Prospect and Challenges of Digital Embedded Credit
By Irfan Mohammed Abir
Badsha Mia is a small shop owner in Shah Ali Market in Dhaka, Bangladesh. He used to work for a relative’s shop in the same market, but he always wanted to have his own business. So about a year ago, he mustered up the courage and used his savings to open up the Badsha Store. When ShopUp first met Badsha in his store back in January, he seemed very happy and welcoming with a can-do attitude. He was greeting every client, promoting new products and assuring customers that he would source any product that was missing. Everything looked very promising.
But after talking for a while, he began to open up. He said he had started his shop with high expectations: it was a busy market and many people knew and loved him for his welcoming nature from his previous job. However, he hadn’t managed to get his trade license and despite all the goodwill and his hard work, he wasn’t able to meet his expectations for success. He explained that he often fell short of meeting customers’ demands because he was unable to get products on credit from most distributors, especially from companies in high demand at the market. Even while we were there, he had to send his employees to a nearby shop to pick up a product for a customer whose required brand product was not in his store. “This is bad for business,” he said.
Badsha Mia is not an exceptional case. Research by UNCDF has found that only the top 20 percent of retailers are able to access credit from suppliers; most pay cash up-front upon delivery of products. 60% pay for stock in instalments. Also, 61 percent of retailers had borrowed primarily from MFIs and informal sources over the last 12 months. In-depth interviews with more than 50 small and medium retailers in the Fast Moving Consumer Goods (FMCG) sector revealed more or less the same challenges everywhere, in urban, semi-urban and rural markets.
Addressing the challenges
Through technological innovation and partnership, ShopUp is trying to address these challenges for FMCG retailers and provide a feasible financial solution which also benefits all the players in the FMCG retail supply chain.
Challenge 1: Small retailers don’t have the proper documents to access credit from banks or other financial institutions. SME loans require a trade license, which is not always available. In some areas of Bangladesh, trade license issuance is halted for quite some time. Even retailers who already have trade licenses often don’t renew them properly and thus are unable to meet the basic loan criteria for financial institutions.
Solution: In order to solve this issue, we decided to onboard distributors, who usually have all the proper documents and extend credit support to the retailers through them. The distributors know their retailer base quite well and they always provide informal credit support to some of the retailers. If we can formalize the credit recording with NID based KYC and enable credit support with recourse through the distributors, the lack of documentation problem is resolved.
Challenge 2: Most small retailers cannot provide any collateral for the credit they need.
Solution: To solve this issue we considered multiple measures: firstly, if we can offer nano loans with a short tenure (7–15 days), it will significantly reduce the risk of collateral-free unsecured credit for the small retailers. Secondly, we are implementing embedded finance modality, i.e. connecting credit disbursement system with order placement system. Thus, retailers are able to avail credit while placing orders for goods and also, we are able to blacklist the defaulter retailers through order placement system, cutting them off from product supply. Hence, it can act as a means of ensuring good repayment behavior instead of requiring collateral.
Challenge 3: Retailers don’t have a proper sales record-keeping system, making it difficult to assess their creditworthiness.
Solution: Most of the large FMCG manufacturers have centralized digital order placement systems which collect data on a daily basis from all of their registered retailers. This purchasing data could be used as a proxy for sales records for each retailer, and if we can combine the data from enough manufacturers, we can assess the total sales for each individual retailer. The sales record can then be used to determine a retailer’s creditworthiness and help set their credit limit.
Designing credit models with these solutions:
Based on the findings, we designed two different models for financing small FMCG retailers. One is connected to distributors, depending on them to select and extend credit to retailers they deem worthy. For this model, a limited KYC process based on national identity documents would suffice, thus eliminating the challenge regarding proper documentation for banks. Detailed sales records are kept along with credit records to determine their sales volume and assess their creditworthiness, so that in the future, this data can be used to connect them to the formal credit system.
The other model depends on the manufacturer to provide retailers’ sales records, which are used to determine a short-term credit limit for the retailers. Here, retailers are connected with a formal financial institution through extensive KYC and credit assessment. The retailers can request credit while placing an order through the manufacturer’s system.
Now, going back to our friend Badsha Mia. As we were exploring the possibility of an anchor-based retailer financing scheme with Unilever, we offered him to be part of the prototyping if he could get his trade license. He did it within one month and reached out to us. After closed support for only two weeks, he got used to the system and started managing the credit on his own. The results were amazing. His sales grew almost double. He is now using credit support smartly and efficiently with an aim to fly high.
There are thousands of retailers like Badsha Mia in Bangladesh who just need a little help. With a properly designed retailer financing model, we can give them the support they need to become sustainable and reach their full business potential.
