The Billion-Dollar Market Nobody's Talking About | Rudolfo Beltran & Dan Smith

There's a major boom right now going on with microfinancing across the globe in countries you may not think about. Today we sit down with multiple insiders in this space to find out what's happening with microlending, who's borrowing, who's lending, and what are the benefits. Just to give you an idea, we do six million loans a month. The average loan is $19. Okay, it's all done digitally. There's no cash. Only about 20% of Africans have direct access to banks or financial institutions, so 80% rely on microlending to get access to capital. I'm Siamak and this is Market Insider. Dan, it's great to have you and welcome. Well, thank you so much for letting me participate today. We want to talk to you about microlending. You're involved with this. Can you tell us more about it? Yes. Well, microlending is a very powerful process of allowing people to get access to capital that don't otherwise have any sort of capital to a bank or credit union. About two billion people around the world need microlending because they can't go to a bank or credit union, and about two-thirds of those are women. It's an industry that's very supportive of women globally, and it's big in developing nations like India, Philippines, all over Africa, all over South America. So, many of these nations, the women and the underserved communities just can't go to a bank to get a loan, a small business loan, a school loan for their kids. So, microlending is the way that they can access capital affordably and also quickly. And is this money coming from developed countries like the U.S. and other countries, or is it from everywhere that's going into these loans? Well, microlending has developed into a very global phenomenon in that you have a lot of institutions now that are supporting it in developing nations. You have a lot of small companies that do microlending. So, you have microlenders that are of all different sizes. As a matter of fact, there's a report out there that says there's about 28,000 to 30,000 microlending companies globally. For example, in Kenya, where we operate, there's over 700 microlending companies, not just ours. So, it's very popular, but also it's very needed. And so, you can see there's a very large number of microlending firms globally. Does it apply to other countries in other areas too? People are doing it everywhere, you mentioned. Yes, microlending is everywhere. Some of the biggest countries are obviously India with its population. And then, of course, the Philippines is very big. In Africa, every country uses microlending. Only about 20% of Africans have direct access to banks or financial institutions. So, 80% of Africans rely on microlending to get access to capital. Can you give us some examples of what kind of loans people are taking out and what are they doing with this money? People are shocked when I tell them, we lend $5 as a microloan. And this would be, for example, to the Bota Bota drivers. Now, Bota Bota drivers are these motorcycle taxis, but they also could be deliveries. But these motorcycle drivers will fill up their tank, drive around all day long. So, they borrow the $5, fill up their tank, earn the money, then they'll pay us back. They'll actually pay the lease on their back every day. And so, when they're paying the person that owns the bike, they pay us back their loan, that money leftover is theirs. And most of them earn enough to be able to support their family through this process. And that's just one example. So, they'll borrow almost $5 every single day. We have a lot of women that borrow maybe $10 or $20 from us, and they'll go borrow or go buy rooted vegetables from a farmer, and then they'll sell that in the marketplace, and then they'll turn around, pay us back, then get another loan, go get more goods to sell in the marketplace. We meet a lot of people that do secondhand clothing, new clothing, shoes, bags, merchants of all different types. And one of my favorite stories is we work with a lady who builds coffins. And she started by herself five years ago. And today, through micro lending, she has six employees. She started making one coffin a week. She makes 10 coffins a week. She's expanded her business. Every time I go back to Kenya, I see that she's expanding the size of her business. And all through the power of micro lending. She started by herself, and now she employs six Kenyans to support that business. So, essentially, what you're saying is people are borrowing their working capital. Yes. And then they use that to generate more income. Absolutely. Even $5 and $10 makes a huge impact in those countries. It makes a very big impact. When we tell people that our average micro loan is $19, they shake their head. They go, that's what? People lose $20 bills just around on the street. You can find something like that. And you see people just borrowing $19. And that is critical money for them. And they can literally turn that to three or four times the return. And that's what they're able to do to support their family. How does the interest side of it look like? I like to talk an interest on two sides. One is the interest return for investors, but also a lot of people want to know, well, what's