At the meeting of the Investment Committee, proposals for financing submitted by the company from East Africa, Cashway (Kenya), were considered.
General description of the startup
Name – Cashway Limited
• Organizational and legal form – Limited Liability Company, an analogue of a limited liability company. The American form of a legal entity is registered in Kenya.
• Number of founders (shareholders) – 1, Cashway Financial Ink. (USA)
• Country of registration – Kenya
• Registration date – 2018
• Type of activity – microcredit using a mobile platform
• Share capital – USD 726,418 (2020)
• Gross Income – $ 3,195,413 (2020)
• Net Income – 560,576 USD (2020)
Purpose of creation
A significant proportion of Kenya’s population is mobile and active. interested in short-term financing for solving everyday problems and problems of microbusiness. They are not ready to attract bank loans, which often requires a lot of time to collect documents and go through bureaucratic procedures. An increasing number of Kenyan people are interested in receiving funds quickly and within 24 hours, first as an interesting experience, then as a convenient financial tool for overcoming cash gaps.
Cashway sees its clients as young professionals, university students, micro-business owners, aged 18–45, actively using mobile technologies and often needing instant funding to solve problems that do not require delay.
As shown by the data presented, the total mobile lending market in Kenya at the date of application is about $ 1.6 billion, according to its indicators it reached the level before the start of the pandemic. By 2025, it is planned to increase the volume of lending in Kenya to $ 3–4 billion, all market participants – banks and microfinance organizations – are interested in this growth. For this type of loans, a fairly high statistics of repayment is recorded, no more than 10–12% of issued loans fall into the risk zone. This trend will follow a downward trend as the national economy recovers.
Key benefits of Cashway
The startup considers its key competitive advantages in the microcredit market as the ability to satisfy the interest of the target audience. This is facilitated by a convenient mobile application with an intuitive interface, which can be used even by clients who have no experience of interacting with financial institutions.
The staff of the company understands well the requirements and wishes of the audience, the marketing department carefully analyzes the changes in market demands, adjusting the loan product for them in terms of lending terms, credit limits, interest rate.
Thorough attention is paid to risk management; for this, a proprietary underwriting program was developed – an assessment of potential risks based on the documents of a potential client, his answers to key questions, using scoring technology. The program automatically decides on the provision of microloans, if any questions arise, the decision is made by the credit manager.
Market conditions
The mobile microloan market in Kenya is highly dependent on the state of several factors, ranked by degree of importance:
■ the level of consumer demand. It grows as access to mobile communications in the country increases, while it covers no more than 37% of the population, and unemployment decreases, then a potential borrower can pay interest;
■ the size of the key rate of the Central Bank of Kenya. As it rises, so does the interest rate for on-lending, which makes microcredit products unaffordable for most of the population. Now the rate is 7%, which gives banks the opportunity to offer credit products at 11–12%. The 15% rate looks attractive for microfinance with its increased risk;
■ the level of free funds in the country that can be attracted as free liquidity for further placement in microcredits. For a number of international companies, this factor turns out to be less significant, since there is a possibility of attracting funds from foreign founders and financial institutions, funds;
■ the number of market participants and their ability to provide microloans.
Now we can assume that the well-thought-out actions of the Kenyan government to develop infrastructure projects, to install power grids to new enterprises will lead to the creation of new jobs and a corresponding increase in the effective demand for microcredits. The development of the economy and overcoming the consequences of the coronavirus have already brought the market to a pre-pandemic state, and its explosive growth is predicted by 2025.
Business model
The business model used by the startup reflects the trends that have emerged over the past 2 years that are characteristic of the most developed countries in Africa. A technological platform is being created that uses electronic money from one of the country’s most developed electronic payment systems as a means of lending. The client submits an application for financing, on average, amounts are requested in the amount of 30–40 US dollars at 15% per annum with a repayment period of one month. Some of the entrepreneurial clients who attract loans on a permanent basis in the amount of USD 400, this audience seems to be the most solvent.
The resources of MPESA – the mobile payment system, the first in the number of clients in Kenya, created for the implementation of microfinance projects, are used. This allows you to significantly reduce the level of transaction costs for issuing and repaying loans, transaction costs are reduced due to a single operating platform for clients and the lender. In fact, Cashway is a technology franchisee to provide microfinance services. Limitations in the technical capacity of the payment system can negatively affect lending services. Now the service is scaled to the markets of three countries – Kenya, Tanzania and Afghanistan, but its further scaling depends on the developers. Now it is planned to cover it and India, which may arouse interest in the microfinance markets with mobile money of global players.
