The Exchange sat together with Daniel Goldfarb, the Co-Founder, CEO of Lendable.
Lendable is the first debt platform designed specifically for African alternative lenders – non-banking, asset-backed finance providers operating in microfinance, and a range of Pay-as-you-go (PayGo) services including energy. Its platform combines capital from experienced international debt investors from North America and Europe. They include family offices, alternative investment fund managers, high net worth individuals, impact funds and banks.
The Exchange sought to understand the micro-lending sector in Sub Sahara Africa, how alternative lenders are promoting responsible lending and the impact the microloans are having on the economies of the countries in the region.
Who is Lendable and what led to its formation?
We are a US based company originally, with our African headquarters in Nairobi. The basic and original idea for Lendable came when we observed a global need. In the world, there are about 2 billion people who do not have access to credit. I have not seen Kenyan numbers but it is something like 50%, Ugandans is higher something like 70% and could even be higher for Nigeria and Ghana.
What we basically saw, these are huge numbers of people who are not getting an opportunity to access a loan to purchase an asset that will help them to start a business and that lack of access is keeping them in a status of need constantly and so we asked questions of why. Why isn’t a bunch of capital flowing into these countries? It is 2 billion people without access to loans who if they happen to get these types of loans, they will try all the best to pay back. Can we get the right product that they can pay back? We believed that the challenge and solution was that you have 2 billion people who have no access to loans and mirror that with somewhere in America or Europe where trillions of dollars lying somewhere in banks and the owners do not know what to do with it. So the question we asked ourselves is how we build a financial technology or service that is able to connect the institutional capital to these people who need them.
Do you consider Lendable a start-up and disruptive?
You see the alternative lenders, the non-banking lenders are the fastest growing segments of the credit sector. These are small business lenders doing lending through MPESA network, to consumer lenders, Pay-as-you-go solar financing to boda-boda finance. These models are reaching customers who have never been reached before. And they are able to reach these group of clients because they are offering new products than before and they are able to leverage on technology and these models are working. We are helping these non-banking lenders grow. That is why we exist. We are providing link to these institutional lenders. The way we are overcoming challenges that existed earlier is because we try and understand the loan portfolio of these alternative lenders.
For an example, in the case of bodaboda lenders who are working with a thousand bodaboda riders, if we are going to give them money so that they can lend to others, what collateral are we going to take. They do not have lots of property, they do own cars and you can see the company is not particularly rich. So in the case of traditional bank system, they will be required a percentage of collateral. But in this case, the collateral is not there yet we can see this is a great business that churns out revenue. Therefore it is the technology that allows us to give them credit as the collateral.
If you look at the nature of alternative lenders, they have been in business for seven years and have not been able to raise more than a few hundred thousand dollars. These are companies that we come in and give them 100 million shillings. There has been no lending institution in the market working to take the risk and understand it and that is something we pride ourselves in. so we are bringing something new to the market and our clients can attest to this we are disrupted. We have numerous products like financing institutions that provide medical insurance advance as well as organizations lending to boda-boda operators which was one of the earliest finance that we did. We use models that place Kenya at the bedrock of innovations.
Which elements do you use to measure success?
Speed is so important for this business. If you look at the business we lend to, those are organizations that start with less money. These are bankers or former Telco workers that have taken risks with their savings and have given out two million dollars in loan and now they are trying to scale that to 10 million dollars and that is where we come.
And for them, the number need of their business is speed. It is getting money out there in the shortest time as the demand is crazy. The number of people who want a boda-boda loan or insurance loan is very high. And for the lenders, they are trying to give out capital as quickly as they can in order to scale up because only then that their models will work better. That means they have to have technologies that allow speedy qualification and dispatch of loans.
What is the philosophy of Lendable on responsible lending?
The way we look at alternative lenders is that these are non-banking lending companies in across many areas like SME finance, consumer finance, productive asset finance. We put those together because it is a similar population with similar needs. This is where we spend most of our lending.
We believe responsible lending is commercially the best strategy. If an alternative lender is not providing a quality product and service to their customers in a transparent way, then it is not responsible for lending. And the reason it is good commercial practice is that is if you give them a very bad product ultimately that will backfire. They will stop paying when they realize how you are treating them. The idea as not trying to be smarter than the customer but find a balance. We are very keen on responsible lending. We want to be the leader in pushing the alternative lenders in being responsible because ultimately the market we will work for them. You might think it is working for go by breaking rules but in the long run, it will catch up with you.
The Kenyan Government through Central Bank is pushing for regulations to the micro lending environment. Is this what the industry needs?