the interest rate we're charging our borrowers? Or what is the average interest rate? So, first off, let's talk about what the borrowers normally pay. Globally, the average interest rate, and for a micro loan, these are 30-day micro loans. So, the average loan, say for us, is $19. The person will pay back about $21 on that 30-day loan. So, we only charge around 10% for that 30-day loan. But the average in Africa is 33%. Even for a 30-day loan? For a 30-day loan. So, 80% of our customers only pay a very flat rate, very nominal fee for that loan. Now, on the flip side, those that come and invest with us here in America, or are investors to participate in our micro lending program, they will earn between 12% and 24% return on their investment. So, it's because our loans are 30-day micro loans that they go out each 30 days. That's how we're able to pay the higher returns. But we also, because our co-founders Kenyon, we don't want to harm our borrowers. We want to make sure they're able to pay their loans back, and we want them to be repeat borrowers. So, we'd rather have a lower interest rate for them so that they're loyal to us, number one, but two, we know they can afford to pay back their loan and grow their business. And if they grow their business, then they become part of our credit union in Kenya. Now, we take those people that were just micro borrowers, now they're part of a formal financial institution. And just to let you know, we have now 300,000 people in our credit union in Kenya, where four years ago we had zero. So, we've taken 300,000 people that were just borrowing that $19, $20, $50 a month, and now they're part of a formal credit union, they're earning interest, they can borrow even lower interest rate loans, they're building their businesses, and we even offer them free business classes. What about the risks? Do you have cases where people don't pay back or they cannot pay back? And what does the risk side of it look like? Kenya is a very unique country in itself. It uses a digital wallet called M-Pesa, and with the M-Pesa digital wallet, everyone in Kenya uses this digital wallet. And the digital wallet basically is where you have your money coming in, you pay each other through the digital wallet. Nobody uses cash in Kenya, or it's very rare. 99% of Kenyans use this. Well, if you don't pay back your micro loan, your digital wallet is flagged. Meaning what happens is, you can't go borrow from one lender and then not pay them back, and then go borrow from another lender. Because your wallet is flagged, they'll go, oh, you need to go back and pay lender A before you can borrow from us. So, this is one of the ways that we keep our defaults at a low risk because they can't just borrow and borrow and borrow and never pay back. So, it's a very unique situation in Kenya because their wallets are flagged. Now, our default, or what I like to say as a delinquency rate, people that don't pay within the 30-day range is about 7% on our end. But overall in a year, we have less than 1% that truly don't pay us within a timeframe of, say, four to six months. What about the rest of the industry? When you look globally, what does it look like? Is there a lot of defaults? There are a lot of defaults in other countries because one of the things they don't have is that infrastructure of a digital wallet or a digital mechanism that tracks everybody in such a way where if a person defaults on a loan, they don't have a way to stop them from getting another loan. Some people are getting a bunch of loans and they're not paying back. And then they're getting themselves in trouble. And so, this is where micro-lending gets a bad name because of what happens in other countries. So, because of the digital wallet in Kenya and other countries are starting to use more digital wallets, you're starting to see the micro-finance industry, as it's growing into that digital space, it's getting a better payback. You're getting less defaults globally overall. And that is encouraging people to pay back, but you're also then putting less people at risk. And that's the big thing. We don't want people to be at risk. They're already at risk. You want to keep them from getting deeper into risk. And that's the whole thing that micro-financing should be doing is helping people get out of those risky situations. Dan, tell us how does this work? Like somebody borrowing $5 and paying back the same day or in 30 days. Can you tell us how it works? It is phenomenal how it works. So, 90% of our loans are not even done on a smartphone. They're done on a regular cell phone. And when a person in Kenya wants to borrow, they'll actually use what's called a USSD code. And the USSD code will be like star 690 pound 7. That starts the process of them being able to borrow a loan. What we look at is their mobile phone number and their mobile phone number and their national ID attaches to a credit report. If they don't have any credit, as long as they've been paying their cell phone, they automatically qualify for a low loan, maybe $5 or $10. They'll get that money in their wallet, in their Impezzo wallet, usually within 5 to 10 minutes. Now, if they pay us back within those 30 days, they want another loan, they're instantly approved to get that