EFIOPIC. Financial Infrastructure Platform (technology)

This Entry has been submitted.

EFIOPIC. Financial Infrastructure Platform (technology)

Ethiopia
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

Our solution will
• provide a financial services smart card(biometric) that identifies each borrower(SME) uniquely and becomes a means to build a reputational collateral
• allow to build a reliable database and provide a credit scoring to rate SME’s credit worthiness
• Enable MFIs to deliver financial services to SMEs(loan transactions, savings) electronically

About Project

Solution: What is the proposed solution? Please be specific!

Our solution is unique in Ethiopia in that: • It is the first platform to provide a substitute to collateral based financial services i.e. allowing SMEs with no collateral to get access to loan, • It is a platform to access loan to SME having not sufficient collateral to get loan to the extent of their demand • It is the first technology based platform that will allow SMEs to access suitable financial services through MFIs • It is the first to collect credit/payment related data; capture finger print of the borrower and build a central database which will facilitate financial institutes on making loan decisions • It is the first of its kind in applying biometric technology to financial services • It is the first electronic/card based loan disbursement technology • It is scalable and will allow to add other service modules that are believed to alleviate the challenges of SMEs
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

Ethiopia ranks 127 out of 183 for ease of credit for SMEs according to IFC. A separate study shows that SMEs play a major role in the Economy as the largest employers and contribute 20 – 25 % to the GDP of the country. There are currently 1.7 million SMEs in Ethiopia organized as single entities or cooperatives. Our solution will have considerable social impact through SMEs, as our solution enables SMEs gain access to financial services through FIs. This increase or new access to financial services will have direct impact on the growth of SME and ability to generate employment. Increased earnings of SMEs will in turn create saving culture which will allow households send their children to attend schools as there will be less pressure for engaging them in labor work providing additional income to the family. In a society where 57.3% of the population under the age of 15 is illiterate (CIA fact book) this will have tremendous social impact. This in turn will be creating a source of workforce for SMEs. In Ethiopia, SMEs are major labor sources to housing projects which are projects designed to alleviate housing problem of low income groups. Currently the government spends close to U$ 1 billion in low cost housing building homes for 400,000 residents annually. Strengthening of SME thus directly impacts access to housing for these residents.
About You
Organization:
Global Computing Solutions plc. (GCS plc.)
Visit website
About You
First Name

Munir

Last Name

Duri

Your Organization

Global Computing Solutions plc. (GCS plc.)

Country

, AA

About Your Organization
Organization Name

Global Computing Solutions plc. (GCS plc.)

Organization Phone

+251115513862

Organization Address

Ethiopia Addis Ababa Meskel Square, P.O. Box 2451

Organization Country

, AA

Organization Type

Private Institution

The information you provide here will be used to fill in any parts of your profile that have been left blank, such as interests, organization information, and website. No contact information will be made public. Please uncheck here if you do not want this to happen..

Your solution
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:

Africa.

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

USD 10,000

Number of employees in your target firms

5-24.

Average number of employees of your target firm

18

Specify the size, average and range of expected loans or investments in each target firm

Our solution allows MFIs to increase average size of the loan to SMEs from the current level of USD300 to USD750 in 5 years (that counts to average growth of 25% per year).
We assume that without solution growth rate would be on the level of 11% per annum and still around 30% of SMEs wouldn’t get access to loans due to the lack of collateral either for 30% more SMEs amount of proposed collateral would be insufficient
Expected range of loans provided to SMEs will be USD350-15,000

What stage is your solution in?

Operating for less than a year

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

National bank of Ethiopia(NBE) recently launched an initiative in establishing the first credit reference bureau – as a replacement to the current simple software application used to monitor loans (with value of above U$ 20,000) banks serving only 30,000 borrowers in a country of 80 million population.
Our solution will then mainly leverage intervention from the public institutions (NBE, FIs, Federal micro and small enterprise agency ) in catalyzing private SME finance.
Our solution will enable unique identification of borrowers (SME) which the initiative of NBE does not address, through deployment of FSC(financial service card). This combined with our engagement for collection of data over period of time; creation of a reliable database on SME credit, payment and other relevant history onto the credit bureau. This will enable MFIs and Banks access to credit history allowing reputational based collateral be extended to SMEs.
This solution will also leverage the above mentioned interventions of public entities through
• Providing non collateral loans to SMEs through our technology to rate the SMEs’ credit worthiness.
• Reducing service fees to SMEs through providing a solution that will reduce operational as well as transactional cost of the FIs.
• Making a much quicker loan approval through increasing operational efficiency.

What barriers does your proposed solution address?

Asymmetry of information, Informality, Lack of collateral, Lack of financial capacity, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of financing to women entrepreneurs.

