Credit access in the developing world: can start-ups mobilise change?

Lack of access to financial credit has been a long-standing issue in developing countries; but a new wave of start-ups are offering a solution to this age old problem. Through mobile technology, these new companies are paving the way towards helping the world’s poorest access financial resources.

It is well established that access to credit plays an essential role in the development of the world’s economies. Increasing the availability of credit allows investment capital to be used by individuals and businesses, which leads to growth in economic activity.

The disparity in access to credit between the developed and developing world is stark. Research by the World Bank shows that micro, small and medium-sized enterprises (MSMEs) in developing countries are disproportionally affected by poor access to credit. The existing financing gap for MSMEs in developing countries is estimated at $2.1-$2.6 trillion, equivalent to 30 to 36 per cent of their outstanding credit. 

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Traditionally, those who live in poverty and do not have access to financial institutions like banks can only receive loans from informal money lenders; this is both expensive and risky. Whilst microlending has been used by governments and NGOs (for example, Muhammad Yunus’s Grameen Bank), it is still expensive, limited geographically and often ineffective due to poor risk assessments.

In recent years, this pattern started to change. Through mobile money, these previously insurmountable barriers to credit access have been addressed by start-up companies.

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In 2010, former UN officer Shivani Siroya founded Inventure, a start-up funded by famous venture investors Chris Sacca and Zachary Bogue. Inventure harnesses the power of the mobile to help the 2.5 billion people around the world who have no financial access; all through the use of mobile phones. Inventure is currently operating in Eastern Africa, India and South Africa.

Inventure works with local partners to produce an app that accesses, with the owner’s permission, the information available on an individual’s mobile phone. The app aggregates information from bill payments, social networks and other sources such as how frequently texts are replied to and how often the phone is on low battery; all to formulate a risk profile. This then allows customisable loans to be sent straight to the user’s mobile.

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In Kenya, where there are over 26 million mobile money users. Inventure has seen substantial success after launching Mpoko Rahisi to provide low-interest M-Pesa loans. The interest rates can vary between 5-11 per cent. In Kenya, over 40,000 loans were deployed in less than a year which saw a repayment rate of 85 per cent, with 60 per cent of customers using the money in small businesses.

Other companies have followed a similar path, including Branch, Saida and Lenddo, funded by some of Silicon Valley’s most successful investors and incubators. Furthermore, larger firms like Visa and Alibaba have recently shown interest in this sector.  

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These new technologies are solving problems; however there is still some way to go. Start-ups appear to have overcome initial barriers to entry, however poor legal structures in host countries still represent a barrier. While Inventure have been successful in countries like South Africa, where legal access to mobile money is particularly free, other countries where regulation is less business-friendly will prove more difficult.

That said, with the rapid development of new technologies in the fields of mobile money and cryptocurrency, the future of credit access looks bright. Companies like Inventure should continue to innovate and stay ahead of the curve in order to continue having a positive impact.

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