IBM is rolling out a new supply chain finance platform across Africa, using machine learning algorithms and blockchain technology to extend microloans to small businesses.
The tech giant’s research lab in Kenya announced today that it is working with Twiga Foods, a business-to-business logistics platform for kiosks and food stalls in Africa, on a new concept for disbursing microfinancing to businesses using a blockchain-enabled platform.
The partnership has allowed Twiga Foods, which helps farmers distribute bananas, tomatoes, onions and potatoes to 2,600 kiosks across Kenya, to add financial services to its offering and thus scale its reach. Having piloted the platform with 220 small food retailers across Kenya over an eight-week period, the trial saw its customers increase their order size by 30%.
The platform is now ready to be rolled out across Africa – to new sectors and suppliers – by the end of the year.
The idea is to utilise something that most people in Africa have – mobile phones – to bring them something they haven’t – access to working capital.
During the pilot, all loans were executed via mobile and went directly towards working capital for the businesses. When a retailer had an order delivered from Twiga, they would receive an SMS with options for financing that order. The retailer would then respond, confirming which loan option they preferred. The average loan was around US$30, offered for four and eight days with an interest rate of one and two percent, respectively.
Speaking to GTR, Andrew Kinai, the lead research engineer on the project at IBM Research, says the platform is about “linking SMEs, their suppliers and the banks” and using alternative data to give lenders the confidence they need to provide financial services.
Small businesses are hugely important for most African economies, yet they often have difficulty accessing sufficient credit due to the complexities of financing processes, high loan costs, collateral requirements and lack of a credit score.
“These vendors are quite small, so if they were to go to a bank, the bank would probably want an audited account or collateral and things like that. These small businesses don’t have that,” says Kinai. “So what we’re trying to do with our solution is to use alternate data, which can give a good idea of how well a business is doing and leverage that to provide credit to these small-scale vendors.”
This data, which includes information on purchase history as well as repayment, is crunched by the platform’s machine learning algorithm to predict the creditworthiness of a vendor. Once the credit score is determined, the blockchain platform, powered by Hyperledger Fabric and executed through smart contracts, will manage the entire lending process, from application to receiving offers, to then accepting the terms and eventually repayment.
Connecting multiple parties, blockchain is an optimal technology to manage the loan process, as it becomes transparent to all permissioned parties involved, from the lending bank to the borrower’s bank and the loan applicant themselves.
While the pilot didn’t involve any banks, the next stage of the project will be to bring in lending partners, Kinai says.
The companies are also set to expand the project to more of Twiga Foods’ vendors, as well as to other suppliers, including outside of Kenya, by the end of the year.
“For this pilot, we were doing it with one supplier, but the vendors often have other suppliers. Each of these suppliers has a snapshot of how that business is doing. So in the next step, we’re envisioning we’ll have multiple suppliers, to give an SME or vendor a ‘financial identity’, which is composed of all of these snapshots from various suppliers. A blockchain network would be very important in managing this,” Kinai explains.
It is hoped that such a financial identity stored on the blockchain could help SMEs across Africa access a wider range of financial services in the future.