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Driving economic inclusion through alternative lending

M-KOPA Solar kit and a digital solar powered TV during the launch of the TV at M-KOPA Solar offices in Nairobi on February 17, 2016. FILE PHOTO | NMG
M-KOPA Solar kit and a digital solar powered TV during the launch of the TV at M-KOPA Solar offices in Nairobi on February 17, 2016. FILE PHOTO | NMG 

In the era of “digital” everything it is easy to forget the incredible productivity a hard asset can bring to an entrepreneur.

Productive assets are what micro enterprises (or informal businesses) need to grow, and eventually enter into the formal economy.

Productive assets enable subsistence farmers to become crop sellers, drivers to become taxi owners, and hard labourers to become machine operators.

We believe that economic inclusion starts with informal entrepreneurs.

By adding just one productive asset to someone’s mix, you can start a positive economic cycle for that individual – which allows him or her to create more assets and pay down liabilities.

But the credit gap is massive. In 2013, the IFC estimated the developing world funding gap for formal and informal micro, small, and medium enterprises to be $2.1 trillion - $2.6 trillion.

Working capital

Traditionally, to secure a working capital loan for a kiosk, the owner might have been expected to offer up a title deed, if they even have one.

There are two major trends disrupting this; firstly, asset finance is ‘self-collateralized’ and secondly, we’re able to get increasingly better data to assess risk.

Pay-as- you-go (PAYGO) providers now have smart ways to lower collateral requirements by financing based on the future cash flows created by a new asset – rather than existing title to unrelated land (for example).

More and more, the asset being purchased, acts as the principal collateral.

Mobile money usage is enabling much better collection of micro payments. In January 2017, GSMA, the global association for the mobile telecommunications industry, calculated that over 1.6 million mobile money transactions were generated per month by PAYGO solar customers alone.

This volume of digital transactions is enabling the capturing and analysis of payments data at a level never seen before in informal businesses.

Alternative lenders, like, d.light, Watu Credit, M-KOPA Solar, PEG Ghana, Raj Ushanga House, SunCulture, and Tugende are using this convergence of technology to reach more customers and lower the cost of servicing them.

In the process, they are creating incorruptible records of repayment that can be used to understand their cash flows and identify new ways to extend credit to the small and micro business segment they serve.

Thanks to these alternative lenders, micro enterprises are now accessing solar systems, fridges, internet-enabled phones, cooking stoves, televisions, hand pumps, irrigation equipment, motorcycles, cars, and water tanks. Each of these can kick start a positive economic cycle. But these alternative lenders need cash – and lots of it - to fund new loans.

By 2020, the market for East African alternative lenders is expected to reach $15 billion (Sh1.6 trillion). This type of capital will be difficult to fund from within the source markets.

Alternative lenders are increasingly looking overseas to institutional credit investors.

As new sources of commercial credit are tapped to fund them, it is also changing the narrative of African business and entrepreneurship.

As this continues, investments in African micro-entrepreneurs by the big credit desks at the global institutions will go beyond “impact” and become ‘business as normal’.

Daniel Goldfarb is a co-founder and CEO of Lendable Inc, a provider of loans and software to alternative lenders

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