Mobile Loans Keep Africa’s Semiformal Economies in Business

Solopreneurs and micro-businesses are the lifeblood of Africa’s informal and semiformal economies, but when it comes to accessing working capital loans, they are typically underserved by most financial institutions.

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

“Traditional financial institutions won’t lend to our customer base because they lack collateral, documentation and guarantors,” he said. “So, we’re really going to focus on this niche market of semiformal businesses who are primarily operating in cash.”

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

As a result, Shahid said that the firm has seen a lot of uptake in Uganda, where they face little to no competition in the space.

A Human-Digital Approach for Cash-Based Businesses

To serve the informal and semiformal market, Numida has built a credit scoring model that doesn’t require electronic transaction data as most do. Instead, loan applications are processed based on inputs to a mobile app.

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

He said this differs from other digital lending platforms on the continent that require businesses to use point-of-sale systems or to be engaged with an eCommerce marketplace to build a credit score.

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

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

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

Despite this, when it comes to loans, Shahid said that customers repay via mobile money. This is also the disbursement method used for 99% of borrowers, with bank transfers reserved for the highest value loans above $2000.

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

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

That 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 significant set of fraud flags that are automatically triggered in the loan application flow and [can then] pull disbursements prior to a subsequent loan based on the 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 managing accounts and gleaning additional information needed for the underwriting process.

He further said that the combination of human touch and machine validation will enable the firm to develop digital payment products for businesses “that would allow us to get into the payment streams of our customers and their customers.”

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

And as cash-based, semiformal businesses represent “a massive market in pretty much every country across Africa,” there are huge growth opportunities on the continent for the firm moving forward.

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