Competitive market situation
Electronic lending services using MPESA e-wallets and relying on the resources of the mobile operator Vodafone and using other systems in Kenya are provided by 14 companies, including retail banks and mobile operators. The level of service offered by Cashway makes it possible to talk about a good position, but not yet a leader. The limitation of own funds and attracted sources of financing reduces the number of resources that can be allocated in loans. At the same time, traditional banking systems in the country have a negative attitude to the growth of e-money lending, prompting the Ministry of Finance of Kenya to monitor this activity seriously, initiating external audits.
At the same time, it is possible that new not creditor companies will enter the market, but large electronic money management systems, which will change the situation on the market.
Financial indicators of the project
Cashway entered the market on the growing trend of interest in e-money lending in 2018. This made it possible to work at a small loss in the first and second years, recruiting a professional team and significantly reducing transaction costs, bank fees, and the cost of raising funds. In its third year of operation, the company posted a net profit of US $ 346,916.
At the end of the fourth year of operation, 2021 is expected that the gross income will exceed the level of 7,719,838 US dollars and will show a net profit of more than 1.77 million US dollars. Accordingly, it was possible to achieve a good profitability of 22–23% per year. It is created due to the short term of crediting, high turnover of funds. The total attracted funds of the founders and external creditors exceed USD 5.6 million.
Team
The startup recruited 15 young professionals, experienced in banking financial structures around the world. Top management has an American business education (Stanford Business School). There are marketing, engineering (IT technology), operational and credit departments.
Requested investment
The startup is requesting a loan of 2,000,000 million dollars, focusing on the fact that this amount will allow it to quickly increase its customer pool. Interest, term, collateral are discussed parameters.
Benefits and risks for the investor
The advantage of this project for the investor will be the already demonstrated success of the technology, its application by large companies, the prospects for expanding activities to other countries of the region and to the East. Assuming that the formed pool of clients may also be interesting for the implementation of other services in the information sector of the economy, he understands that he can, together with a low interest rate on invested funds, get a structured audience estimated from the point of view of effective demand for the implementation of services of a related type.
At the same time, he assesses the team that already has experience in launching fintech startups in difficult conditions as a hotel asset of the project and is ready to consider proposals for creating divisions of the company for the sale of compatible information services.
As a significant advantage of the investment market in Kenya, one can consider tax exemption for the registration of enterprises operating in high-tech industries in areas of accelerated economic development.
The risk and the most significant can be considered the project’s connection with one platform of the mobile operator. This can be considered as a dependence that reduces the potential of the project in the implementation of credit. financial, informational projects of a different type. The refinement of such global technological solutions for new tasks is virtually impossible.
Current investment strategy
Investors, for the purpose of which this opinion has been prepared, is guided by high-risk investments in high-tech projects at the seed stage. He understands that only 5–10% of venture capital enterprises can be successful, but risk in his understanding is a common characteristic of entrepreneurial activity and he is ready to invest in startups, having studied their innovative and technological potential, while for the total project portfolio he expects to see an average yield of 45%. Lending to existing projects can be interesting as the creation of tools or means of finding new investments.
Proposed financing terms
Taking into account the above risks and benefits, the following lending conditions can be considered:
■ amount of 2,000,000 US dollars. The funds are transferred to the parent company, since when a debt arises, the US judicial system provides more opportunities for prompt collection;
■ interest rate – 11–12% per annum with the return of the loan body and payment of interest on a quarterly basis;
■ term – 2 years with the possibility of extension in the development of other areas of cooperation;
■ collateral – securities (stocks or bonds) at the disposal of the project, cryptocurrencies. Bond proposals will be reviewed as soon as possible.
This requires setting up a control system over the company’s operating activities, establishing mandatory monthly reporting. When deciding on the development of joint areas of work, the investor will insist on transferring a controlling stake to him. Further financing is possible under these conditions.
Conclusion: funding for Cashway is advisable if it is viewed not as a one-time event, but as a tool for offering other high-tech services to the African market.
