Is there enough space for all of us and just how easy is it to set up shop?
In a span of just under 3 years, 3 new micro credit platforms have taken shape in the European micro lending P2P context: MyC4, Babyloan and the soon to be launched myAzimia.org (Azimia means to borrow and lend in swahili). These platforms are all aligned to a specific domestic market thanks to the way such businesses are regulated in Europe ; Myc4 is based in Denmark, Babyloan in France and myAzimia in the UK.
These are platforms all with varying business and revenue models but all with one key objective; to channel the capital of private and institutional investors in Europe to small businesses based in a emerging economies in sub saharan Africa and Asia. In achieving this objective, these young businesses get a life line of capital that they badly need, finally get an opportunity to enter the formal financial sector and the economic and social fabric of the countries that they operate in are significantly improved and ultimately the quality of life of these individuals is upgraded. I don’t need to to reinvent the wheel here, we all know about the fantastic tool that microfinance can be in helping to alleviate poverty and helping to improve lives, but the innovative element of these platforms takes microfinance as a financial tool to a new level as it uses the internet as a linkage between the entrepreneurs in developing economies and social investors in Europe.
As I mentioned already the business models of these platforms are all different, and one platform in particular has suffered significant reputational damage within the last 6 months as a result of selecting MFI partner institutions in Africa, that for one reason or another, turned out completely unable to deliver what they had promised. This is a challenge that any platform of this nature faces, the questions that need to be thoroughly explored before selecting partner institutions responsible for loan selection and assessment are:
1. who are the partners in the developing country?
2. Are they regulated locally?
3. Do they understand our process?
4.Do they already have a quality loan book?
5.Do they have high standards in their credit approval procedure?
6. Do they understand the local market and how it operates?
7. Do they have a good track record?
The identification and marketing to social investors is also an important aspect but to my mind has been highly overrated by some commentators. My motto is, get the right partners to work with, understand the market that you plan to disburse loans in and everything else will follow.
Babyloan.org has already signed up 8 partner institutions in the Philippines, Cambodia, Vietnam, Togo and Benin and are aiming to sign up another 22 within the next year. MyAzimia, located in Berlin and London are talking to field partners in East Africa at the moment and are focusing their effort on selecting partners with significant experience in the field and a strong existing governance structure. The selection of the wrong partner could make the difference between success and failure as the MyC4 experience has shown.
The next question to explore is: is there enough space for all of us? The answer to this question is a resounding YES! Looking at the African context, at the moment there are 300 million Africans who would qualify for micro credit although only 20 million have access to it, which means that there is still an unfulfilled gap that platforms focus on the african microfinance space would be able to fill. Also, there is evidence that the number of social investors in Europe is growing significantly with numbers projected to grow even more as a result of the financial crisis that has made investors jittery about investing in the formal financial sector as well as the fact that through the philanthropic process, more and more individuals want ‘to give something back’ and funding emerging market loans would definitely fulfill this need. Capital is key for these platforms to succeed as the sole link between investors and the entrepreneurs is through their website so these need to have capacity, be scalable, reliable and secure. From the MyC4 example it could take anything from a few thousand euros to develop a functioning website to a couple of millions, it all depends on what the platform wants to do and how it wants to do it. MyAzimia for example believes that by the summer, it’s website will be fully functional and investor ready. The platform has relied on open source programming to keep development costs down and within reason.
The key to the success of any of these ambitious initiatives is sustainability: they have to reach break even and recover costs to be able to survive in the long term. Babyloan is diversifying its revenue streams to achieve this by charging their partner institutions an access fee to use their platforms while MyC4 has now introduced a fee payable by the entrepreneurs based in Africa to receive loans through the platform. MyAzimia’s key revenue stream will be a marginal fee paid by the lender on the fully funded loan, although no fees will be charged on the borrower or the MFI. These revenue models need constant review in line with changing market conditions and investor appetite. For example Babyloan started off with a fairly basic model where the fee was 1 euro for every 100euro loan but graduated to the current model where partner MFI institutions are charged an access fee of 500euros as well as an additional quarterly management fee based on the value of their individual loan portfolio outstanding.
Although we agree that there is sufficient demand in this market place for more players, one thing that comes to mind is the need for these platforms to find a common voice in Europe as we are all trying to achieve the same objective although at the outset it may seem that we are in direct competition with each other.
In conclusion, what these innovative platform have in common is that they fulfil a previously unmet significant need within the social investor community in the european context: they have created a virtual connection between the small businesses in need of capital and the growing number of social investors looking for a double bottom line return, ie financial returns and a social impact.
Guest post contributed by Kanini Mutooni