of 77%. Combining these
two effects, the loan portfolio has increased by about 23%, in line with glo-
bal trends. 12

BACKGROUND OF SOME ETHICAL QUESTIONS
IN MICROFINANCE
A good setting for ethical questions is the billion dollars increase in capita-
lization by Compartamos, an MFI in Mexico 13. 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
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 appa-
rent growth rate.
13. See ROSENBERG, R. (2007), “CGAP Reflections on the Compartamos Initial Public Offe-
ring: 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).

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. Moreover, competition
would help in reducing the market interest rates, eventually.
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 understan-
ding how it is ethical” 16 (Bhalchander Vishwanath, Founder CEO of Uni-
ted Prosperity 17). “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 dissemi-

nate 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 counterpro-
ductive in the long run and curb Investment. What would be useful howe-
ver is good overall legislation/regulation backed by a good enforcement
machine?” 18 (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 (produ-
cing low or no profit) - at least in conditions of Russian credit market” 19
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 princi-
ples 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=view_disc&viewQuestionAndAnswers=&gid=2288812 and quoted with per-
mission.
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=view_disc&viewQuestionAndAnswers=&gid=2288812 and quoted with per-
mission.
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=view_disc and quoted with permission.

(Julia Suvorava, Head of Operational Risk Management at KMB Bank, Rus-

sia).
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.
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 inte-
rest rates. 20 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. 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.
A third question is related to the transparency of interest rates. Flat inte-
rest rates of 10% on initial balance are effectively almost equal to an effec-
tive interest rate of 20% per annum. Therefore, one provides the impression
to poor illiterate people that they are paying 10% while the shrewd finance
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 Ber-
nheim - 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-MEN-
DES, 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.

man knows he is making about 20% 23. 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.
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 sub-
sidy providers which in turn are financed by all the public together, provi-
ding 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.
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

The inquiry in this research is whether the lucrative and not-for-profit status
conduct to different business models, in particular different services rende-
red to target customers. To investigate the possible directions that MFIs
might take from the inception of the model explained previously, we consi-
der 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.
As a research method, case study focuses on a special matter to unders-
tand the complex real-life aspects or adds new insights to what is already
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.

familiar 24. 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. Case study research generally
poses questions which begin with “how” or “why” 26 for exploratory, descrip-
tive and explanatory purposes 27.
To answer these questions, the selection of exemplary and typical cases is
crucial. If many cases are selected, then each case should be treated indivi-
dually. The underlying principle for selection is replication logic and not
sampling logic 28; relevance rather than representativeness 29. In other words,
a “purposeful sampling” rather than a “random sampling” 30 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.
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. 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 tac-
tics used in analysis include matrices of categories, flow charts, tabulating fre-
quency of events, and in particular, cross-case analysis 32, which is employed
in our research.
ONLINE LENDING MODELS

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
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

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.
Their initial promise was to lower interest rates to borrowers and
increase returns to lenders compared to what commercial banks were promi-
sing. 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 specia-
lised 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 offe-
rings, 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.
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-for-
profit.
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.
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.
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 microfi-
nance in particular, First European Research Conference on Microfinance, Brussels, 2-4 June,
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1281373

Figure 1 - KIVA: Movement of funds
Field Partner
Lenders Kiva Entrepreneur
MFI
The Lender chooses

The MFI distributes funds to
who to lend to, but
individual borrowers or to
routes the funds
groups of borrowers

through KIVA
Figure 2 - Microplace: Movement of funds
Microplace
Lenders
Security Field Partner Entrepreneur
Issuers MFI
The Lender buys bonds of

The security issuers
social funds but indicates
distribute funds to identified
which MFI these should be
MFIs
directed to

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 bor-
rowers once the first ones pay back, the donors don’t get their money back.
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
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 mar-
ket 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 corre-
lated 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
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 mar-
ket, as advocated by C.K. Prahalad’s bottom of the pyramid model. 34 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 bor-
rowers 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-
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.

urban models with high population density and lower transaction costs.
Their first lending site has been Bangalore. They have followed this up with
Ahmedabad.
Smita and NK Ramakrishna decided, instead, to stick with the not-for-
profit route, because the mission of helping the poor and message it con-
veyed to society was more important for them 35. 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 termi-
nation of a transaction. For the moment, there is no evidence of either Dha-
naX or Rang De shifting its mission from NGO to for-profit or vice-versa.
Risk of non-reimbursement
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.
Since Rang De is an Escrow Agent, legally speaking, it’s the social inves-
tor 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.
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
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.