If you checked any of these barriers, describe how your solution addresses them

Asymmetry of information:
Our solution will reduce information asymmetry between SMEs and FIs (Financial Institutions) through enabling SMEs to establish their identity credibly to financial institutions and allowing FIs access to such information to gain better knowledge of SMEs.
Informality:
Our solution will provide access to financial products that are affordable which protects SMEs from informal sources of loans associated with high interest rate.
Lack of collateral:
Our solution will address this barrier through creation of a unique identity and collection data to build history; SMEs will then gain access to loan for the first time or loan to the extent of their demand based on reputational collateral as opposed to physical asset based collateral
Lack of financial capacity:
Our solution will provide access to affordable financial products for SMEs.

Lack of institutional capacity of financial intermediaries:
FIs will be able to uniquely identify their client base allowing for credit history to be built. This will enhance their capacity to assess loans and process loan applications in short period as well as to increase their reach in terms of customer base.
High transaction cost for financial intermediaries to serve SMEs:
FIs will be able to reduce services charges since processes and operational cost s will decrease significantly. Furthermore, Interest rates will also be reduced due to accurate risk assessment.

Lack of financing to women entrepreneurs:
In Ethiopia women are disadvantaged having less physical assets and reputational collateral addresses women led SMEs to have better access to credit.

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

Our solution is on its initial stage of implementation. Studies show that the introduction of a credit bureau concept has indeed enhanced the growth of SMEs’ access to financial products.
Love and Mylenko (2003) clearly demonstrated that in developing economies where credit bureau services are available the probability of approving loans to SMEs (whose credit history is registered on the credit bureau) is 40% as compared to 28% when there is no credit bureau to provide credit information about the SME. The main constraint in the latter is basically the need to present collateral in order to get access to loan.
In addition to that; since it will take quite a long time to approve loans; there will be operational and transactional costs for the financial institutions which will be reflected on the service fees that will be imposed on the SME (borrower) which in most cases are unaffordable for borrowers.
Further studies done by Mckinsey & Company (2009) support the above deduction and further ascertained that financial constraints of SMEs will be resolved where credit bureaus exist. 27% of SMEs reported to have high financial constraints when the credit bureau is in place as compared to 49% when there is no credit bureau.

How many firms do you expect to reach?

.7mln SMEs are currently active in Ethiopian market; 60% of those are currently clients of MFI’s. We expect the number of SMEs to increase to 3mln in 5years
We expect to reach 2.2mln SME’s in 5years, including substantial number of SMEs which are not currently have access to financial services

What is the volume of private SME finance you aim to catalyze?

Amount of loans to be provided by MFIs to SMEs for 5years without solution is estimated on the level of USD3.1bln, while implementation of the solution will catalyze additional USD1.4bln as it will cause the average loan to increase and reduce number of unbanked SMEs by providing them reputational collateral

What time frame will be required to reach these targets?

see the previous questions.

These goals could be divided to short-term and middle-term.
We assume that after 1 year we will have a proper database that will allow us to provide credit scoring for around 150 thousand SMEs. We also estimate that in period of 5 years we will cover around 80% of all SMEs in the country with financial cards.
We estimate that percentage of unbanked SME’s will drop by 15% in absolute figures in 5 years caused by implementation of the solution, while average provided loan will increase by 25% per annum

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

As National Bank of Ethiopia is implementing the credit bureau as a national priority and our solution add substantial value that is critical for SMEs to benefit from the credit bureau, we see the strong base for the project success
However in a middle-term perspective we consider factors that could slow down either penetration or the effects of the solution:
• Shortage of information that wouldn’t allow creating a proper and reliable database for credit scoring;
• Impediments in terms of geographical expansion. In order to succeed, the wide coverage is necessary. Slowing the geographical penetration will cause slowing of the solution impact
• Slow adoption of the solution by MFI’s and SME’s. As solution is innovative, it could take time for both MFI’s and beneficiaries to adopt it
• Also see question about non-financial issues in Sustainability section

Sustainability
List all the funding sources that are required for the sustainability of this solution

Our solution is funded by private source, which is currently determined as initial equity contribution for the capital requirement from the project initiators, gained from their other businesses in the country, on the level of USD1mln.

We require raising additionally USD5.5mln (for initial CAPEX and OPEX financing as well as educational programs) for solution sustainable development. For this purpose we consider alternative sources, where priority is given to donor organization.

We estimate funding provided by these 2 sources as sufficient for sustainability of the solution. However we also consider alternative opportunities as a last resort in the form of soft loans and partial financing of CAPEX or either a cost of financial services cards on behalf of SMEs by the public bodies (MFIs, Development Bank).

We believe that not only financial funding will help the solution to be sustainable, but also funding of experience and knowledge is necessary. As sources of such a funding we consider international organizations such as IFC, etc.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

We expect that the major portion of CAPEX (60%) that will allow business to function properly (i.e issue financial services cards, build credit scoring database, allow electronic transactions) to be made in the first 2 years of operations.

We will have 3 major sources of revenues – charge for issuing financial cards, providing credit scorings and commissions for transactions through M-Wallet. Those revenues will allow to sustain the business and since the critical mass would be reached (according to our assumptions it will happen after 2 years of operations), business model will start creating revenues, that will be enough to support business activities.

