Alternative Lending In Depth: An Interview with Kaivan Sattar

08.20.21

This week, Jason Colodne, Managing Partner at Colbeck, spoke with Kaivan Sattar, CEO and co-founder of Asaak, a fintech startup providing asset financing to African small businesses. They discussed alternative lending opportunities in emerging markets.

Sattar launched Asaak in 2016, becoming the first digital lender in Uganda. The company finances motorcycle taxis — Uganda’s second leading occupation after agriculture — as an avenue to democratize credit and achieve higher incomes for borrowers. Sattar is on a mission to redefine risk perceptions surrounding Africa and to increase access to capital markets throughout the continent.

Alternative Lending in Uganda

Colodne: What first sparked your interest in alternative lending?

Sattar: I first came to Uganda as a grad student at Columbia through their program Engineers Without Borders. While I was working there, I noticed a very interesting phenomenon: even deep in Ugandan villages, farmers had access to mobile phones and were very comfortable making digital payments to each other, but the rest of Uganda hadn’t caught up yet.

Farmers could send mobile money and clear their transactions within seconds in their personal lives. Yet, if they wanted a loan from the bank, they had to do things the very traditional way. This means they had to go all the way into town, wait in line at the bank, fill out a lot of paper applications, and wait eight weeks to get a response. Then, even after they had received and sent payments, they would have to go back to town, kill half the day, and deposit some cash at the counter.

My partner Eddie and I saw an opportunity to become the very first digital lender in Uganda, where we have now been lending for the past five years. Personally, I am motivated by finding solutions to poverty which can actually sustain themselves. Unlike philanthropy, where I fear that the money will run out one day, in microfinance, I can build a business incentive to solve poverty. And this incentive can actually last for a lifetime.

Asaak’s Approach to Asset Financing

Colodne: Describe the typical due diligence process for Asaak. What kind of data points do you examine before extending credit?

Sattar: We seek to answer two central questions in underwriting: one, does this motorcycle taxi driver earn enough income on a daily and weekly basis to afford the loan installments? And two, does he view this as a serious obligation?

These are essentially questions of character and reliability. The way we answer those questions is by collecting alternative data through different ride hailing apps. In Uganda, when you’re calling an Uber you can get a motorcycle — colloquially known as a boda boda — instead of a car. People often prefer these because of traffic jams: this is the fastest and most reliable way to get through town. Now, the typical boda driver does not own his own motorcycle, and he often spends about 50% of his income just to pay rent on a bike. He would love to own the asset himself, but he doesn’t have any documented income or formal credit history to be able to get a bank loan.

That’s where we come in with our fintech approach. We partnered with all of the major ride hailing apps in Uganda. They show us how many trips a driver has done in the past month, what their ratings are, how often they’re driving, etc. We use their financial and behavioral data points to make our lending decisions.

Colodne: What are Asaak’s default rates?

Sattar: I’m very proud to say that we have built an asset class which actually performs far better than many lending companies in the US. As we speak right now, 3% of our portfolio is beyond 30 days late. In the US, we have a more lenient measure of default, which is usually 90 days past late, but we hold ourselves to a high standard and say that 30 days beyond late is considered default. So, we actually have less than half the default rate of auto loans in the US. Remember that the US is a place where we have a much stronger credit infrastructure and stronger legal systems, yet we still built an asset class that performs better even without some of those basic building blocks.

Why? Because every motorcycle that we give out supports a family of five. These vehicles aren’t being used for leisure: they’re putting food on the table for families, and because of that, families cannot stand to be without the bike even for one day. Since it plays such a big role in survival, we have been able to guarantee productive use of the funds by lending in kind rather than in cash.

This was a pivot that we made about two and a half years ago. Before that, we used to give cash loans to small businesses, but we found that oftentimes the money would get used up on household needs, and maybe 50% of the cash would actually get injected into the business. That created challenges for payments. So, when we pivoted to this model of asset financing, rather than giving cash loans, our default rates drastically dropped.

Colodne: What are your recovery rates on defaulted loans?

Sattar: We have never taken a principal loss because the bikes are GPS tracked and can be immobilized. There are two guarantors for every loan, and even if the motorcycle is stolen and the tracking device is removed, we still have the insurance policy for theft. With all these different safeguards, we’ve never actually taken a principal loss.

The Challenge of Capital Scarcity

Colodne: How do Asaak’s interest rates compare to competitors?

Sattar: The interest rate environment in Uganda can be a little mind blowing. There are some lenders that charge up to 300% APR even for a secured business purpose loan that requires collateral.

We charge 32% interest per year on our motorcycle loans, and we’re the most affordable lender in the market. Even some of the commercial banks in Uganda — who have access to deposits like savings accounts, which are by far the cheapest form of capital — these banks can charge 40% interest per year.

The challenge in Uganda is simply that there’s not enough credit to go around. Last year, we went to a prominent international bank and sought a business loan to grow our portfolio. They offered us 40% interest per year. As you can imagein, most of our capital is from foreign sources.

Colodne: What channels do you use to acquire new customers?

