Technology

Silicon Valley firm takes up Sh1bn equity in Kenyan e-loans start-up

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Nearly four in 10 Kenyans used mobile money to get a loan, the highest number globally. FILE PHOTO | NMG

A Silicon Valley venture capital firm, which is an investor in Facebook and Airbnb, has invested $9.2 million (Sh929m) in a Kenyan start-up using a Facebook-linked mobile app to allow users borrow and repay micro-loans via mobile money platform M-Pesa.

Andreessen Horowitz is banking on the equity in Branch to help the financial technology firm scale operations in Kenya and grow its loan book, highlighting the growing popularity of mobile-based credit.

The California-based fund did not disclose the equity stake it now controls in Branch, an Android app offering entrepreneurs small loans of up to Sh50,000 disbursed through M-Pesa and repayable in six months.

“With this latest round of funding, we’re able to expand further to meet the huge demand for our credit product in Kenya and enter new markets,” said Matt Flannery, co-founder of Branch.

“This round of funding will enable us to scale our team along with our loan portfolio.”

The capital injection will help grow Branch’s loan book nearly tenfold from the $1 million (Sh101 million) reported in October 2015 and fund expansion to regional markets.

Andreessen Horowitz’s investment in a Kenyan based app underscores investor confidence in East Africa’s largest economy and underlines Nairobi’s claim as the continent’s premier innovation hub.

Mr Flannery, an American techie, co-founded peer-to-peer lending platform Kiva in October 2005 to directly link micro-borrowers to investors and charities who directly fund projects at zero or concessional interest rates.

Kiva opened its regional hub in Nairobi in April 2013 to disburse zero-interest loans dubbed Kiva Zip to small traders through the website. The programme has closed shop in Kenya due to low Internet penetration.

He stepped down as Kiva chief executive in June 2014 to begin working on a mobile application to disburse loans, which is now Branch.

Branch previously raised $1.4 million (Sh140 million) in seed funding from two Silicon Valley venture capital firms namely, Formation 8 and Khosla Impact.

To date, Branch has raised $10.8 million (more than Sh1bn) in equity funding.

Mr Flannery unveiled Branch in Kenya in April 2015, targeting micro enterprises in need of quick loans but are locked out by traditional banks that demand collateral and rank SMEs as high risk borrowers.

Users download Branch from Google Play, log-in with their Facebook accounts. The loans are charged a one-off fee of between six per cent and 16 per cent depending on loan size and repayment period.

The Android app awards users a credit score by remotely analysing information such as calling patterns, mobile money transactions and Facebook behaviour, the California-based techie revealed.

This helps to build a loan applicant’s profile to determine eligibility for a loan, he said, adding that the app “disburses loans in minutes.”

“User privacy is extremely important to us”, said co-founder Daniel Jung, seeking to dispel fears on information privacy. “We use world-class data encryption and never sell our user information to third parties,” he said.

Mike McCaffrey, a principal consultant at MicroSave, expressed doubts over the effectiveness of a mobile-based lending app, saying few Kenyans own smartphones for accessing the app.

“I am still very cautious of people using apps in East Africa. There is still a very small percentage of people that have smartphones,” said Mr McCaffrey.

“Using an app as a strategy in a place like Kenya means it will very likely only be a niche product for the foreseeable future,” he said.

One in every four Kenyan adults or 26 per cent owns a smartphone or other smart devices such as tablets, according to Pew Research Centre.

This places Kenya as the third ‘smartest’ economy on the continent behind South Africa (37 per cent) and Nigeria at 28 per cent.

Branch had processed more than 20,000 loans by last October since launching in Kenya in April last year.

The average loan size is Sh4,000, according to Mr Flannery. On average, each customer has taken out four loans each, ranging from Sh250 to the maximum Sh50,000, the founder said. “As users prove themselves, loan sizes go up, loan length goes down, and annual percentage rate goes down as well,” he said.

Branch this week set up shop in Tanzania, disbursing the first mobile-based micro loan on Easter Monday.

“This week, the company disbursed its first loan in Tanzania, marking an important milestone towards its goal to expand to several African countries,” Branch said in a statement.

At the beginning, Branch had a default rate of about 25 per cent of its loan book because it had “very little data” from borrowers, said Mr Flannery.

“Our ‘robot’ learned very quickly how to manage risk and is improving each day,” he said, putting the Branch’s current non-performing loan portfolio at about five per cent from seven per cent in October last year.

Branch is seen as a head-on assault on banks’ mobile-based lending platforms such as M-Shwari, M-Co-op Cash, KCB M-Pesa, and Equitel, as well as MkopoRahisi.

“The proprietary technology we have developed means that we are able to charge lower interest rates than our competition, and reward users who repay on time with lower fees, larger loan amounts and more flexible repayment terms,” said Daniel Szlapak, Africa director for Branch.

M-Shwari was launched in November 2012 by Safaricom and Commercial Bank of Africa (CBA) to offer loans to M-Pesa customers based on their savings and repayment history. The loans are payable within 30 days and attract a 7.5 per cent fee.

Co-op Bank in August 2014 unveiled M-Co-op Cash, an Android app which offers loans of between Sh100 and Sh200,000 repayable within a month at a one-off seven per cent processing fee.

KCB in March 2014 partnered with Safaricom to launch KCB–M-Pesa to disburse loans of up to Sh1 million via mobile phones and repayable in six months at an interest rate of between four and six per cent per month.

Equity Bank, through Equitel, issues cellphone-based loans.

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