The Future of Alternative Credit Scoring For Digital Banks
Amidst the escalating challenges posed by climate change to the global economy, and the long-standing history of financial institutions shying away from serving the bottom of the pyramid due to the perceived high risk and unattractiveness, particularly smallholder farmers and small enterprises.
Commercial banks often have a limited appetite to lend money to vulnerable groups, such as the poor, women, and smallholder farmers, because of a lack of customer data or history to assess creditworthiness. With limited options, these people often turn to informal channels despite high interest rates and the risk of exploitation by unregulated players.
However, proactive financial institutions are changing the narrative through the adoption of alternative credit scoring systems to access invaluable insights into the power of inclusive finance. Fostering financial stability and fortifying the real economy against climate risks, alternative credit scoring plays a critical role in safeguarding the integrity of the financial sector to provide credits at the bottom of the pyramid.
Alternative credit scoring systems offer concrete ratings, precise grading, and actionable recommendations for financial institutions to navigate agricultural lending adeptly. These insights drive collaborative efforts to establish a robust alternative financial ecosystem that prioritizes inclusivity, ensuring that no segment of society is left behind in the face of climate-induced challenges.
Alternative credit scoring in essence, determines an individual’s creditworthiness using non-traditional sources such as value chains, crop and agronomy data, harvest records, and digital footprints, rather than relying solely on traditional sources like debt repayment history or credit files It empowers lenders to extend credit to previously underserved audiences, including the unbanked, enabling them to access loans and build their credit histories.
With alternative credit scoring, lenders can expand credit to a new targeted audience, helping the unbanked gain access to credit. Alternative credit scoring helps those who were once unable to enter the credit system, giving them access and easy loans to establish their credit scores.
By leveraging alternative data for credit scoring, lenders can streamline loan origination processes, leading to potential interest rate reductions for borrowers. Additionally, borrowers with inadequate credit histories, previously subjected to unfavourable interest rates, can undergo reevaluation based on their digital footprints and value chain data. This innovative approach equips lenders with the means to accurately assess lending risks and provide underwriters and analysts with the necessary tools to offer mutually beneficial loan products for both lenders and borrowers.
At a field visit organized by Zowasel at its Crop Centre in Ondo, southwest Nigeria, Abdul, the Head of Operations of Zowasel Nigeria points out that lack of data has historically been an obstacle for banks and financial institutions to extend credit to the unbanked, and thus an impediment to achieving financial inclusion for smallholder farmers. He highlights using alternate data as another way for lenders to conduct credit scoring and tap opportunities at the bottom of the pyramid.
“The driving force behind the Technology Powered and Human Inspired tool is to increase economic opportunities and improve outcomes for hardworking individuals at the bottom of the pyramid who would otherwise be unfairly overlooked and underbanked,” said Jerry OCHE, Founder & CEO at Zowasel. “Now that the model has a proven track record of performance over the last years, We are thrilled to share ACESS with more financial leaders looking to implement a next-generation credit scoring solution to expand their loan portfolio across the bottom of the pyramid to support food security” he added.
In 2022, Zowasel partnered with VFD Microfinance Bank (VBank) a leading digital bank for its initial pilot offering 20,000 USD in alternative financing to qualified smallholder farmers through the ACESS platform. While most banks across the continent consider these segments as non-prime by traditional credit scores. The portfolio performance of the “non-prime” borrowers promoted the bank to further commit a hopping 100, 000.00 USD for a second pilot across two states and two crops in Nigeria.
At present, Zowasel only offers three loan products including loans for farm inputs, mechanization services, and bundled services, payable after harvest through the sales of crops on its marketplace platform. As part of expanding further collaboration, VBank dispatched a team of experts on a fact-finding mission to the company’s remote Crop Centers to meet with its customers to get a firsthand understanding and validation of the value chain to help in their product design and development efforts to cater unique needs of the small farmers.
The bank executives engaged with farmers in the different value chains across Idanre and Bamekimo two key cocoa-producing communities in Ondo State, southwestern Nigeria. Across several villages visited, the team had a one-on-one interactive session with farmers providing insights into the requirement for affordable and easy access to alternative loans to boost productivity and the bank’s interest in supporting value chain development and food security.
Based on the insight gained from both communities, Vbank will develop products and services that will improve the quality of production and livelihood. Zowasel as the key farmers’ inter-facing organization will continue to provide support and assistance to farmers through its marketplace structure and the ACESS program
Speaking on the visit, Bright Bassey, Product Manager at VBank said ” Your views are important to us, this visit provided insights into the challenges faced by smallholder farmers in these regions. As a Bank, we are committed to developing and implementing tailored financial products and services that will address these challenges, empower local farmers, and contribute to the agricultural development of the country”
“We are committed to providing services fairly and professionally across the agricultural value chains. Our focus is to take our partnership to the next level and manage a united financial vision” according to Ikechukwu Mbaliri; the Bank’s Senior Data Scientist.
About ACESS
ACESS is an alternative credit scoring and loan assessment tool that bridges the GAP between financial institutions and farmers, cooperatives, and SMEs at the bottom of the pyramid to unlock alternative financing to increase productivity across value chains.
The tool uses an AI-powered predictive system and a human-powered dynamic variable system to assign scores and grades to potential borrowers based on the computation of the sum of weighted attributes and scores determined from individual data points.
The driving force behind the technology-powered and human-inspired tool is to increase economic opportunities and improve outcomes for hardworking individuals at the bottom of the pyramid who would otherwise be unfairly overlooked and underbanked.
It supports financial institutions across branches and staff with little or no agricultural knowledge in the decision-making process and processing loan applications to make quick lending decisions in a low-risk, cost-effective, and faster environment. It allows for effective time and risk management for agricultural lending, enabling financial institutions to access customer data at a glance for creditworthiness checks and KYC verification to make quick lending decisions in a low-risk, cost-effective, and faster environment to save time and money.
The platform combines expertise in data science, risk management, credit structuring, financial and agricultural technology, and regulatory compliance to help financial institutions. Retain a broader range of profitable customers Fulfill financial inclusion mandate Identify non-prime customers exhibiting prime risk
Please reach out to partners@zowasel.com to discuss how the Alternative Credit Evaluation Scoring System can be adapted and deployed for your financia institutions to scale your lending across the agricultural value chain.
