Loans keep Africa’s semi-formal businesses open

Self-employed entrepreneurs and micro-enterprises are the lifeblood of Africa’s informal and semi-formal economies, but when it comes to accessing loans for working capital, they are generally underserved by most financial institutions.

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In an interview with PYMNTS, Mina Shahid, co-founder and CEO of Ugandan FinTech startup Numida, which provides working capital loans to micro and small businesses, explained why.

“Traditional financial institutions are not lending to our client base because they lack collateral, documentation and guarantors,” he said. “So, we’re really going to focus on this niche market of semi-formal businesses that do mostly cash.”

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

As a result, Shahid said the company has seen considerable success in Uganda, where there is little or no competition in the industry.

A human-digital approach for cash-based businesses

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

“Our claim to fame is really that we built the scoring model and all the operating practices and underwriting to be able to provide an unsecured working capital loan to a cash-based business that has no transaction history digital,” Shahid explained.

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

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

Instead of relying on digital transaction data, Numida’s proprietary scoring model is based on historical data from previous loans issued.

More so: Small businesses need credit, lenders need a better way to assess that risk

Because of this, the firm has been able to specifically target businesses that have good cash flow but struggle to build a credit score because they transact primarily in cash.

Still, when it comes to loans, Shahid said customers repay via mobile money. This is also the disbursement method used for 99% of borrowers, with wire transfers reserved for higher value loans over $2,000.

Numida’s merchant rebates are what mobile connectivity research organization GSMA called “ecosystem transactions” in the 2022 edition of its annual State of the Industry report.

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

The growing wealth of repayment data resulting from the large volume of relatively low value loans processed over the years has enabled the firm to develop “a meaningful set of fraud indicators that are automatically triggered in the loan application flow And [can then] pull disbursements before a subsequent loan based on app usage behavior,” Shahid explained.

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

He further said that the combination of human touch and automatic validation will enable the company to develop digital payment products for businesses “that would allow us to tap into the payment flows of our customers and their customers.”

In fact, Numida has already made a few forays into ecommerce lending, including a partnership initiative with pan-African marketplace Jumia.

And because cash-based semi-formal businesses represent “a huge market in nearly every country in Africa,” there are huge growth opportunities on the continent for the company going forward.

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