Individual entrepreneurs and micro-enterprises are the lifeblood of Africa’s informal and semi-formal economies, but when it comes to accessing working capital loans, they are generally underserved by most financial institutions.
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In an interview with PYMNTS, Mina Shahida, co-founder and CEO of Numida, a Ugandan FinTech startup that 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 semi-formal business market that’s mostly cash.”
In addition, 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 a lot of popularity in Uganda, where they have little competition in the field.
A human and digital approach to 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 as most do. Instead, loan applications are processed based on input in the mobile app.
“Our claim to fame is really that we’ve built the valuation model and all the operational methods and underwriting to be able to provide an unsecured working capital loan to a cash company that has no history of digital transactions,” Shahid explained.
He said this is different from other digital lending platforms on the continent, where companies have to use point-of-sale systems or work with an e-commerce 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 wider customer segment,” added Shahid.
Instead of relying on digital transaction data, Numida’s proprietary scoring model is based on historical data on previously issued loans.
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Because of this, the company has been able to specifically target companies that have good cash flow but have difficulty getting a credit rating because they mainly deal in cash.
However, when it comes to loans, Shahid said customers are paying back through mobile money. This is also the payout method used by 99% of borrowers, with wire transfers reserved for the highest value loans over $2,000.
Numida’s merchant refunds are what mobile connectivity research body GSMA called “ecosystem deals” in its 2022 annual State of the Industry report.
As the GSMA noted, ecosystem transactions such as bill payments, bulk payments, merchant payments and international money transfers accounted for less than 10% of all mobile money payments in 2012. However, in 2021, this figure had risen to 20% of the $1 trillion in transactions processed.
This growing wealth of repayment data from the large volume of relatively small loans processed over the years has allowed the company to develop a “significant set of fraud flags that are automatically triggered in the loan application flow and [can then] to make disbursements before the next loan based on the usage habits of the app,” explained Shahid.
However, he noted that there are limits to how much of the system can be automated, so the startup still has loan officers to manage accounts and obtain additional information needed for the underwriting process.
He also said the combination of human touch and machine validation will allow the company to develop digital payment products for businesses “that allow us to tap into the payment flows of our customers and their customers.”
In fact, Numida has already made some forays into e-commerce lending, including a partnership initiative with pan-African marketplace Jumia.
And with cash-based semi-formal businesses representing “a huge market in almost all African countries”, the company moving forward has huge growth opportunities on the continent.
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