AFB’s lending model based on trust rather than collateral

When financial services group AFB started in 2010 in Ghana, it mainly focused on lending to government employees, but two years ago started expanding into consumer and SME lending.

Karl Westvig

Karl Westvig

Karl Westvig, AFB’s group CEO believes the future of financing is in consumer lending.

A growing population of African youth is joining the job market, keen to acquire assets. Westvig explains the majority need financing not tied to collateral, as is the norm in traditional lending.

AFB offers its clients cards which they use to make purchases in select retail outlets on credit. AFB settles the payment with the merchant, and consumers repay AFB within six months.

In Kenya it has over 70,000 cardholders and is currently expanding at a rate of 10,000 new clients per month. In the two years it has been in Kenya, AFB has disbursed in excess of US$11.2m. Its cardholders purchase items such as clothes and books and household equipment like refrigerators and microwaves.

The business has just launched in Tanzania and was recently licensed to open in Zambia. Westvig notes the potential for consumer lending is “incredibly large” in Africa. “I think we are at the beginning of a 15 to 20 year wave of the consumer. We are just scratching the surface.”

In Ghana AFB continues to lend to government employees, although Westvig says it is not a viable business in the long-term. It is “highly competitive” because generally, lending to people who have a guaranteed salary is seen as safer.

“We see the long-term opportunity in consumer financing,” he notes. Nonetheless, Westvig explains, consumer financing remains risky, adding there is always a minority who don’t want to repay debts. “So if your fraud and risk procedures are not very good, you can lose a lot of money.”

The company also lends to formal and informal SMEs. Informal traders, often shunned by banks, can borrow up to $100 for working capital. AFB has branches in local markets where traders such as vegetable vendors operate. Those who wish to borrow are assessed for credit-worthiness and disbursed money via mobile phone wallets.

“In the formal SME market the largest advance we have just given out was $110,000 in Kenya. This is the fourth advance given to that one entrepreneur. Their first was to buy chairs and tables when they opened their first restaurant. Today they are opening the fourth,” says Westvig.

Lending based on trust

He adds AFB targets “average people” such as traders who can’t get loans from banks because they either lack collateral or their businesses are not formalised. Although microfinance institutions do serve them, their lending is based on savings, and they have to be a member of a group for three to six months to borrow.

“We lend to individuals and we don’t ask them to make deposits. We take a risk on a customer based on their willingness and ability to pay. We inherently believe most customers want to repay their debts.”

AFB has a debt repayment rate of more than 90%. Since it doesn’t ask for collateral, Westvig says the company focuses on understanding people, building relationships and rewarding those with a good repayment record with better terms and bigger funding.

“If you truly want to touch the broader population in Africa, you have to lend based on trust,” he says.

The challenges

As it expands, some of the challenges AFB faces revolve around talent and financing. The company has 1,500 employees across five countries.

“To build a very large consumer financing business across Africa you need capital,” he says. In Kenya, AFB has now invested $22m while in Ghana it has injected a total of about $40m.

Although Ghana has opportunity, Westvig says the business environment is “challenging right now”. He attributes this to large budget deficit, high inflation and a devaluation of the Ghanaian cedi.

“We got into Ghana because it is a good market to be in, and in Ghanaian cedis we perform really well, but not so well in US dollar terms because of the currency devaluation.”

Spreading risk

Westvig says the company sees opportunity in countries that have a strong sophisticated retail sector and a variety of telecommunication firms with mobile money wallets. Markets where there is “concentration of power” in one person or organisation is a turn-off for AFB.

“The market must have diversified risk, so that if you lose one big retailer or one mobile operator you don’t close business.”