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 gua-
rantor.” “The above excerpt has been taken from the standard loan agree-
ment that every lender has to sign. Note that the term guarantor here refers
to DhanaX”. 37
Interest rates
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.
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 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. 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.
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 web-
site indicates the following information on its interest rate policy: 40 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
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.

• 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
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 pay-
ments. 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.
Both Rang De and DhanaX seem to be particularly vigilant on the trans-
parency 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
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.

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 respec-
tive 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
Table 1 summarises our findings for the two Web sites.
Table 1 – Summary of Findings


Dhanax Rang De
Governance For-profit company Not-for-profit Trust

Escrow Agent
Security SHG are co-guaranters SHG are co-guaranters
Dhanax is second level
guarantor
Interest rates:
Lenders 14% 2% flat (3% APY)
Website operator 7.5% 1.5%
Field Partner 2.5% 5%
Borrowers 24-25% 8.5% flat
Transparency 24-25% EAR 16% EAR
Market Interest rates of top 21% to 32% (11% for 21% to 32% (11% for
ten brick and mortar MFIs NGO) NGO)
Outreach (18 months) 1000 loans 1018 entrepreneurs

Scale $250,000 $150,000
Average loan size $250 $150
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 bor-
rowing 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 coun-
tries. These relationships do not need a website. Thirdly, there is a strong
need to leave something for the future generations of offspring and their des-
cendants. 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.
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

Here are some directions for future research.

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?
Why do lenders really want to lend? How do members come online, how
are they identified, and how are Info/online security matters handled?
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:
•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).
41. http://www.kiva.org/about/pic , click on “How to become a field partner” last accessed on

Nov. 11, 2009.

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 Trans-
fers 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?
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 compa-
ring the social impacts of the two websites in terms of poverty alleviation.

142
Appendix 1: Trend Lines 2005-2007 MFI Benchmarks (Median Values)
MFI Age Assets Personnel Asset growth
Number Years USD Number %
Year 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2007/2006
Bank 46 48 50 8 9 10 108 206 929,00 160 506 016,00 230 711 700,00 537 675 816 43,7%
Credit Union 35 35 35 10 11 12 8 823 462,00 13 586 466,00 21 965 300,00 54 74 92 61,7%
NBFI 143 169 172 8 9 10 10 523 999,00 13 837 662,00 24 089 865,00 127 150 198 74,1%
NGO 222 196 190 9 11 12 4 011 160,00 5 097 944,00 7 189 580,00 74 95 106 41,0%
Rural Bank 41 39 40 19 22 22 3 968 061,00 4 579 626,00 6 215 232,00 61 64 69 35,7%
All MFIs 487 487 487 9 10 11 6 673 576,00 9 059 366,00 13 724 483,00 96 122 146 51,5%
Source: The Microbanking Bulletin, Issue 18, Spring 2009
Journal of Innovation Economics 2010/2 – n° 6

Appendix 2 – Top 10 Indian MFIs in Mix Data-base
Number of Average loan

2008 Loan Portfolio borrowers outstanding
SKS 278 710 715 3 520 826 79
Spandana 245 209 050 2 432 000 101
SHARE 190 831 717 1 502 418 127
Bandhan 103 827 768 1 454 834 71
Asmitha 104 332 997 890 832 117
SKDRDP 96 666 108 801 527 121
BASIX 73 600 059 498 681 148
Grama Vidiyal 31 917 238 360 466 89
BISWA 37 471 172 352 352 106
Equitas 43 401 148 339 158 128


Top Ten 1 205 967 972 12 153 094 99
2007
SKS 261 686 364 1 629 474 161
Spandana 182 150 739 1 188 861 153
SHARE 151 664 954 989 641 153
Bandhan 82 431 182 896 714 92
SKDRDP 85 153 994 574 968 148
Asmitha 83 648 773 565 806 148
KAS 20 925 617 396 861 53
BASIX 49 399 253 305 438 162
Cashpor MC 36 696 201 303 245 121
BISWA 29 400 061 24 643 1 193
Top Ten 983 157 138 6 875 651 143
Growth
percentage 23% 77% -31%

Appendix 3 – Legal Status of top Indian MFIs in 2008
Legal Status Former status
SKS NBFC since 2006 Society before
Spandana NBFC since 2005 Society before
SHARE NBFC since 2000 Society before
Bandhan NBFC since 2007 Society before
Asmitha NBFC since 2002


SKDRDP Trust
BASIX NBFC and Bank since 1997
Grama Vidiyal NBFC since 2008 Trust before
BISWA Society since 1994
Equitas NBFC since 2007
Source : Their websites.

