How investors can make money by lending to African entrepreneurs
Danish company MYC4 is using the internet to allow investors from around the world to lend money directly to entrepreneurs who are doing business in Africa, solving every entrepreneur’s dilemma: access to financing. How we made it in Africa’s Dinfin Mulupi interviewed MYC4’s director for Africa, Eric Naivasha, about the platform and how it is helping grow small businesses on the continent.
Tell us about MYC4
MYC4 is an online marketplace that was started in Denmark in 2007 with the aim of connecting African businesses that need capital with funds available all over the world. A big number of businesses in Africa are excluded from financial services, maybe because they don’t have a credit history or guarantee. You see a lot of small traders doing the same business for over 20 years without growing. MYC4 wants to connect these under-served businesses directly to lenders. We mobilise investors from Europe – 99% of our investors are from Europe – who actively participate in funding African businesses. Right now we have more than 19,296 investors. Through the platform, investors have disbursed US$22m in loans to over 10,378 businesses in the last three years.
How does the MYC4 model work?
Our model is peer-to-peer, meaning that an investor picks a business they want to fund directly through the online platform. A business applies for a loan from a micro-finance institution, which are our partners in this case. The micro-finance institution will vet them, and then upload their profile on MYC4.com. We then open this to our investors, who start bidding on that particular loan. If they were requesting say $5,000 – this can be funded in two days. One loan can be raised by even 100 investors. The minimum entry [for] any loan auction is €5 (around $6.5). The risk is therefore distributed among many investors, because most of these small businesses are high risk. This process, right from application for the loan to disbursement, takes about seven days, since most of it is done online. We are just using the internet to build a marketplace. There can be a minimum of 200 loan applications every day with an average loan size of about $3,800. On a monthly basis we disburse about $400,000. We are currently concentrating in East Africa, although we have a partner in Ghana.
Is this profitable for investors?
On the MYC4 platform, the lender gets to choose the interest they want to participate within a particular loan. If the wanted interest on a particular loan is say, 12%, some investors will bid higher (more commercially oriented investors), and socially oriented investors may bid lower than the wanted 12%, even 0%. What the client gets is the weighted average of all the bids. Since MYC4 uses the Dutch Auction System, the platform will always accept the most competitive bid in terms of interest ensuring that the client gets rightly priced capital. For instance, a bid of €20 at 20% on a loan would be kicked out by bids of less than 20%.
Initially, before we perfected our risk management strategies, investors were losing money because most of the businesses were not paying back. But for the last two and a half years, investors have been making a very good return on MYC4… Today, when the loan is paid, most investors don’t withdraw their money on the platform, instead they keep reinvesting. We have created an auto-bid where investors define their preferred investment, for example agriculture-related businesses or women-owned businesses, such that when they get a return and that particular business is on the platform, the system bids for the investor automatically. Our model is very transparent. The investor, micro-finance institution and MYC4, all make a return.
Can people living in Africa invest, given that the €5 minimum entry is affordable?
Yes they can. They would, however, have to use euros and not local currencies. Alternatively, they can make a bank transfer to a MYC4 account, which will be converted into euros. Many people don’t want to do that. For this reason, we are working on a myc4.co.ke, which will allow the use of local currency and mobile transfer systems like M-Pesa.
What impact has MYC4 had on African businesses?
We have businesses that are on their fourth loan with MYC4. The businesses have created a total of 52,000 new jobs. Small traders have been able to scale their operations through the loans.
Describe some of the challenges you face
Liquidity is our biggest challenge. From January to September 2012, we have received requests for funding worth $4m, and we have only been able to fund $3.3m. That means some requests did not get enough funding. We are looking to attract more investors so that as we grow, we are able to fund all the requests that are coming on the platform. In the future, we will have a multi-currency platform, which should attract a lot of investors.
What are your future plans?
We want to move into the rest of Africa by 2015. We will be looking at the Southern African and West African regions. We also want to register a lot of business, like MYC4 East Africa Limited and have local shareholders. We will also expand our partners to about 45 micro-finance institutions which will use MYC4 as a funding platform.