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Loans Keep Africa’s Semiformal Businesses Open

Solopreneurs 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 typically underserved by most financial institutions.

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In an interview with PYMNTS, Mina Shahidco-founder and CEO of the Ugandan FinTech startup company Numidathat provides working capital loans to micro and small businesses explains why.

“Traditional financial institutions do not 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 semi-formal businesses that are primarily cash-based.”

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

As a result, Shahid said the company has seen a lot of adoption in Uganda, where they have little to no competition in the space.

A human-digital approach for money-based businesses

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

“Our claim to fame is really that we 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 company that has no digital transaction history,” explained Shahid.

He said this differs from other digital lending platforms on the continent, where businesses must use POS systems or be involved in an e-commerce marketplace to build a credit score.

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

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

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This has allowed the company to specifically target companies that have good cash flow but struggle to build a credit score because they primarily deal in cash.

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

Numida’s merchant refunds 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 payments, merchant payments, and international money transfers accounted for less than 10% of all mobile money payments. But by 2021, this number had risen to 20% of the $1 trillion in processed transactions.

That growing wealth of amortization data from the large number 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 flow of loan applications and [can then] draw payouts prior to a subsequent loan based on app usage behavior,” Shahid explained.

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

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He went on to say that the combination of human touch and machine validation will enable the company to develop digital payment products for businesses “that allow us to get into the payment streams of our customers and their customers.”

Numida has even made some forays into e-commerce lending, including a partnership initiative with the pan-African marketplace Yumia.

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

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