On government regulation, we don’t see it as a bad thing. Reactive regulation car hurt the manner. We are into markets like Nigeria that has well regulated non-banking sector and it is clearly stated what you can do or not do, these are all good things. We are excited about regulations just that it should be done smartly and in consultation with the players in the market. What we are currently pushing ourselves and alternative lenders for self-regulation. We have been signing responsible lending guidelines with alternative lenders and these are the principles we are following and helping alternative lenders with practical tools for implementing responsible lending. This is a combination of transparency data privacy and data professional for a price.
There must be a lot of data analysis involved
One of the things we have heard from our alternative lenders over and over again is: Can you help us better understand our data? This is an area we have built expertise over the last few years.
How do you store data and how do you make it useful and practical and then how do you analyse the data? Data is your lifeline. You cannot make some decision without certain information. With our clients, we help them understand their own data. We don’t provide data we do not sell data, we just provide a way of understanding data.
There is a project we piloted a year ago which is trying to provide analytical products to our clients so that they can become better in understanding their data.
How do you choose who to work with?
We chose partners based on the quality of operations. We appreciate these clients are all strong. In any given month, there is an amount of interest collected by these organization and they are sure they can go lower than a certain level. We fund a bunch of high-quality lending institutions and all that is purely guided by their operations. It is your training, how you operate and your people that make your business tick. We love data, we only make the decision to entering into a partnership with any entity when we have data. When we get the chance to work with a partner, we try to get into a level of understanding of their portfolio than other banking lenders would. We not only verify their information but even look at the raw data. This is why is why we are strong.
Is the Kenyan market ready for a credit based economy like what happens in the US and the developed nations with use of credit cards
It is impossible to sum a successful credit business without understanding the context, the culture and history of the people. That is why I moved into Kenya. I did not think I could run this kind of business sitting somewhere in the US- and am not saying I now know what people in Kenya think and say. But I try to surround myself with the context under which I do business.
One of the issues of credit culture. Kenya is such a unique place, there is nowhere else that looks like Kenya in terms of how financial markets are shaped. M-Pesa changed greatly how things run around here but it was not just M-Pesa alone but various things that came together with it. So you have all these supporting companies that exist around M-Pesa and cannot exist without it. What this means is that what credit looks in Kenya and means to people is different from anywhere else in the world. To give an example of this, in the US you look at a loan portfolio and if someone goes for a period of three to four months without paying, they are not going to pay back your loan. In Kenya, it is possible for someone to go 90 days without paying and then all of a sudden start paying once things start looking better for him. That could mean a number of things. It could mean cash flow was somehow constrained and so someone is trying to pay but they possibly are unable to pay. It might take those 90 days, but once they get that money, they will try and pay back.
This then calls a different system of evaluating creditworthiness. All these systems are not good or bad, but they are just different. You have to understand those differences. I believe if the government takes a lesser role and let the sector apply responsible lending guidelines that will fundamentally help the sector grow.
What is the worth of your loan portfolio
We have given out about 8 million dollars of loans and the demand is growing very fast. We are not going to raise more money in the moment, but we will raise some in the coming years. for us, the fundamental question is not if we can be able to raise this kind of money but the thing we can do with it, what products do we launch next, which country do we go to next? These are the kind of big questions we are asking.
Is Kenya working for you?
We just began in Kenya and we are going to do more for Kenya. We believe Kenya is a phenomenal market and we will continue evaluating different products. It is a market that is growing and we see different opportunities in there. When you look at the next five years, there are things that are exciting for example in the SME lending, it has the biggest growth in all lending categories in the market and it is one of the things we will push. We will do more business loans small dukas, mama mbogas all the way to formal retail shops around Nairobi. These are products we are really excited about.
Do you look beyond Kenya?
We are also looking forward to being more than a Kenyan company. If you go to Nigeria they call us a Kenyan company same as Ghana, South Africa as anywhere else in Africa. We are excited to become a Sub-Saharan company based in Kenya. That process is interesting because the rest of Sub-Saharan is trying to catch up with Kenya. This should be something Kenyans should be proud of for being a market leader. Nigerians are flying here to learn from Kenya and that is really amazing. Nigeria is a massive economy and they are flying here to learn about Kenya. And so we have a lot to do in terms of doing business with the rest of Africa.
What next for Lendable?
In the next five years, the way in which the people interact with capital finance is going to be totally different from what is happening. It is an evolution. We as Lendable are not leading but we are following in this change. Our job is to provide capital to alternative lenders. These are mostly local lenders in Kenya, Uganda, Ghana or Nigeria. We are providing them with what they need to create the future of the market. We are not the ones creating the future. It is not going to look like the American credit system. It will look different. It is a future of financial inclusion that is drastically Kenyan and distinctly Sub-Saharan Africa. It teaches the rest of the world how to do credit financing.