next bit of money they need. And if they started at $10, they could come back and borrow $20 from us. And then they can go $30 and so on. So, as they build up their credit, they're able to build up the amount that they can borrow each month. And as long as they pay us back within the timeframe that they've agreed upon, they're instantly approved and it all goes handles through the digital wallet. So, when they pay us back, they come into back our digital wallet at the credit union. Then again, we distribute all that money back out to the digital wallets of all the people we do. And just to let people know, we do 300,000 microloans every day. Wow. There's 700 competitors in Kenya and there's many more across the globe. So, there's a lot of opportunities in banking globally. And you're starting to see in Kenya alone, the banks now have a microfinance division. They would not get into this for a long time. Now, you're starting to see Kenyan Citizen Bank has a microfinance division. But what's interesting, you want to know how much interest rate they charge for their 30-day borrowers? 30%. So, the bank is charging the people 30% that are not bankable. So, they're not really banking customers, but they're part of their microfinance division, but they're charging them three times what we're charging them. And this is why a lot of people, when they find out about us, they go, oh, we want to get a loan from you. For a lot of us that are here in this country, and a lot of people, when they're 18, they have access to credit cards. What are your thoughts? Can you share with us, what's the impact of credit to people? We might take for granted the availability of credit in this country. In this country, when you want to start a business, many times you can go to friends, family, or you can go to a bank and get a loan. Credit cards are easy. Credit cards don't hardly even exist in Kenya. That's why the digital wallet is so big. Many merchants don't even take a credit card or have credit card processing machines in Kenya or in many African countries. So, it's either cash or digital wallet. Well, cash, you could get robbed easy. And this is one of the things that when they found using the digital wallet starting in 2007 in Kenya, so they're celebrating over 18 years with this digital wallet, that it reduced petty theft and crime in Kenya. And it also lifted up a million people out of poverty just because you pulled the majority of cash out because then people didn't lose their cash. They were able in a way to save it, but it was on their phone. And then that allowed them to be able to trade their cash. Okay. Hey, I'll pay you. Okay. What's your cell phone number? All right. Here you go. I've just traded you $5. Okay. Here you go. I'm buying something from you. Here's your cell phone number. So, it's just like a credit card, but they're just trading it through a cell phone. And that's it. That's the way it works. But you don't see credit cards in Kenya because they don't have the credit card processing machines. And because those are all tied to banks. Well, most of the merchants don't have bank accounts. So, that's why the success of M-Pesa is so strong. Rudy, it's great to have you and welcome. Oh, thanks for having us. You work with micro lending in Africa. Can you tell us more about the consumers? Who are the people that are borrowing and how does this work? Well, like I mentioned earlier, they're called micro enterprises, right? 90% of the loans are for business purposes. We know that when they fill out their loan application, everything's done with their smartphones. They also can use flip phones. There's a technology for that as well. And so, these individuals, again, they just don't have access to financial services, right? And they're at the bottom of the pool, right? But this program allows them to participate in the economy. And there's 700 companies that operate in this space. So, it's available, right? But we're only touching 30% of the people that need access to financial services. That's a huge number when you think about it. And so, just to give you an idea, we do 6 million loans a month. The average loan is $19, okay? It's all done digitally. There's no cash. They adopted this digital banking system. They've adopted the use of the smartphone as their digital wallet. And so, this allows them to have access. What do they use these loans for? We know 90% of it's for business purposes because they have to fill out the application. They have to put the purpose of what they're utilizing the funds for. But we also see in the August-September range where that changes a little more to 75-25%, 25% being personal because that's when the kids go back to school, right? So, they're taking out personal loans for educational purposes, right? Getting school supplies, getting uniforms for their kids. And so, we see a little different dynamic in August and September. But 90% is for business purposes. Tell us about those. Can you give us some examples of the business purpose loans for people that may not understand how it works? Yeah. I mean, one of the biggest things that we do, we have a partnership with a group of, they're called Boto-Boto Drivers. They're bike messengers. So, our CFO, Dr. Barry Oriambo, has a special