Appendix 4 – Online lending models within the microfinance industry
Launch Country in
Date which started Coverage Legal status Model website
Kiva NovǦ2005 US Global Non-profit Intermediery to MFI www.kiva.org

Microplace OctǦ2007 US Global For profit Investment www.microplace.com
Intermediary to
MyC4 May-2007 Denmark Global For profit Small buisness lending www.myc4.com
Rang De Janu 2008 India India Non-profit Intermediery to MFI www.Rang De.org
DhanaX Feb 2008 India India For profit Intermediery to MFI www.DhanaX.com
Babyloan July 2008 France Global For profit Intermediery to MFI www.bayloan.org
Wokai Janu 2009 US/China China Non-profit Intermediery to MFI www.wokai.org
United
Prosperity May 2009 US/ India India Non-profit Guarantor to bank www.unitedprosperity.org
n° 6 – Journal of Innovation Economics 2010/2

145
Appendix 5 – Interest rates charged by different MFIs in India (October 2009)
146
Interest Rate Effective annual rate/ Source (consulted on Oct 28, 2009)
On flat basis declining balance
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 23.56% + + http://www.bandhanmf.com/faqs.html
+ 10% deposit
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 http://69.89.31.196/~basixind/images/BasixAR2009Final.pdf
10% cash deposit p. 66
Grama Vidiyal Not disclosed
BISWA 20% http://www.biswa.org/en/index.php?option=com_docman&task=c

at_view&gid=45&Itemid=65, Annual report 2008, p. 17
Equitas 27.5% to 28.5% http://equitas.in/ProFea_LoanProductsSummary.html
Journal of Innovation Economics 2010/2 – n° 6


Should Online Micro-Lending Be For Profit or For Philanthropy

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SHOULD ONLINE MICRO-LENDING BE FOR PROFIT OR FOR

PHILANTHROPY? DHANAX AND RANG DE

Arvind Ashta et Djamchid Assadi

De Boeck Supérieur | « Journal of Innovation Economics & Management »

2010/2 n° 6 | pages 123 à 146

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insolvency. The paper explores and compares two different approaches to

THE TALE OF TWO INDIAN MICRO-LENDING

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SOCIAL INNOVATION OF WEB 2.0

124 Journal of Innovation Economics 2010/2 – n° 6

sactions and receipt options. The technology already existed. It is used to

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n° 6 – Journal of Innovation Economics 2010/2 125

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126 Journal of Innovation Economics 2010/2 – n° 6

in to lower these interest rates. 10 Appendix 1 provides an idea of the break-

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n° 6 – Journal of Innovation Economics 2010/2 127

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128 Journal of Innovation Economics 2010/2 – n° 6

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n° 6 – Journal of Innovation Economics 2010/2 129

(Julia Suvorava, Head of Operational Risk Management at KMB Bank, Rus-

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130 Journal of Innovation Economics 2010/2 – n° 6

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RESEARCH METHOD OF STUDYING CASES

n° 6 – Journal of Innovation Economics 2010/2 131

familiar 24. Case studies, based on qualitative approach, scrutinize a limited

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ONLINE LENDING MODELS

132 Journal of Innovation Economics 2010/2 – n° 6

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n° 6 – Journal of Innovation Economics 2010/2 133

Figure 1 - KIVA: Movement of funds

The Lender chooses

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Figure 2 - Microplace: Movement of funds

The Lender buys bonds of

134 Journal of Innovation Economics 2010/2 – n° 6

Wokai, another not-for-profit, is also directed at a specific market of US

DHANAX AND RANG DE:

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n° 6 – Journal of Innovation Economics 2010/2 135

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136 Journal of Innovation Economics 2010/2 – n° 6

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n° 6 – Journal of Innovation Economics 2010/2 137

• 1% is for Rang De to cover its operational costs.

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138 Journal of Innovation Economics 2010/2 – n° 6

DhanaX launched its operations in February 2008. In the first 18 months

Table 1 – Summary of Findings

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Governance For-profit company Not-for-profit Trust

Outreach (18 months) 1000 loans 1018 entrepreneurs

n° 6 – Journal of Innovation Economics 2010/2 139