Start-up takes on money­len­ders with short-term mi­cro­fi­nance loan op­tions

The Myanmar Times - - Business - STEVE GIL­MORE s.gil­more@mm­

MYAN­MAR’S money­len­ders have a cap­tive cus­tomer base of poor house­holds un­able to ac­cess tra­di­tional bank or mi­cro­fi­nance services. But a Yan­gon-based start-up is work­ing on a sys­tem to of­fer small short-term loans that can com­pete di­rectly with lo­cal loan sharks.

Debt is a huge prob­lem in Myan­mar. Data is scarce, but in many poor com­mu­ni­ties on the out­skirts of Yan­gon ex­perts believe the ma­jor­ity of house­holds are in debt.

Banks lend only with col­lat­eral – such as land or gold – which many poor fam­i­lies do not have. Mi­cro­fi­nance is ex­pand­ing, but the amount poor house­holds bor­row is of­ten too small for tra­di­tional MFI loans, which av­er­age around K250,000 ac­cord­ing to USAID.

The US gov­ern­ment or­gan­i­sa­tion re­cently started a US$10 mil­lion guar­an­tee pro­gram with five lo­cal MFIs to help them pro­vide loans of up to $5000. That ini­tia­tive is aimed at help­ing mostly fe­male-owned busi­nesses grow op­er­a­tions and hire work­ers.

ZigWay – a Yan­gon-based start-up co-founded by Mi­randa Phua and Lau­rent Savaete – is tar­get­ing the other end of the mi­cro­fi­nance spec­trum. Ms Phua says that in poor Yan­gon town­ships some­one might want to bor­row K20,000 for a week or a smaller amount for just 24 hours. This is where in­for­mal lenders thrive.

“Money lenders are very flex­i­ble,” says Ms Phua. “Although MFIs of­fer lower in­ter­est rates, they can’t match that flex­i­bil­ity. That’s where we saw the gap.”

In ad­di­tion to higher in­ter­est rates, money­len­ders also of­ten pro­long a loan by re­fus­ing to ac­cept any pay­ment less than the full amount and put pub­lic pres­sure on clients to re­pay. House­holds can eas­ily find them­selves trapped in debt.

“A lot of peo­ple bor­row money for day-to-day ex­penses, and food is one of the big ones,” says Mr Savaete. “Some­one doesn’t have work that day, so they bor­row and then take an­other loan to re­pay that loan and so on.”

ZigWay aims to of­fer loans in short, flex­i­ble ma­tu­ri­ties and in sizes up to K50,000 – less than half the typ­i­cal MFI thresh­old.

“At that level the MFIs find it hard to lend be­cause they can’t make a profit,” says Mr Savaete. The fact that MFI’s typ­i­cally rely on a man­ual faceto-face process for is­su­ing loans also makes is­su­ing smaller amounts for shorter terms prob­lem­atic, he adds.

But MFIs are also ea­ger for ways to ex­pand their services and reach peo­ple in need of loans but un­der­served by mi­cro­fi­nance, says Mr Savaete. New reg­u­la­tion al­low­ing MFIs to take de­posits and bor­row from banks should also help them raise more cap­i­tal for loans.

ZigWay’s plan is to part­ner with a tra­di­tional MFI. The es­tab­lished mi­cro­fi­nance lender will is­sue the loans us­ing a ZigWay-de­signed sys­tem that au­to­mates each stage of the credit cy­cle, says Mr Savaete.

“Draw­ing in cus­tomers, as­sess­ing credit risk, lend­ing money – the idea is that this is all au­to­mated and so the cost of the trans­ac­tion can be low­ered,” says Mr Savaete. Au­toma­tion would also is­sue loans more quickly, help­ing cus­tomers avoid a trip to a money­len­der while they wait for an MFI to ap­prove a loan, he adds.

The spread of smart­phones and mo­bile cov­er­age across Myan­mar helps make au­toma­tion plau­si­ble. Wave Money – a joint ven­ture be­tween Te­lenor and Yoma Bank – re­cently re­ceived the coun­try’s first mo­bile money li­cence. The firm’s chief ex­ec­u­tive Brad Jones says he is hop­ing to help ZigWay with a pay­ment plat­form.

The start-up is still work­ing on the sys­tem, but has had strong in­ter­est from mi­cro­fi­nance lenders and is about to start a pi­lot pro­gram with a ma­jor MFI, says Ms Phua. That pi­lot pro­gram will al­low the firm to ex­per­i­ment with dif­fer­ent kinds of loan de­liv­ery models, in­clud­ing mak­ing use of the MFI’s credit agents and po­ten­tially find­ing peo­ple in the lo­cal com­mu­nity to act as credit agents.

Ul­ti­mately, ZigWay wants to de­sign a smart­phone app that would al­low cus­tomers to bor­row loans from MFIs and build out a credit pro­file to help se­cure fu­ture loans.

“But right now our tar­get cus­tomers are women aged 18-40 and who may have a smart­phone but are not app users,” she says.

The pi­lot pro­gram will also al­low ZigWay and the MFI to col­lect data on re­pay­ment and de­faults, which is cru­cial for as­sess­ing credit risk. One dif­fi­culty with lend­ing to the type of poor house­holds ZigWay is tar­get­ing is that they lack things like proof of in­come or home own­er­ship that are typ­i­cally used to gauge re­pay­ment risk.

In other de­vel­op­ing markets firms have ex­per­i­mented with al­ter­na­tive meth­ods of as­sess­ing credit risk, for ex­am­ple mo­bile phone us­age pat­terns. Ms Phua says that there is less of that kind of data avail­able in Myan­mar at present, although it could be­come use­ful in the fu­ture.

“There are ways to as­sess cred­it­worth that don’t rely on tra­di­tional meth­ods,” says Mr Savaete.

‘Although MFIs of­fer lower in­ter­est rates, they can’t match that flex­i­bil­ity [of money­len­ders].’

Mi­randa Phua ZigWay

Photo: Staff

In some ar­eas, ex­perts say, more peo­ple owe money than don’t.

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