4G Capital ramps up sustainable SME lending in East Africa

Fintech operator 4G Capital is boosting accessibility to financial products for those underserved in traditional markets, including SMEs.

After a number of years of steady growth, 4G Capital, a Kenya-based fintech which mixes customer oversight and training with unsecured SME loans to achieve a 94% average repayment rate, will have lent more in the 2019 financial year than the cumulative total since it was founded in 2013.

By the end of 2018, 4G Capital had disbursed 345,000 loans since inception at a total of $44m.

Within this year alone the firm expects to have lent an additional 420,000 loans worth $46m, bringing the six-year total to $90m.

Wayne Hennessy-Barrett, CEO and founder, attributes the success to “organic growth” by investing in partnerships and expanding the firm’s physical presence across East Africa.

“We’ve concentrated on the organic growth of the company, almost quadrupling the number of teams across Kenya and Uganda from 28 to 96 as well as increasing our customer acquisition through multinational distributors operating in the region,” he says.

“By focusing on customer success and protection – and as a consequence, portfolio quality – we’re continuing to enjoy repeat rates of 80%.”

Customer interaction 

After Kenya’s fintech boom was catalysed by the introduction of mobile money M-Pesa in 2007, East Africa’s most diverse economy is now home to over 150 fintech companies; many offering digital credit services.

While permissive regulation helped foster the growth, credit default and debt distress has risen over the past few years as fintechs receive little market scrutiny and many forego due diligence when disbursing loans to customers.

Kenya’s Credit Reference Bureau (CRB) has blacklisted 2.7m people for being unable to repay loans as little as $2.

Hennessy-Barrett calls this type of credit “blind lending” as it is usually facilitated through an app or online platform, without personal interaction.

Yet the former major in the British army turned start-up leader, believes even fintechs can use customer relationships as a bridge to success and to secure industry-topping repayment rates.

His model stands in stark contrast to many of its peers as one which links the success of 4G Capital’s customers to its own success.

Aside from investing heavily in customer relationships through the ‘boots on the ground’ approach, with a presence in 92 markets throughout Kenya aimed at encouraging repayment through financial literacy training, the lender is also introducing an insurance product.

They believe that insurance, which is characterised by low penetration rates and high premiums across Kenya and much of the continent, will help their customers keep their finances above board in times of distress.

“We have a busy R&D department which constantly drafts and models new products, delivered either by ourselves or with partners,” says Hennessy-Barrett.

“We know many of our customer struggle with healthcare costs when they arise. If we can introduce them to an affordable and agile method to access contingency funds under specific circumstances, this will help their overall financial wellbeing.”

Products which benefit customers are also accompanied by know-your-customer practices and data analytics. 

Some concern is voiced by the CEO over a “credit bubble” in the Kenyan marketplace, where SME financiers have become overexposed to their clients, who are increasingly defaulting on debt due to poor lending practices. The situation is being worsened by the exponential growth of betting companies in East Africa over the past few years.

In contrast, 4G Capital opts to never refinance loans, choosing instead to focus on the sustainable business development of its customers. 

4G Capital uses algorithms and artificial intelligence to turn raw data into “smart data”; data which has been screened and optimised, in order to understand the suitability of their customers for lending applicability and size.

“We have identified a finite number of relevant factors which correlate with historic market behaviour, and from this we are able to accurately predict the parameter of loan size, duration and price-point for the different business types we serve,” says Hennessy-Barrett.

Market growth

After growing the business across Kenya, 4G Capital is beginning operations in Uganda and has set its sights on a total of 1m customers by 2020.

This year alone the company expects to grow its customer base by 200%, fuelled by the promise of its latest market entrance. 4G Capital is currently adding nearly 10,000 MSMEs to its platform every month.

Hennessy-Barrett says that “while Uganda is different from Kenya in a number of ways, the fundamentals of the MSME space can translate across many borders.”

The third-largest market in the East African Community (EAC) at around 50m after Tanzania and Kenya, Uganda is an obvious choice for a business looking to expand in the region.

With few barriers to market entry, a vibrant mobile money culture and pro-business government despite the lack of political freedoms, the capital Kampala is no great conceptual leap from the markets in Nairobi and beyond.

However, in relation to Kenya, the market is relatively underserved which gives 4G Capital the chance to consolidate quickly in its SME lending space.

“There is an enormous appetite for what we bring to the party,” says Hennessy-Barrett.

“Both as direct lenders and in partnership with suppliers and multinationals.”

However, with five-year ambitions to become the “go-to provider of digital SME financial services” in “Africa’s biggest markets” it’s clear that 4G Capital will need to find solutions to operate in countries which have low levels of mobile money penetration.

Nigeria for instance, Africa’s biggest market, is yet to experience the mobile money revolution after the innovation was blocked by the banking industry and its influence on legislation. 

Payments and loans throughout most of 4G Capital’s operations are processed via a mobile money platform.

M-Pesa has been transformative in allowing small enterprises without bank accounts to instantly send and receive money, to and from everyone from fintechs to gambling companies across the entirety of Kenya, regardless of rural isolation.

To support MSMEs in markets with low mobile money penetration, 4G Capital has also built bank-to-bank transfer functionality and is in conversation with major payments companies to provide even
further optionality for MSMEs, says Hennessy-Barrett.

Despite early profitability, the CEO reveals that 4G Capital is now looking to accelerate its growth by raising institutional debt and equity.

Their model, using customer analytics and care to guarantee repayment, is likely to have a big impact in the market the company seeks to enter.

“I guess we’re hard-headed and pragmatic about the problems we’re trying to solve, and that manifests in a more mature approach to the market than might be typical in the fintech world,” says Hennessy-Barrett.

“We don’t believe in any silver bullet that can create an instant ‘home run’. Successful operations are built through cumulative successes, starting with the customer and our unit economics.”