Sattar: We use a variety of channels — television ads, Facebook, partnerships with ride hailing apps, etc. — but by far the biggest channel is word of mouth. In Uganda, and in Africa generally, when someone loves a product, they tell all their friends about it. There is an issue of low trust in society. People are usually pretty skeptical of trying a new company unless their friend has tried it first.

This is true particularly in the financial services sector. Our clients have to make a down payment in order to get access to a bike loan. They pay anywhere from 20% to 50% of the cash price of the bike. In the past, there have been unscrupulous companies that came to Uganda and collected people’s down payments. They just disappeared with the money and never gave out any bikes.

Colodne: What are Asaak’s current and future funding sources?

Sattar: To date, we have raised about $3 or $4 million dollars of debt from different family offices and high net worth individuals, and now we’re starting to go more of the institutional route. We recently secured some new credit lines from hedge funds and another capital partner that we work with.

We typically raise term loans from different family offices. We also have an off-balance sheet lender that we work with called Untapped. Untapped buys whole loans from us. For example, they’ll give us money to originate say 100 motorcycle loans, and they will own all the cash flows from these loans, and then they’ll pay us a loan servicing fee for managing the portfolio. It’s more like a revenue share.

Colodne: Do you plan to move beyond asset backed loans one day?

Sattar: Most of our loans are collateralized, with the exception of a personal loan product we offer to drivers of good standing.

We’re also currently piloting smartphone loans which work in a similar way to our motorcycle loans. Someone makes a down payment to access the phone, and if he ever defaults then we have a way to shut down the phone to make it unusable. This improves our scalability because we don’t require any pre-existing collateral from the client — the asset itself is the collateral, and using technology, we have a way to secure it.

By ensuring the productive use of assets, we know that our clients are using these gadgets to make money, which keeps the risk profile low so that we can charge them lower interest rates. And it’s easier for us to raise that capital because we have extremely low credit risk in our portfolio. This is our general strategy, and we will keep expanding this blueprint to other assets.

In the future, we want to finance cars and minibuses and trucks. We like lending in the mobility space because these are businesses that have daily cash flow. The underlying assets are also highly liquid: it’s very easy to sell an impounded motorcycle, or car, or minibus, as opposed to less liquid things like crops.

What Can We Expect from Microfinance?

Colodne: Critics of microfinance argue that it doesn’t live up to its grand promises to alleviate poverty and that it diverts scarce resources from more sustainable forms of economic growth. What socioeconomic goals should investors realistically expect from microfinance?

Sattar: When I first started getting interested in the microfinance, I saw the same hype as well. People thought of it as a silver bullet: it was going to fix poverty, people would have longer lives, kids would have better schools, etc. That’s a lot to ask from one approach.

The most important outcome we would like to see from microfinance is higher incomes for our borrowers. How do you achieve those higher incomes? If you’re just give out unrestricted cash loans to low-income households, it will be difficult. We learned that there are so many pent-up needs in the household that only half the money makes it to the actual business — the rest gets used towards personal emergencies.

That inspired our shift toward asset financing. We found it improved our scalability because now we didn’t require any pre-existing collateral from the borrower. It guaranteed a productive use of the funds by lending in kind, rather than in cash, and it also created some skin in the game. By having them make a down payment for this asset — in addition to knowing that the motorcycle is GPS tracked, and fuel can be cut off to the engine, and the bike can be traced — it makes it really difficult for the driver to walk away from that obligation.

We learned that by ensuring a productive use of the loan, you can increase the borrower’s income, and by growing the borrower’s capacity you ensure the success of the loan. That’s how we’ve gotten these extremely low default rates of 3%.

Colodne: What else would you like to share with investors?

Sattar: Part of our vision is to build a completely new asset class. When we first started this company, we saw that African small businesses were paying over 100% interest per year for secured business purpose loans, whereas in Western capital markets, people typically don’t make more than 10% a year in yields on fixed income. There was clearly a huge mismatch in global credit markets and the risk perception of Africa.

For five years, I’ve pitched to hundreds of investors who have said that lending in Africa is too risky, there’s no credit reference bureau, the courts are corrupt, there is no underlying infrastructure to help manage repayments, etc., etc., etc. All of those things are true, but we’ve still found a way to get credit risk even lower than it is in in many US lending companies because we know that the money is being used productively and generating income for the entire family. It’s hard to get such strong payment motivators in the US, where I feel that a lot of lending is around luxury needs or consumption goods.

One day, we want Asaak to be the vehicle for trillions of dollars to enter Africa. Our ideal is to become the Pan-African bank. We want motorcycle loans to be traded on Wall Street the same way that mortgage-backed securities and other asset classes are right now.

The other idea I want to put out there is that it’s very possible to make money and make profits while doing good at the same time. I encounter a lot of skepticism around this. People religiously believe it’s too good to be true. “How can this be a rapidly growing fintech startup while also helping the poor?” they say.

I would just point to the data. Every time a boda driver takes out a loan with us, he saves 50% of income that he used to spend on rent. This is the first formal asset that he’s owned in his life, and it can be a stepping stone towards much more. We want them to have multiple bikes, to open their own transportation company, to build a fleet of vehicles — these are all things that they can do to bring themselves up to the middle class and to have a different life for their children.

About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at inquiries@colbeck.com.