Tag: financing

Escaping the rental poverty trap: how Tugende gives motorcycle taxi drivers the ability to own

Overview

A recurring theme across East Africa is how owning an asset is a path out of poverty.

It’s a bit of a chicken and egg problem, as banks typically require an asset as collateral before giving a loan.

Tugende gives people their first step on the ladder.

Starting as a side project of some bikes that Michael bought for his motorcycle friends, Tugende has now grown into an organisation that thousands of drivers use on their path to ownership.

Michael and I discuss the issues of the rental poverty trap, the process around how they mitigate risk, and how he sees is customers as micro venture capitalists.

It’s a very insightful about the financing industry in Uganda, and across the region. I hope you enjoy.

 

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Here are some of the key quotes:

“Tugende means ‘Let’s Go’”

In both Luganda (the local Uganda language) and other East African languages it’s a common phrase.

“Motorcycle taxis are very popular”

The 100,000s of motorcycle drivers in Uganda can’t get access to credit, and therefore end up renting their bikes.

“The rental poverty trap”

This is where all money is being spent on renting an asset and there’s none left to save to then progress.

“I bought three bikes”

Tugende started when I financed three friends so that they can own their own motorcycle. It was very much a side project which turned into my main endeavour in 2012.

“Customers know their economics better than we do”

Some people have several motorcycles which they buy, own and then sell on for cash.

“Payments go towards ownership”

The weekly payments are about 15% higher than when they pay a landlord, though the light at the end of the tunnel is that these are all going towards them owning the asset.

“Motorcycles are the lifeblood of the economy”

They move agriculture, people and goods in a quick way, and provides employment and earnings for a large swathe of the population.

“They’re a good asset”

Motorcycles are fairly durable and can have fairly regular/ predicatble cash flow. It helps us mitigate against the risks involved.

“We don’t fear running out of customers”

Exact numbers are difficult to gauge but our best guess is 400,000 motorcycle drivers in Uganda.

“Almost every driver is male”

In Kampala there was one female driver who was well known. She know works for Tugende…

“We have a robust screening process”

This is to cover for not having a collateral asset and some of the other constraints that banks have. We look for “responsibility and roots” – will other people vouch for you? Benefit of the doubt is given.

“Buying bikes isn’t our gig”

Drivers will find a bike that they want to buy and come to us. We don’t bother with sourcing motorbikes and leave that to the customer. We’re brand agnostic.

“Micro Venture Capitalism”

Our customers know their communities better than we ever could. The cash they earn from selling a second-hand bike is like a seed fund.

“We hire for problem solvers”

A big part of our business ethos is resilience and being prepared for the unexpected. People who work for Tugende might not have the best academic results, but they’re great at acting under uncertainty. A lot of people have been hired from the boda boda community.

“Tugende is an economic opportunity company”

We don’t look at ourselves as a motorcycle leasing company. We’re in the business of giving people assets for them to own and leave the rental poverty trap.

“Insurance is a growth area”

Looking forward, as well as offering different asset classes we will also look to extend our insurance partnerships to our customers.

“Helping people help themselves”

This is our mantra. We’re about finding people who already know how to make money, they just need some help unlocking the opportunity. This isn’t bound to just motorcycles.

Social Media Follows etc.

Facebook: TugendeDriven

Website: www.tugendedriven.com

Why lack of working capital chokes the Kenyan food industry, and how Umati Capital solves this

Overview

Working capital in East Africa is tough to get your hands on.

Umati Capital are looking to help, using technology to give credit where banks won’t, typically through giving food producers an advance when a big order comes in.

Ivan and I talk about how the legal environment means issuing credit is tough, how they evaluate their clients, and their vision to professionalise the supply chain across the continent.

It’s similar to the SME Financing episode with Bakka from Patasente, so give that a listen too if you find this interested.

I also should note that the only room available in their co-working space was quite echo-y, and so the audio quality for this interview isn’t great.

A couple of answers get lost and so I’m sorry about that.

Nevertheless, I hope that doesn’t detract from what is a very interesting interview

 

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Here are some of the key quotes:

“My background is in banking”

I worked for Citibank across Africa. My co-founder has a background in Management Consulting.

“Banks require collateral to access capital”

This is a real blocker for small businesses looking to finance their operations. We’re using technology to open this up.

“We are working capital providers”

Our typical customers are food producers and we give them bridge financing when they receive an order.

“Supermarkets take 3 months to pay”

Imagine you are a cheese producer. You buy milk from farmers, turn it into cheese and sell it to a supermarket. The supermarket will accept it, but not give you the cash for 3 months. The farmers can’t wait that long and so the cheese producer has to find the money from somewhere.

“… and so a lot producers stay small”

If faced with the choice between small and regular payments or 10x sales through a supermarket, most will opt for the former as otherwise they’ll go out of business. They are thus bound to stay small.

“There’s a multiplier effect”

Not only does getting an advance smooth the operations, it also allows businesses to grow their business by constantly producing more of what they make.

“Cash flow based lending”

This is a concept in developed markets. If you can know with good probability that cash will come into a market then banks will lend based on that. That doesn’t happen with African banks, partly because there’s less trust that the courts will intervene.

“We make money by…”

Charging interest for the duration of the money being given. Typically this might be between 4-8% over 56 days.

“It might seem high”

Annualised you might think 24% annually seems expensive. However if access to this capital means you can grow your business by more than the interest you pay, it makes sense.

“There a multitude of checks that we make before releasing money”

When onboarding a customer we look into how many invoices have been unpaid previously due to quality issues etc. Then we look at the buyer and undertake a similar exercise.