deal with them. They borrow anywhere from $5 to $10 a day depending on their needs. And basically, if you look at the old model that was used in the taxi industry, taxi drivers didn't own their taxi car, right? They leased them from the businesses that owned them. And this is the same thing that's happening in Kenya where an individual goes in, leases a motorcycle for the day or a week, and then he goes out and does his messaging. He needs money for fuel. He needs money for lunch. But then at the end of the day or at the end of the week, he's made enough money to pay back the loan and start all over again. What about the traditional banks in Kenya? Do they not get into this space or is it because people don't have good credit? No, they don't get into space because of the credit issue, right? And so, they deal with the 1%. And the 1% there is very wealthy. But there's a lot of businesses that work with the banks as well. From a commerce standpoint, there's a lot of growth in Kenya going on. So, the banks are busy enough with that side of it, but they don't touch the microloan platform. It's something they see as very small. But again, like I said, there's 700 companies in this space and it's growing. And what are the risks? Is there potential losses as well for people? Well, our algorithm, we eat the default rate, okay? We don't pass it on to our investors. So, right now, our default rate is 7%. The industry average is about 14.5%. So, well under indexed industry, which is a good thing, right? But we don't pass that on to our investors. They come in, depending on what level they come in, they can make 12% or they can make 24%, right? And look, we have 100 months of consecutive payments to our investors. Meaning, our obligations per month have been met for 100 consecutive months. What about the users of these loans? Let's say, I'm the person in Kenya that wants to rent that bike. What interest do I pay to get that loan? Yeah, it depends on your credit rating at the time, right? So, if you're barring the maximum at 500, you're paying the lowest rate at 8%, okay? If you're barring the five to $10, you're paying the higher rate, which is about 24%. And so, our average is usually about 18% a month, which tells you there's more loans on the other end, right? Than on the bottom side. But look, we do 6 million loans a month. It's about 4.2 million in cash a day. And so, that's equivalent to 125 million a month in microloans. And does it work for people that are getting these loans? Is there enough margins for me to go do that job? No, it is because I can tell you, I'll give you a great example. Not only do we have the microloan platform, but we also have a credit union. And that credit union has been around for the last four years. And currently, we have five locations, we have 10 satellite locations, and we have 300,000 members in our credit union. So, what does that tell you? That means the algorithm works. The microloan platform has helped these individuals to have good positive credit history. So, now they have full financial services, right? Which means they have checking, they have savings, they're able to get business loans up to $10,000, depending on their credit. And so, they're allowed to participate in those financial services. So, you see a lot of opportunity into the banking, basic financial services lending in Africa. Right. No, I mean, if you look at our track record, you look at the digital banking system that's in Kenya, they're in seven other countries in Africa as well. Those are markets that we'll definitely look at as far as expansion goes, right? But we'll have to find partners in those countries. And I think the biggest thing, look, I mentioned earlier, there's close to 2 billion people that don't have access to financial services, right? Can we change that overnight? Absolutely not. We can't do it overnight. But we can't put a dent in it, right? And by what I mean is, you look at last year, we raised $42 million in capital. That means that that's going to be over $500 million in new microloads in Kenya over the next 12 months, okay? So, that's how we can put a dent in this and hopefully get those folks out of those situations. And Rudy, you seem passionate about this. Your eyes are telling me that. Can you tell us why? Well, I think because I totally understand the socioeconomic impact that this has on these individuals, right? When you have families that are struggling to eat on a regular basis, where their kids aren't going to school on a and then you see the impact, right? We've had my colleagues that have been in Kenya to see it firsthand how individuals break down because they're so happy that their kids are going to school on a regular basis. They're able to eat on a regular basis, right? And all those things, those are all little things that we all take for granted here in the U.S. But I think when you see it firsthand and understand the socioeconomic standpoint of it, it's a big thing. It really is. Rudy Beltran with Nova Global Fund. It was great to have you. No, thank you for having me. I appreciate it. What do you think about microlending in Africa and other countries? Make sure to let us know in the comments. I'm Siamak. This is Market Insider. We'll see you next time.