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Welcome back. Financial innovation gained notoriety after the 2008 financial crisis, when an arcane structure built around US subprime mortgages threatened to collapse the global economy. Even today, in many ears, this phrase brings to mind Wall Street shenanigans that increase the incomes of a select few.
However, there is significant scope for innovative approaches to tackle financial exclusion, particularly in developing countries, and to increase the incomes of families and small businesses that remain underserved by the formal financial sector. Today we’re highlighting some interesting companies in three very different parts of the world that are aiming to do just that.
Financing developing markets
Inside the new ways lenders are delivering finance to rural areas and beyond
When Hugo Garduño Ortega began exploring opportunities to join Mexico’s burgeoning emerging sector of financial technology, he noticed a striking pattern.
As in other developing countries, the majority of Mexican households and small businesses struggle or are unable to access the financial services that help them thrive.
But even as Mexican fintech startups attract increasing interest and funding from international investors, they are increasingly focused on serving the already wealthy rather than tackling financial exclusion. focus, Ortega found. “Everyone is talking about consumer financing for the same people who already have credit cards,” he said. “It’s unbelievable. No one is actually trying to serve rural communities.”
Ortega’s business, Verqor, aims to counter that trend. The company is one of a growing number of startups in developing countries that leverage technology, data and innovative lending practices to expand lending to smallholder farmers and other underserved groups. .
The lack of credit history of many Mexican farmers is a deterrent for many banks. So are concerns about the availability of collateral for financing, especially given that farmland is often owned by local communities rather than single farmers.
Verqor aims to avoid these problems by taking a completely different approach than traditional bank lending. Ask potential customers to give you access to their transaction data from the past five years and analyze that data to build a detailed picture of their business. This means that even if 60% of customers have no formal credit history, Verqor can assess their likely ability to repay a loan.
The loan is provided as a credit balance rather than cash and can be used to purchase agricultural inputs such as fertilizer, along with goods collected from local vendors through Verqor’s proprietary platform. “If you’re giving yourself credit, you might want to make sure it’s productive,” Ortega says. “It’s not like a farmer can just get a new pickup truck with the fertilizer credit.”
Verqor further reduces the risk of default through its repayment approach. When the farmer delivers the product to the customer, the payment is made through Verqor, which picks up the outstanding loan amount and sends the remainder to the farmer.
Although this approach may seem restrictive, Verqor offers farmers much lower interest rates than those charged by the informal moneylenders they typically rely on, while minimizing the risk of default. credit can be provided. Vercor’s bad debt ratio was 1.7% over the past three years and 0.4% over the past 12 months, Ortega said. That compares with Mexico’s overall bank interest rate of 1.9% as of June, according to CEIC data.
Verqor is one of more than 70 companies in more than 30 countries receiving investment from Accion Venture Lab, an impact-focused investment vehicle run by US-based nonprofit Accion International.
“We see financial services as a means to an end,” said Rahil Rangwala, one of Accion Venture Lab’s two managing partners. “We can provide access to loans, but does that mean farmers have more income? It means small businesses can stock more of what they sell and better manage their cash flow. Does that mean?”
Nairobi-based Apollo Agriculture applies similar logic to provide loans to around 380,000 smallholder farmers in Kenya and Zambia. Customers register through field agents who inspect farms and perform basic due diligence. Apollo offers a package of “everything you need to be successful,” including fertilizer, seeds and crop insurance, CEO Benjamin Njenga said. Similar to Verqor, Apollo offers customers coupons that can be redeemed for items at local stores. The loan will be repaid through mobile money after harvest. Mobile money is widely used in Kenya and increasingly in other parts of Africa.
“Their mission is, ‘We want farmers to make more money,'” said Amee Parboo, another managing partner at Axion Venture Labs, which also invested in Apollo. say. “It’s not about financial products. It’s about knowing what to offer to get a more productive yield, which means more money for them.”
In Indonesia, former HSBC banker Fajar Adiwidodo is applying a similar approach to support small manufacturing businesses that typically have difficulty accessing working capital loans. “So they have to buy raw materials in cash and are paid in arrears whenever they deliver the product to the buyer,” Adiwidodo said. “It’s the strange thing about this world that small businesses have to fund big businesses.”
Adiwidodo’s company, Bababos, provides raw materials such as steel bars and raw polymers to small manufacturers. When a client sells a finished product, we collect payment directly from the buyer through an escrow account system.
Since starting business two years ago, Bababos has attracted more than 400 small manufacturers as customers and currently generates approximately $1.2 million in monthly revenue. Adiwidodo said the country’s non-performing loan rate is currently around 0.3%, much lower than Bank Indonesia’s typical interest rate on small and medium-sized business loans.
He added that Bababos’ practice of providing customers with goods rather than cash was a major factor in this low default rate. “Banks are not satisfied with the risk profile of their customers, so they need collateral,” he said. “But you can solve that by managing your supply chain.”
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