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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.

Justin Chola, MBA '99
Justin Chola, MBA '99

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 Financial Services, a consumer finance and credit firm with branches in Zambia, South Africa, Ghana, Uganda, and Tanzania, is building its future on exactly this market. Bayport offers modest loans to thousands of employed but "unbanked" Africans – people who, for lack of bank accounts or other collateral, haven't had access to traditional credit institutions. Its loans average $250 – a substantial sum for a teacher earning $200 a month – but they may run as low as $20 or as high as $1,500. Repayment terms range from one to 36 months.
"We fill a valuable gap between banks and loan sharks," says Justin Chola, MBA '99, CEO of Bayport's Zambia operation and a shareholder in the Zambian business. Chola, along with his South African partners and joint shareholders in the Zambian business, Grant Kurland and Stuart Stone, visited the Johnson School on February 15 to speak to Professor Jan Katz's international management and marketing classes.
Pie chart of microfinance institutions by number of clients. Source: Bayport Financial Services PowerPoint presentation at Cornell, February 2007
Source: Bayport Financial Services PowerPoint presentation at Cornell, February 2007

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."

About 20 percent of Bayport's borrowers are civil servants working in far-flung rural villages. To
Chola with his partners Grant Kurland, chairman of Bayport Financial Services (left), and Stuart Stone, Bayport's director (right), outside Sage Hall, Feb. 15. Bayport Financial Services is a microfinance company in Zambia with operations in Ghana, Tanzania, S. Africa, and Uganda. Chola and his partners were guest speakers in Jan Katz' class, "International Competitive Strategy."
reach them, the company deploys mobile teams of three to four employees each, equipped with laptops, printers, generators, and anything else they need to operate off the grid. "They will go into the remote locations and disburse loans to teachers, who would otherwise have to travel hundreds of kilometers to get access to our products," Chola says.
Whether working on the road or in branch offices, Bayport's consultants help inexperienced customers understand what borrowing means and how the obligation will affect their disposable income. But there's no attempt to discourage someone who wants, for instance, to use the money to buy a TV rather than to pay school fees. "We try to educate and encourage them to borrow for the right reasons, but we do not discriminate," Chola says.

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."

Mopani miners waiting in line for loans from Bayport Financial Services on the first day they became available
Mopani miners waiting in line for loans from Bayport Financial Services on the first day they became available
Today, they present a united front against a stream of new competitors. Lacking Bayport's investments in systems and training and its relationships with unions and employers, most of the upstarts fail, but they temporarily distort the market for consumer credit. "They'll come in and try to upset the pricing mechanisms, they'll try to steal our staff and pay them ten times what we pay them, but not on a sustainable basis," Chola says.
In the future, Bayport looks to expand into new countries and diversify into a broader range of services, such as providing insurance and selling appliances and other consumer goods on credit.

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."