We estimate that on year 3 of operations our solution will have an ability to graduate from dependence on public finance. To reach this goal, we aim to aggressively penetrate the market, not only by creating effective partnerships with MFIs, but also providing educational programs for SME’s (we are planning to spend USD100 thousand per year for educational programs). Also using a mobile biometric stations, which will be moving within the country in order to provide SMEs with a financial cards and increase awareness in the rural areas, will also have a considerable influence. We also believe that partnerships with Federal Micro and Small Enterprises Development Agency as well as labor and other associations on the local levels will be effective tool for penetration of the solution.

Though, all these effort will help to achieve a critical mass of financial cards owners as well as a wide database for credit scoring.

Provision of credit scoring on commercial basis will also help the solution to graduate from dependence on public finance. As solution have significant advantages for MFIs (as decreasing of operating costs, reducing % of defaults, etc.), we expect MFIs to widely use the solution and usage of international experience and consultancy, that will help to create a reliable credit scoring system, will be one more point for it.

Wide usage of M-Wallet by MFIs will also make the solution financially sustainable. As M-Wallet will reduce transactions costs for MFIs we expect considerable number of transactions to be processed. Decreased probability of default (if decision based on credit scoring) would eventually increase the average loan and the total volume of loans in the system. Since those loans will be provided through our M-Wallet, commission’s per transaction basis will create a positive cash flows and help the solution to function without dependency on public finance

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

The largest private funding source for our project is from its initiators.

In the event of the potential loss of this source (considered to be low) a multi approach strategy has been developed
1. we diversified our sources of funding and in case of loss of the private funding, the funds from donor organizations and other sources (see question 15) will be enough to start operations

2. we have a plan to attract additional investments in case of potential loss of the private funding:
- we’ll propose MFIs to partly finance creation of a database and will start to process data, for which initial investments are minimized. Early interest of MFI’s in such a database was recognized

- as GCS plc., owned by initiators of the project, is a partner of NBE in credit scoring bureau and in order to make bureau fully functioning NBE needs a proper tool for identification of potential borrowers, we’ll offer NBE to partially finance biometric solution and card personalization machine in order to make financial services cards

- as one of the project goals is financial inclusion of the SMEs we will obtain a soft loan in a donor organizations and commercial banks

3. we’ll start operations that will generate positive cash flows in order to invest in a further project development. For instance, we could start with issuing simple ID cards without functions of M-Wallet and make limited investments in biometric stations

4. we also could provide other services which require biometric solution – i.e. for the statistical agency in order to simplify their processes of collecting data

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

In order to achieve success and self-sustainability we need to partner with the following entities

1. NBE(National Bank of Ethiopia).
GCS is the supplier for the credit bureau, with this initiative we also need to extend this partnership to be comprehensive

2. FIs(Financial Institutions).
FIs are the links to SMEs

Are there non-financial issues that could threaten the sustainability of your proposed solution?

• Shortage in information that is necessary for building a credit scoring database. The only information that currently is available is limited information on MFI’s level about their customers and their credit history. However this information is not consolidated (even between branches), was collected manually (that could be associated with a number of mistakes) and not available electronically. That makes processes of collecting data cumbersome and increases time for creation a proper database for credit scoring and, therefore, despite investments made in the system, opportunity for collecting revenues could be delayed

• Lack of sufficient skilled manpower (i.e. analysts) for assessment of credit information within the country. However we’re going to attract external consultants with related experience to train employees

• We also consider changes in legislation and micro and macroeconomic situation as potential issues that could threat the project

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

Our solution aims to scale up through highly growing SME sector itself as well as highly growing sectors where SMEs are active; moreover, as MFIs are our main partners in provision of the solution, the project aims to scale up with growing of MFI sector and expanding geographically with MFI expansion.

SMEs play a critical role in the Ethiopian economy and significantly contribute to the country GDP. Furthermore they are considered by the government as a major driver of the economy that was demonstrated by the extension of government funding provided to MFIs in a form of soft loans totaling USD550mln during 2007/2008 in order to stimulate SME lending. As consequence we expect a high growth in terms of number and size of SMEs in the country, as well as increasing of their sustainability. That will considerably expand potential market for the solution.

As number of SMEs, their size and ability to build a proper credit history depends on the particular sector developments, proposed solution will scale up by focusing both on a highly promising sectors which are on initial stage of development such as manufacturing (45% growth in 2008/2009 compare to previous year in current prices), hotels and restaurants (58% growth in 2008/2009) and sectors in a transformational stage as whole sale and retail trade (15% of the country GDP, 53% growth rate in 2008/2009) and construction (5% of the country GDP, 34% growth rate in 2008/2009)

Solution will scale up geographically as MFIs increase their geographical coverage in the country by opening new branches in the rural areas. During first 2 years we’re going to partner with 4 major MFIs, which have a largest amount of branches in the country and will give us wide reach within the largest regions which covers 50% of Ethiopia’s territory and around 78% of population. It’s estimated that MFIs will expand their branch network at least by 15% every 2 years