Credit keeps Africa’s semi-formal businesses afloat

Solopreneurs and micro-enterprises are the lifeblood of Africa’s informal and semi-formal economy, but when it comes to accessing working capital, they are typically underserved by most financial institutions.

Related: Nigeria’s underpaid gig workers are flocking to one-stop shop financial platforms

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 will not lend to our customer base because they lack collateral, documentation and guarantees,” he said. “So we’re really going to focus on this niche market of semi-formal businesses that operate primarily with cash.”

In addition, informal local lenders tend to charge high interest rates and predatory terms, exposing small businesses to serious risk.

As a result, Shahid said the company has gained a lot of traction in Uganda, where they face little or no competition in this space.

A human-digital approach for cash-based businesses

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

“Our claim to fame is truly that we developed the scoring model and all the operational practices and underwriting to be able to offer an unsecured working capital loan to a cash-based company that has no digital transaction history,” explained Shahid.

He said this differs from other digital lending platforms on the continent, which require businesses to use point-of-sale systems or partner with an e-commerce marketplace to create a credit score.

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

Rather than relying on digital transaction data, Numida’s proprietary scoring model is based on historical data from previously originated loans.

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

Because of this, the company has been able to target companies that have good cash flow but are struggling to build credit as they primarily do cash settlement.

Despite this, Shahid said customers are repaying via mobile money when it comes to loans. This is also the payout method used by 99% of borrowers, with bank transfers being reserved for the highest value loans over $2000.

Numida’s merchant paybacks are what the 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 payouts, merchant payments and international remittances accounted for less than 10% of all mobile money payments in 2012. But by 2021, that number had grown to 20% of the $1 trillion in transactions processed.

This growing body of repayment data from the large volume of relatively low-value loans processed over the years has enabled the company to “develop a significant set of fraud indicators that are automatically triggered in the loan application flow and… [can then] Pull payouts ahead of a later loan based on app usage behavior,” explains Shahid.

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

He went on to say that the combination of human touch and machine validation will enable the company to develop enterprise-grade digital payment products “that would allow us to tap into the cash flows of our customers and their customers.”

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

And since cash-based, semi-formal businesses represent “a huge market in pretty much every country in Africa,” there are huge growth opportunities on the continent for the company to evolve.

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Convenience is prompting some consumers to store their payment information with merchants, while concerns about security are causing other customers to pause. For How We Pay Digitally: Stored Credentials Edition, a collaboration with Amazon Web Services, PYMNTS surveyed 2,102 US consumers to analyze the consumer dilemma and how merchants can overcome resistance.


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