How we made it in Africa first interviewed Michael Wilkerson, founder and CEO of Tugende, in 2015. Tugende provides financing to motorcycle taxis drivers – known as boda-bodas – in Uganda through a lease-to-own agreement. Boda-bodas typically don’t own their motorcycles; they use a large portion of their earnings to rent them from a ‘landlord’, never quite managing to save enough to buy their own. Tugende’s model is simple: responsible drivers are identified who pay Tugende typically 15% more a week than they would if they were renting the motorbike. Within 24 months or less – most clients finish ahead of schedule – they become owners. The company finances those deemed too risky by traditional lenders, such as banks.
Sven Hugo talks to Wilkerson to learn more about the company’s revenue model, the challenges it faces and expansion plans on the horizon.
How has Tugende evolved in the five years since we last talked?
The last five years have been a wild ride, mostly positive. When we spoke back then, we had 800 active clients and 200 customers who had completed their payments. Today, we have more than 23,000 active clients and more than 12,000 completed clients.
The lessons learnt over the last five years are too many to condense into a few sentences but the bottom line is that you can bet on our customers, who are considered too risky by many traditional financiers.
Describe Tugende’s revenue model.
It is a classic asset financing model. The majority of our revenue is from interest income and we receive a small amount of trading income through sales margins, as we get volume discounts from our suppliers.
The other small yet growing segment of our revenue model is value-added services. For example, we get a commission from the insurance we package in with all of our asset finance deals. This includes vehicle insurance as well as medical and life insurance, among other policies. Despite being small compared to the interest, it is a growing part of our business, especially as we look to keep our clients as partners for decades. They may not need financing every time but they can renew their insurance through us every year.
Do your clients buy the motorcycles directly from Tugende?
They buy it through us but they decide on the bike and the customisable accessories. We partner with different suppliers and try to ensure our clients have the option to choose whatever works best for them. It allows us to have some quality control; if there’s an issue with a spare part, for example, we can get it resolved faster than if they had to deal directly with suppliers.
Tugende recently announced the completion of a $6.3 million series A investment round led by Toyota Tsusho investment fund Mobility 54. What will this funding be used for?
The new funds will be used primarily to keep serving our core business and clients, as this is currently working. In addition, we are investing heavily in technology and piloting new products. We are getting ready for new market expansion to further widen the pipeline of clients we serve. We have received many requests to open branches in other areas of Uganda and Kenya not yet covered.
What measures do you take to ensure your clients repay their loans?
Young men on motorcycles have historically been considered high risk; however, if you ignore the bias, you realise these people own profitable businesses. By designing our products to be affordable within the cash flows they already generate, we reduce the risk of not getting paid. It is the reason we focus on business clients. Clients pay because they are motivated by the opportunity of full ownership and they value the other opportunities we provide, such as insurance and driving permits.
Tugende also works through communities and we get to know some of our clients’ clients, the places they work, we visit their homes and we get two guarantors. By the time we are serving a client, there is a network of people connected to the customer and we can work through the community to overcome most challenges along the way.
I cannot give exact numbers on the default rate but I can say we outperform every commercial bank in East Africa, in terms of the portfolio at risk and write-offs.
Do you plan to introduce new products?
Absolutely. You can categorise our expansion plans into scaling up the products we already understand, so mostly motorcycles; building new products; and then deepening the relationships with existing clients and networks. This can mean upgrading of an insurance package, or it can be agricultural lending to our client who has already paid off one asset and has a secondary income stream from family agriculture.
We’re excited about the potential of e-mobility because of the environmental positives. We are also excited because if our clients can make and save money by not spending on fuel, it is better for us. There are millions of electric bikes being sold in China and the time is ripe to penetrate sub-Saharan Africa.
Last year, you launched in Kisumu in Kenya, how does this market differ from Uganda?
Kenya has about three times the GDP of Uganda. With the bigger economy, there was already more competition in financial services – even in high-risk sectors such as ours – but we found a very exciting and welcoming opportunity for our business.
Why Kisumu, and not the capital Nairobi?
It is the largest city in western Kenya and geographically close to Uganda. We saw advantages to having teams on both sides of the border, supporting each other. Our Ugandan team helped train their Kenyan colleagues. Even though there are a lot of similarities between Kenya and Uganda, many companies assume it is easy to copy what is working in one country and apply it to the other. Not so.
We acknowledge we have to get to know our clients as individuals and build from the ground up. A medium-sized town like Kisumu is better for us to customise our offering before going elsewhere in Kenya. We’ll look to Nairobi once we have set up in several towns, purely because Nairobi is so large and is hard to cover with a small team.
How competitive is the industry?
Our number one competitor is the traditional motorcycle landlords from which the boda-boda drivers rent their motorcycles. These informal landlords are often able to match our offering but without our overheads and technology costs. However, because there is so much demand for asset financing, we don’t view them as a significant threat.
Larger microfinance banks and commercial banks compete on and off. The results they have achieved are mixed: institutions have occasionally launched a product very similar to ours and then cancelled it.
We are also starting to see more international competition in this specialist finance niche, such as fintech digital-only loan apps.
Competition is motivational. It is not a winner takes all market.
What are your biggest challenges?
The biggest challenge is how capital-intensive the model is. As an asset finance business we’re funding the clients from day one and only getting the money back over some time. We have a constant challenge of raising debt capital fast enough to keep up with the organic demand.
How do you bridge this capital gap?
One way is to bring in credible equity partners, such as Mobility 54. The more equity you have, the easier it is to raise debt. The other way is to continue to perform in terms of our client repayments and portfolio performance. We have averaged almost a 100% year-on-year growth for the last eight years. There are both debt and equity investors who thought we were too small a few years ago but are now keen to invest.
If you had the chance to start this company again, what would you do differently?
I would learn more about structured finance. Debt is the fuel for the vehicle of our company. I had no investment banking or finance or business background but some of that naivety kept us going when experienced bankers were writing off our clients.
Stress management and self-care should have enjoyed higher priority. As the main founder on the ground, there were times when we just had to find a way to keep going through challenges and obstacles. As a young person with little management experience, I figured it out by building friendships, relationships and mentorships to get through it.
Most of what we know now – and didn’t know eight years ago – has been learnt by doing. I’m not sure we could have done it differently or learnt it in another way. You just have to adapt, iterate, adjust and listen to the clients.