How technology is creating entrepreneurial opportunities in the developing world
Poverty is a challenge world leaders have been working to alleviate for decades. Microfinance and microcredit have made great strides, and startups are now taking up the challenge to improve rural credit systems as well.
When microfinance was pioneered by Muhammad Yunus at Grameen Bank in Bangladesh, it was heralded as a sustainable solution for poverty. Yunus was awarded the Nobel Peace Prize in 2006 for his work, and his model was exported to emerging economies around the globe.
Microfinance has become a key ingredient for rural development, particularly in India, Vietnam, and Indonesia. It’s become a necessity in some countries’ banking systems. Bank Rakyat Indonesia (BRI), one of Asia’s leading microfinance providers, saw defaults in all categories except micro-loans during the late-90s Asian Financial Crisis. Recognizing the value of lending to the economically disadvantaged, BRI now offers ‘mobile banking,’ which involves dispatching a loan officer, bank teller, and security guard to disburse loans in remote locations.
However, the system is not without its flaws. The cost of hiring, training, and paying loan officers to collect debts is substantial–so much so that interest rates must reach 30% or 40% for the bank to recoup expenses. These numbers have been the standard for years, leading to the world’s poorest paying the highest interest rates. But new possibilities opened up with the arrival of the Internet.
Case Study: Zidisha
One startup that has made waves in Kenya, Senegal, and Ghana, amongst other countries, is Zidisha. The platform connects microfinance lenders directly with borrowers, allowing them to interact and transfer money. The company’s founder Julia Kurnia has long been committed to creating social impact in developing countries, as she considers poverty to be “the defining challenge of [her] generation.”
Her journey began in graduate school when she worked with a field partner of popular microfinance platform, Kiva. After observing inefficiencies in the microfinance space first-hand, through Kiva and a government role managing grants in West Africa, she began to think about how to improve the system.
“Even in really destitute locations, young adults were all going online,” says Kurnia. “There were cybercafes appearing everywhere […] I saw how [people] could use a decentralized online marketplace and participate in loan auctions, and I wanted to give them that chance.”
That was the moment Zidisha was conceived, but it took a few more years before Kurnia discovered a suitable money transfer tool, which came in the form of Kenyan mobile money exchange platform, M-Pesa.
“Our first loans were to Maasai nomads in southern Kenya. They lived in settlements that didn’t have paved roads or electricity, or connection to the electric grid, or any bank branches,” she says.
Sitting in her apartment in Washington D.C. in 2009, Kurnia sent US$500 raised from family and friends to a nomad in Kenya via M-Pesa. Eventually, he paid it back the same way. Today, Zidisha has disbursed over $15 million worth of loans to over 200,000 people.
What sets Zidisha apart from predecessors like Kiva is that it enables direct communication between lenders and borrowers, encouraging transparency in a space that usually involves middlemen and opaque transactions. At first glance, the platform feels like a sleek ecommerce website, and the recently-launched Android app is gaining traction and generating more demand for loans.
Initially, Kurnia wanted the platform to work like eBay, where borrowers bid on loans with their preferred interest rates. She soon realized it wasn’t going to work.
“It turned out lenders didn’t want interest, they just wanted to help people,” she says. Zidisha then became purely philanthropic.
Strikingly, Zidisha doesn’t have a ground team of loan officers and evangelists, which means they don’t need to hike up interest rates like traditional microfinance institutions (MFIs). In fact, they don’t charge interest at all, but only a small risk fee, which goes into a fund to reimburse lenders in the case of default.
Without a physical presence in their countries of operation, Kurnia’s team needed an alternative way to determine whether a borrower would pay back a loan. One major component of their risk mitigation system is based on a surprisingly simple notion: scammers don’t have the patience to work their way up through Zidisha’s system.
An initial loan on the platform starts at an average of $1.50. Borrowers can access greater amounts by meeting repayment schedules, eventually working their way up to a few thousand dollars. By setting a small amount for the initial loan, Zidisha can cut defaults down to a minimum. Those who fail to repay the starting loan, which makes up 50 to 60% of borrowers, aren’t eligible to take out larger loans. Conversely, those who pay can generally be counted on to repay larger loans.
Another tech integration that’s essential to Zidisha’s risk mitigation is a predictive credit risk algorithm created using DataRobot.
“We have about 150 different data points, everything from data on the person’s smartphone, if they use our app, to how many friends they have on Facebook,” says Kurnia. Using these data points in conjunction with patterns found in older users’ data, the algorithm is able to predict the riskiness of new borrowers.
Zidisha also integrated with Kenya’s credit bureau, and is now able to use the bureau’s application programming interface to access a borrower’s credit history.
“This is very basic in a developed market but it hadn’t existed in Kenya before,” says Kurnia.
Moving beyond traditional microfinance institutions
Microfinance is enabling great strides in once-destitute communities. About 90% of Zidisha’s loans are for small businesses, and the majority of the remaining 10% is used to pay tuitions. Young people are accessing education, while older generations are pursuing entrepreneurship with gusto.
“We often see people who start one business with their first loan, the second loan they’ll start something completely different, and they’ll be running two or three things simultaneously,” says Kurnia.
Other startups are also introducing solutions for improving microfinance, and impact investors, in turn, are taking notice. According to 2017 Global Impact Investing Network, microfinance and other financial services received about 60% of impact funding in 2016.
Meanwhile, traditional MFIs are maturing, but they remain hesitant to replace legacy systems that have taken decades to set up. This opportunity gives startups the space to innovate.
“I think there’s room for both. In the markets we target, most people still don’t have access to the Internet, so they need to talk to someone in person,” says Kurnia.
Kurnia hopes that as microfinance startups continue to sprout, more information will be shared among stakeholders, enabling greater efficiency and less risk for everyone.
That being said, rural entrepreneurs who need larger loans are still often unable to secure them. Those who borrow from traditional MFIs are considered risky and face unreasonably high interest rates. The current practice for those in need of larger loans is to borrow from a number of different vendors.
Kurnia believes this problem has yet to be solved, and isn’t something that lies within the capability of Zidisha’s model, since it would rely upon having on-the-ground expertise.
“You would need to be able to engage legal action if needed, and you would probably need some security at that point,” she says. “We’re not set up to do that–we’re more of a lightweight, Internet remote platform, so it would probably have to be a local entity.”
Her hope is that people see Zidisha and are inspired to build similar products, utilizing decentralized services to solve key problems in developing countries.
“Our old assumption of what developing countries and what people are like is very outdated,” she says. “The world is becoming much smaller, and even these places which are hardest to reach are becoming more integrated.”
It goes without saying that technology is accelerating development in emerging economies, but this doesn’t mean existing systems should be replaced. To take on an issue as multifaceted and immense as poverty eradication, collaborative efforts are needed from the public sector, non-profit organizations, traditional MFIs, and startups working to bring about inclusive innovation.
Nayantara is Jumpstart’s Editorial Associate.