News EditorInnovative Financing Solutions Target Financial Exclusion in Developing Markets
Financial innovation garnered a negative reputation following the 2008 financial crisis, when complex structures tied to U.S. subprime mortgages threatened global economic stability. However, there is significant potential for innovative approaches to address financial exclusion, particularly in developing countries. Today, we spotlight several companies across different regions aiming to provide financial services to underserved families and small businesses.
Financing for Underserved Communities
In Mexico, Hugo Garduño Ortega identified a troubling trend while exploring opportunities in the burgeoning financial technology sector. Many Mexican households and small businesses struggle to access the financial services that could enable their growth. Despite rising interest from international investors, many fintech start-ups focused on affluent consumers rather than addressing the needs of rural communities.
Ortega’s venture, Verqor, seeks to change this narrative by using technology and innovative lending practices to support small farmers and underserved populations. Traditional banks often shy away from lending to farmers due to their lack of credit history and concerns about collateral, especially since agricultural land is frequently owned communally.
Verqor circumvents these challenges by analyzing potential clients’ trading data from the past five years, enabling them to assess the likelihood of repayment, even for those without formal credit histories. The loans provided by Verqor are not in cash but as credit balances that can be used to purchase agricultural inputs like fertilizers through their platform, with goods sourced from local distributors. This model ensures that loans are used productively, as Ortega explains, “You don’t want a farmer just to get a new pick-up truck with the credit you gave for fertilizers.”
To mitigate default risk, repayment is structured around the delivery of products. When farmers sell their goods, Verqor collects payment, deducts the loan amount, and transfers the remaining balance to the farmer. This method allows Verqor to offer lower interest rates than informal lenders, with a non-performing loan rate of just 1.7% over the past three years, and an even lower rate of 0.4% in the past year, compared to 1.9% for Mexican banks.
Verqor is among over 70 companies across more than 30 countries that have received funding from Accion Venture Lab, a nonprofit investment vehicle focused on impact.
“We see financial services as a means to an end,” stated Rahil Rangwala, managing partner at Accion Venture Lab. “You can provide access to a loan, but does that mean that the farmer is going to be earning more?”
Expanding Financial Access in Africa
In Nairobi, Apollo Agriculture has similarly focused on providing credit to small farmers in Kenya and Zambia. The company employs field agents to perform due diligence on farms before offering a comprehensive package that includes fertilizers, seeds, and crop insurance. Apollo provides vouchers for goods redeemable at local shops, with repayments made via mobile money after harvest.
Their mission is clear: “We want farmers to make more money,” says Amee Parbhoo, also a managing partner at Accion Venture Lab. “It’s not even about the financial product. It’s about knowing what to provide to enable them to have a more productive yield.”
Supporting Small-Scale Manufacturers in Indonesia
In Indonesia, Fajar Adiwidodo, a former HSBC banker, has adopted a similar strategy to support small-scale manufacturing businesses. Many of these enterprises struggle to secure credit for working capital, forcing them to purchase raw materials in cash while waiting for payment from buyers.
Adiwidodo’s company, Bababos, supplies small manufacturers with essential materials like steel bars and raw polymers. Upon selling their finished products, Bababos collects payments directly from buyers using an escrow account system. Since its inception two years ago, Bababos has onboarded over 400 small manufacturers, generating monthly revenue of approximately $1.2 million and maintaining a non-performing loan rate of just 0.3%.
By providing goods instead of cash, Bababos addresses the collateral issue that often inhibits bank lending, allowing the company to maintain a low default rate. “Banks need collateral because they’re not comfortable with the clients’ risk profile,” Adiwidodo explains. “But by controlling the supply chain, we can solve that.”
As these innovative companies demonstrate, financial technology can play a vital role in enhancing access to financial services for underserved communities, paving the way for greater economic inclusion and growth in developing markets
