Giving credit where credit is new
Financial services firm offers African workers an alternative to loan sharks.
By Merrill Douglas
In the United States, even an $8-an-hour retail clerk can get a credit card, finance a car or borrow money for college tuition.
Not so in the developing world, where vast numbers of people with steady jobs – civil servants, unionized mine workers and others – lack access to conventional credit.
Bayport's niche stands one level above the market segment known as "microfinance," and its mission is different from that of institutions such as the renowned Grameen Bank. The typical microfinance institution (MFI) is very small; 73 percent of them serve fewer than 2,500 clients. Many MFIs are donor-funded, and, of the more than 7,000 in existence, fewer than 100 claim to be financially self-sufficient, according to corporate strategy specialist and University of Michigan professor, C.K. Prahalad.
MFIs usually make small, short-term loans to groups of very poor people, who use them to finance businesses.
As a consumer finance company, Bayport also makes small, unsecured loans. But it goes to the commercial market for funding and operates to make a profit. Since its start in 2002, Bayport has grown to encompass 1,000 employees and 61 distribution points serving 150,000 clients across Africa.
Bayport's borrowers may use the loans for any purpose they like. Thirty to 40 percent borrow to pay for education, and another 20 percent for home improvements. The rest of the loans serve a variety of purposes, including investing in secondary businesses, meeting funeral expenses, and consolidating pricier debt.
Chola tells of one client, a police officer, who supplements his income by running a small shop. "The loan allowed him to increase his stock."
Kurland cites another who received a donation of 30 or 40 sewing machines from outside Zambia, which she planned to use to give sewing lessons to local women. When it came time to import the machines, she didn't have funds to pay the import duties. "So she borrowed some money from us to clear the machines."
To reach its market, Bayport forms relationships with employers and trade unions, which serve as its collection arm, deducting money from employees' wages and sending Bayport the consolidated payments. The company's low rate of uncollected debt – a mere 3.5 percent in Zambia – proves the effectiveness of this model.
Annual interest on the loans runs from 70 to 90 percent. That's high by the standards of conventional credit, but not so bad compared with the rates charged by loan sharks, which can run to several hundred percent per year.
"Commercial banks in the markets where Bayport operates do not charge significantly less than Bayport, when all charges and conditions of borrowing are taken into account," Chola says.
For now, Bayport must keep its rates as they are in order to show sufficient return on capital, says Kurland. "As the business grows and we're able to access our own funding more cheaply, we can pass that on in rate reductions."
Probably the biggest challenge Bayport has faced so far has been how to build a trusting relationship among the three partners. "We come from different backgrounds," Stone points out. He and Kurland are white South Africans; Chola is a black man from Zambia, a country that supported the African National Congress during the apartheid era.
Drawn together by similar business interests, the three realized it was better to cooperate than to compete. The partnership took a leap of faith, they concede. "It was, initially, like trying to put a square peg into a round hole," Stone says. "As entrepreneurs, you just push and push until the hole is square. And that's just what we've achieved."
For Chola, Bayport's success is a point of personal pride. "We are building something on the African continent, we're creating jobs, we're giving back to the communities," he says. "For anybody who had the opportunity, as I had, to come to a place like the Johnson School, and had the opportunity to work wherever they wanted in the world, I think it's good to go back home and be part of that growth."