Credit In Emerging Markets

How digital data is a solution for businesses in the informal economy.

When reports appear about business investments and economic growth in Africa’s emerging markets – the important role of business credit in oiling the wheels of dynamic activity is often glossed over.?

Obtaining credit isn’t always easy for small-to-medium-sized businesses, especially if they operate in the cash-based informal economy. Business loans have been around for a long time. So, what is different about their status in current emerging markets? Simple – the shift from analogue to digital provision of financial services has made it possible to broaden loan offerings to many more businesses, and for the approvals process to function much more quickly.?

The result is businesses can obtain funds to power growth – rather than being shut out, with inadequate data available to assess their creditworthiness. A couple of hundred thousand dollars may allow them to open new locations, expand inventory and hire new staff.

It is data availability – collected by digital systems – that rapidly confirms applicants have credible businesses and are healthy prospects for the necessary repayments.

What customers don’t immediately recognise is: Payment growth via POS terminals and other digital methods such as online bank transfers and using smartphones – creates data gathering that most informal businesses never realised would be such a powerful tool to show the breadth and depth of their commercial activities.

Once a digital bank account is obtained to manage finances with ease, speed and efficiency – businesses get insights on spending and finance, to enable better decision-making. Suddenly they have a sales history, insight to help build their business and an identifiable growth trajectory. This moves thousands of businesses from being opaque and therefore risky operations to tangible entities worthy of credit.

Providing and processing loans isn’t always a simple process. Using Nigeria as an example, banking evolved traditionally by providing direct services to people and protecting and issuing their money. Providing credit – a key component of helping businesses to grow – lacked access to quality credit history data. Without the ability to scrutinise previous credit behaviour, decisions to provide loans to anyone – especially SMEs – attracted great caution.

In places where banks were not available – finding a way to deposit cash wasn’t a realistic option. To remain viable, and process more transactions, businesses had to be able to borrow money. This need was the genesis of Moniepoint’s overdrafts product, which has disbursed over $1.4 billion of short-term loans, with very low default rates of less than 1%. This suggested more widespread credit products could be hugely impactful and we set about designing them - launching business loans for working capital in May 2023.

Supporting a business with loans is not about giving them any capital they ask for. They may become over-leveraged and risk defaulting, damaging their credit profile or worse. But data provides insight into their readiness for a loan and what amount would be optimum for their business model and size.

Analysing the recent pace of change in the financial ecosystem, one can see how companies previously exposed solely to the informal market (offline and disconnected from the ecosystem) now have access to terminals and other means to accept digital payments. The real size of an emerging market economy is thus revealed.?

Stepping into the light, and being seen, provides insight into how much they process, where they are, and how they have grown. Digitalisation and the data it provides has literally ensured informal businesses have emerged in Africa’s emerging markets.?

With the huge sums Moniepoint has disbursed in loans to businesses of all sizes, each can explore new options for growth. It’s gratifying to see this burst, all stemming from our first step to bank payments of companies once perceived as risky – until their latent data became ‘visible’. Now they can fulfil their enhanced potential – all because of working capital loans.

Such data-driven changes are transformative in emerging markets. Economic growth no longer relies on big multinationals or exporting mined commodities or agricultural produce vulnerable to the ebbs and flows of world prices.

They can benefit from the expanding trade of local SMEs. These enterprises can achieve scale rather than just struggling to survive, growing across borders and then internationally.

What can and is happening for businesses in Nigeria, is being mirrored elsewhere in Africa, in countries such as Kenya and other emerging markets. The power of digital transactions means that – when striving to grow their economies – Africans are doing it for themselves.

Tosin Eniolorunda is the Group CEO and co-founder of Moniepoint Inc.