“Buyers can find us pesky”

This is because we are holding them to account and essentially professionalising the industry. Our response is that professionalism yields a more stable supply chain.

“There are legitimate and illegitimate reasons for slow payment”

Sometimes the buyer is a middle man and so is waiting on their payment before passing it on. Sometimes though, buyers will choose to retain the capital within their business for other projects they are looking to finance.

“If the quality of the produce is bad…”

Then the responsibility sits with the producer. Umati Capital have a series of mechanisms whereby they reclaim the value in these instances.

“We’re going downstream”

The next phase of our growth is to work with our clients, and turn them into buyers. In the cheese example, it would mean providing finance for the milk producers.

“Technology is at the core of us scaling”

As we look to expand our offering to thousands of small-holder suppliers, we will use technology to keep things efficient and robust.

“Our money comes from…”

A variety of sources who are all looking for a short term return. These are institutional investors, high net worth individuals, and even crowdfunding..

“Clients assess us”

Small businesses may come to rely on financing from an organisation like Umati Capital.

“The market is huge”

Viewed as “SMEs who want credit” it’s massive. Agriculture concerns 25% of the economy and so Umati Capital has chosen here. Competitors have looked at other industries, but there’s place for plenty.

“Our vision is pan-African”

We see similar demand and demographics across the continent and so will be looking to expand our offering elsewhere.

Social Media Follows etc.

Get a Google News alert: (for Umati Capital)

Website: http://www.umaticapital.com/

How a credit marketplace can unlock the potential in SMEs, with George Bakka from Patasente

Overview

Interest rates in Uganda, and indeed the whole East Africa region, are by Western standards, very high.

A small business looking for a short term loan from a bank will be expected to pay in the region of 10% interest per month.

In an economy where payment is often made upon delivery, this causes problems in terms of getting access to working capital.

In this episode, Bakka and I discuss Patasente, the platform he has started to essentially crowdfund credit agreements for small businesses so that they can raise funds to take on new contracts that come in, and grow their business.

 

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Here are the key quotes

“I’m passionate about what finance can do to develop entrepreneurship”

Patasente is a credit marketplace to allow people to guarantee or loan growing businesses in Africa

“We use crowdfunding to raise working capital”

Local businesses list purchasing orders on Patasente. Patasente fronts the cash once enough people have agreed to buy parts of the contract.

“Small & Medium Enterprises are the main recipients”

These companies have the ability to get new orders and customers, but have issue with getting capital and so they are the main customer for us.

“Alternatives are: to avoid big orders…

Not engaging with buyers who have payment terms of 30-90 days means working capital is retained, but typically the business stays stagnant.

“… or go to money lenders”

Other informal lenders charge up to 20% per month. These require fixed assets which often they do not have.

“We don’t require collateral for our financing”

Because it is all based off the Local Purchasing Order (LPO) we validate the creditworthiness of the trade buyer, rather than requiring a fixed asset like the banks.

“There are many moving parts to giving this type of financing”

Understanding the contract type, payback time, buyer reputation, product monitoring etc. Because of this, banks have not entered the market for this type of financing.

“Developed markets have credit scoring”

This sophisticated market means that banks are much more comfortable offering credit in such an environment.

“We research buyers before accepting the contract”

There are some ‘big names’ in Uganda who already have a good reputation. We research whether they pay on time etc.

“We research recipients before accepting the contract”

Is the person receiving the money actually going to be able to fulfil the order and receive the payment in due course. Have they got experience in the industry they are operating in.

“What’s the worst case scenario”

Does the underlying asset have inherent value if everything goes wrong? Is the good perishable/ will it be possible to resell.

“We have an internal list of approved buyers”

If a borrower brings an LPO from a buyer Patasente has used before, it’s a matter of hours before the cash is approved.

“Otherwise our ground work takes 48 hours”

We send people out on the ground to assess the company asking for the money, often undertaking an alter ego.

“SME typically pay 5-10% of lump sum”

Most occasions SMEs get paid back within 90 days and so it looks like 1.5-3.5% per month

“Typical investors are local Ugandans with a bit of cash”

They need to happy with the level of risk, and also are looking to invest.

“We recommend establishing a portfolio”

Most investors are asked to buy a range of loans to diversify their risk.

“Investors choose loans from the Patasente”

We tested it in person first, and then decided to build a website once we saw the idea was working.

“We also do due diligence on the lender”

When the person registers they give over information (bank statement, ID, where they stay) to verify they are a real person.

“Investors use mobile money when they live far away”

Patasente has a transaction account that people who can’t meet in person use to send mobile money.

“We finance 50% of the loan that we list”

This shows the investor that they are invested as well. We typically get a good return on this part of the financing.

“There’s little regulation on how much we can lend out”

We assess how much capital we have and therefore how much we can lend out.

“An equity investor provided our initial capital”

This is the money that we use for lending out as part of the loan.

“Payment infrastructure is our biggest challenge”

Transaction fees take up a lot of the cost of moving money around, both nationally and internationally.

“Data is needed to evaluate creditworthiness”

Both from the borrower and the buyer. Getting more information on who is receiving the LPO and issuing it.

“Our vision is to make Africa’s number one credit marketplace”

It’s a big market, and by laying strong foundations we can expand to make this the de facto way for SMEs to raise finance.

“Patasente means: “find/get” “money”

A combination of Swahili and Luganda

Social Media Follows etc.

Company website: Patasente

Bakka on Twitter: @GeorgeBakka

Company profile: VC4Africa