Loans keep semi-formal businesses in Africa open

Sole proprietors and small businesses are the lifeblood of informal and semi-formal economies in Africa, but when it comes to obtaining working capital loans, they are usually denied by most financial institutions.

Related: Bankless Nigerian freelancers are flocking to integrated financial platforms

In an interview with PYMNTS, Mina is a martyrCo-Founder and CEO at Ugandan startup FinTech Numidawhich provides working capital loans to micro and small businesses, explains why.

“Traditional financial institutions will not lend to our customer base because they lack collateral, documentation and guarantors,” he said. “So, we’re really going to focus on that niche market of semi-formal companies that are primarily cash-based.”

Moreover, informal local lenders tend to charge high interest rates and predatory terms, exposing small businesses to serious risks.

As a result, Shaheed said the company has seen a lot of traction in Uganda, where it faces little or no competition in the space.

The digital human approach to cash-based business

To serve the informal and semi-formal market, Numida has built a credit scoring model that does not require electronic transaction data like most people do. Instead, loan applications are processed based on inputs to the mobile app.

“Our claim to fame is that we have built the registration model and all the operating and underwriting practices so that we can offer an unsecured working capital loan to a cash-based company that has no digital transaction history,” Shaheed explained.

He said this differs from other digital lending platforms on the continent that require companies to use point-of-sale systems or participate in an e-commerce market to build a credit score.

“We’ve actually built all of our models independently of those things, which allows us to serve a much broader customer segment,” added Shaheed.

Rather than relying on digital transaction data, Numida’s scoring model relies on historical data from previous loans issued.

More like this: Small businesses need credit, and lenders need a better way to assess that risk

Because of this, the company was able to specifically target companies that have good cash flow but struggle to build a credit score because they deal mostly in cash.

Despite this, when it comes to loans, Shaheed said customers repay via mobile money. This is also the exchange method used for 99% of borrowers, with bank transfers reserved for higher value loans over $2,000.

Numida payments to merchants are what mobile connectivity research organization the GSMA called a “transaction ecosystem” in a 2022 edition of its annual issue. Industry State Report.

As noted by the GSMA, in 2012 ecosystem transactions such as bill payments, bulk payments, merchant payments and international transfers accounted for less than 10% of all mobile money payments. But in 2021, that number has risen to 20% of the $1 trillion in transactions processed.

This growing wealth of repayment data from the large volume of relatively small-value loans processed over the years has enabled the company to develop “a plethora of fraud signals that are automatically triggered in the flow of loan applications and [can then] Withdraw payments before obtaining a later loan based on app usage behavior,” Shahid explained.

However, he noted, there are limits to how much the system can be automated, which is why the startup still has human credit officers who manage the accounts and gather additional information needed for the underwriting process.

He also said that the combination of human touch and device validation will enable the company to develop corporate digital payment products “that would allow us to access the payment channels of our customers and their customers.”

In fact, Numida has already made some forays into e-commerce lending, including a partnership initiative with the African Market Jumia.

And since semi-formal cash-based business is a “huge market in almost every country across Africa,” there are huge growth opportunities on the continent going forward.

For all of our PYMNTS EMEA coverage, subscribe to the Daily Bulletin of Europe, the Middle East and Africa.

How consumers pay online using stored credentials
The convenience is driving some consumers to store their payment credentials with merchants, while security concerns are giving other customers pause. For “How We Pay Digital: Stored Credentials Edition,” a collaboration with Amazon Web Services, PYMNTS surveyed 2,102 US consumers to analyze the consumers’ dilemma and reveal how merchants can make money.

Leave a Comment