Why We Invested in Kwanza Tukule | Filling the flexible payment gap for MSMEs in emerging markets
As part of a focus on financial resilience at Mercy Corps Ventures (MCV), we are exploring challenges around growth and resilience for micro-, small-, and medium-sized enterprises (MSMEs). Here, we share insights on flexible payment options and Buy-Now-Pay-Later (BNPL) products in building MSME resilience.
Written by Hebe Foster, Platform Associate at Mercy Corps Ventures.
Limited cash flow flexibility presents a real and consistent barrier to the resilience of MSMEs in emerging markets.
MSMEs, both formal and informal, represent roughly 90% of businesses and more than 50% of employment worldwide, while formal MSMEs alone contribute up to 40% of national income (GDP) in emerging economies. These businesses include food vendors delivering vital nutrition to underserved rural communities or low-income urban neighborhoods, informal retailers providing access to staples such as household and hygiene items, logistics companies supporting the delivery of fresh produce within hard-to-reach areas, and many more.
While these MSMEs provide vital services for communities across the world to withstand disruption and thrive, they are also exposed to a multitude of supply chain shocks, price volatility, and macro shifts in the global economy, with few tools to endure these shocks.
Image courtesy of Mercy Corps.
Barriers to growth for MSMEs
One of the major impacts on resilience is cash flow flexibility. For MSMEs in emerging markets, access to finance is the second most cited obstacle to business growth (more here). One of the reasons for these barriers to finance is that products are not designed to the specific needs of MSMEs. For example, many of the traditional lenders do not offer the short-term flexible payment options that would allow MSMEs the flexibility to navigate day-to-day changes in customer demand and supply chain ripples without becoming mired in growing debt. While payment schedules of one week or less would be preferable for these retailers, one month is usually the minimum tenure — and even that is rare from traditional lenders with banks, MFIs, and digital lenders offering loans of a 6-month tenure or longer.
Moreover, traditional finance products are often extremely costly due to interest rates reaching highs of 120%, and formal loan requests rarely being accepted by lenders due to lack of lendee collateral or credit history.
What does this look like in reality?
For an informal micro-retailer operating in a low-income neighborhood in Nairobi, Kenya, these barriers to flexible capital can have multiple impacts. For example, Grace* runs a kiosk-based in an urban area. She lives in the same neighborhood in which her shop is located and sells fast-moving consumer goods (FMCG). Every morning, Grace buys stock for her shop and pays her suppliers. However, she is often unable to save because all profits go towards stock acquisition. Her biggest challenges are the high (and increasing) cost of goods, lack of capital to expand her business, and frequent cash flow problems. Additionally, when an unexpected storm hits, fewer people come to her shop to buy products that day, meaning Grace’s profits are reduced and she is unable to stock her shop with the full range of products the following morning. If this kind of shock happens frequently, Grace will quickly use up any savings she has managed to set aside, and might be forced to turn to high-rate loan sharks and fall into cycles of debt, or to close her business.
“We have to get credit going. Food price hikes mean more small businesses need our products. We don’t charge huge margins so saw a lot of demand as food prices spiked. For the ones who can’t pass the cost onto their customers [in low-income areas], they’ll probably go out of business, which would have a huge impact.”
Khadija Mohammed Churchill, CEO of Kwanza Tukule, a logistics company that optimizes the supply chain for informal street food vendors in Nairobi
Opportunities & Solutions
This environment presents opportunities for Buy-Now-Pay-Later (BNPL) solutions, also known as inventory financing, which offer small businesses the opportunity, at point of sale, to purchase merchandise on credit. For MSMEs, such as informal food vendors or small merchant retailers, BNPL products adapted to the specific needs of these customer segments can provide much-needed access to provisions on credit with flexible payment terms and affordable interest rates. As a result, new ways of doing BNPL are appearing across emerging markets, testing the hypothesis that greater cash flow flexibility would give MSMEs more options to grow their businesses and develop resilience in times of shock (and non-shock).
