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Blockchain innovators target SME credit gap

By Frankline Sunday | Published Sun, May 6th 2018 at 00:00, Updated May 5th 2018 at 20:23 GMT +3
Women go about their business at Kibuye market Kisumu county Jua Kali section where they make foot wear commonly known as 'Akala' in which one sells at Ksh. 200 to earn their living. They are amongst thousand of women who have ventured into jobs previously considered to those of men.They are calling on the county government to uplift small scale traders in the region. [Collins Oduor, Standard]

In summary

  • Traders starved of financing from commercial banks
  • IBM partners with other organisations to pilot mobile-based transaction lending

Kenyan entrepreneurs stand to benefit from new investment as local and international firms unveil credit products centred on blockchain technology and data analytics.

This comes at a time when small and medium-sized enterprises continue to face challenges in raising capital to grow their businesses, resulting in majority of them shutting down before realising their full potential.

Last month, tech giant IBM launched a partnership with Twiga Foods, the start-up that runs a logistics supply platform for retailers, kiosks and market stalls.

Loan book

The partnership brings together IBM’s machine learning with Twiga Foods’ customer network to create a dynamic loan book backed by blockchain technology.

“We analyse purchase records from a mobile device and then apply machine learning algorithms to predict credit worthiness, in turn giving lenders the confidence they need to provide micro-loans to small businesses,” said Isaac Markus, a researcher focused on financial services at IBM Research.

The venture gives lenders an opportunity to advance credit to a client base often considered precarious due to high instances of default.

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Data from the Central Bank of Kenya Credit Survey covering the fourth quarter of 2017 indicated that commercial banks increased their risk mitigation measures following the introduction of the law capping lending rates in 2016.

This was cited as one of the reasons SMEs recorded reduced credit access over the past year as lenders tightened conditions and opted for more corporate and government debt.

The initiative by IBM Research could thus be a much-needed shot in the arm for early-adopting SMEs, with the application of blockchain expected to provide both lenders and borrowers a chance to sign up. 

“Once the credit score is determined, we used a blockchain, based on the Hyperledger Fabric, to manage the entire lending process from application, receiving offers and accepting the terms to repayment,” said Mr Markus.

IBM says an eight-week pilot conducted last year on 220 loans averaging Sh3,000 led to a 30 per cent increase in order of size and profits by individual retailers.

Transaction-based lending is not new. Wholesalers and giant retailers often forge long-term relationships with commercial banks, allowing them to access credit against their sales - creating a rudimentary credit scoring system.

Adopting blockchain technology improves the accuracy and reliability of this evaluation process significantly, allowing more investors to buy in.

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