One approach is to create different, more tailored types of BNPL products, including credit that suits the purchasing patterns of these small businesses. Kwanza Tukule’s service allows small informal vendors to provide affordable meals to underserved neighborhoods by providing accessible FMCG with reliable same-day delivery through trusted sales agents. However, these small businesses have experienced multiple types of shock in recent months. Global food chain issues combined with a poor harvest in the spring in Kenya means that staple food items have seen huge price spikes, in some cases more than 30%, and the country’s dollar shortage is reducing the ability of manufacturers to access inputs and basic goods from abroad.
In these conditions, many MSMEs have been forced to reduce the variety or amount of goods they sell, using more of their limited cash to buy fewer items. The risk of going out of business is high when increasingly higher payments need to be made upfront.
These challenges present a vital opportunity to innovate and create new solutions. Kwanza Tukule is working with Mercy Corps Ventures and other partners to pilot BNPL products. The team is working with primary pilot partner SympliFi to test 1- and 7-day tenures, offering selected businesses the chance to opt into delayed payments. The short-term nature of these products fits with the way that vendors — like Grace — usually stock their shops, on a daily or weekly basis. Access to these affordable BNPL products ensures they are able to stock the core products in their inventory, such as maize flour and cooking oil, sell to their customers as usual, and increase their incomes despite cash flow shocks. On top of this, the borrowers are also creating an informal credit history that can be leveraged for access to other financial products (insurance, savings, and so on) and contribute to increased long-term financial stability.
Another approach to BNPL is to embed these MSME-appropriate services into pre-existing platforms, as GrowTrade is doing in Nigeria. This approach allows MSMEs who already use a platform to easily access a range of services, including an inventory financing plan that suits them. For many of GrowTrade’s retailer base, this is the first time they are digitizing the inventory element of their business, and more than 1,500 unique users have already opted for new financing options.
There are pre-existing platforms that offer embedded finance to their users, but they offer fewer options for affordable inventory financing options, limiting their capacity to scale and achieve long-term impact for the MSMEs they serve. GrowTrade and Kwanza Tukule are targeting three key outcomes around resilience that are important for the sector to work towards:
Business confidence: supporting vendors to feel safer within their business. If they have the option to pay for three days’ inventory on a day of their choice, and then have stock for three days, that brings flexibility and peace of mind.
Stabilizing revenue and sales: allowing these MSMEs to build resilience during low-sales phases, or make the most of high-demand periods like the holidays. Flexible BNPL products can help them stock according to demand and not get trapped in low-stock, low-profit cycles.
Saving time and risk: if MSMSEs can access more goods through a platform with a reliable BNPL product they save time and money. Inventory financing at point of sale gives them access to greater stock, and avoids them having to close down their stall, take transport to fetch goods, and possibly pay a higher price.
Questions for the future
These solutions for cash flow flexibility, although nascent, offer exciting potential for the future of MSME resilience and growth. If scaled successfully, BNPL products could offer a solution that does not currently exist in the market: affordable and accessible cash flow flexibility for millions of MSMEs with low default mechanisms while building long-term creditworthiness.
As interest in this space grows, we are exploring multiple questions:
How does this scale?
How does cash flow flexibility fit in with the broader financial products space, including access to savings products, other types of credit, and mobile wallets, etc?
If embedded models can increase impact and scale, what are the associated risks?
What is the future of BNPL and other alternative credit scoring systems? How might BNPL trigger the use of alternative data (e.g. purchasing history, debit-to-credit ratio, income and spending patterns) to build creditworthiness among MSMEs who have never had this opportunity before?
Exploring new ways to support resilience in emerging markets is a driving factor behind all of Mercy Corps Ventures’ work. We want to support vendors like Grace to not only withstand disruptions but also thrive in the opportunities they present.
Stay tuned for an upcoming series on MSME resilience to climate shocks, and explore our new Resilient Futures thesis.
