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THE PROBLEM: Access to credit is a major barrier to growth for small businesses in developing countries in Africa and beyond. The costs associated with enforcing repayment is a binding constraint to expanding trade credit in poor countries, where credit flows are too small to be enforced through the courts.
THE SOLUTION: Unlock capital and credit flows to small enterprises through a low transaction cost trade credit product—an electronic inventory management software and mobile money transfer to lower the cost of monitoring and repayment.
COST EFFECTIVENESS: By reducing hefty transaction costs, this new, cheaper trade credit model could help extend financial resources to lower income populations.
Here is the challenge of a small-scale shopkeeper: to afford his inventory, he must make small and frequent orders to his supplier, and can rarely economize on costs by buying in bulk. If he could get access to trade credit, allowing him to borrow from suppliers and pay back over time, then he could grow his inventory, expand his business, and eventually escape the trap of small and frequent orders.
Here is the challenge of the trade creditor: to extend credit to small shopkeepers, she needs to be able to monitor repayments and trust that she could take the matter up in court if need be. However, the costs of doing so outweigh the revenue she would make from providing such small credit.
With support from DIV, Innovations for Poverty in Action (IPA) in partnership with Financial Sector Deepening (FSD), Coca Cola, Safaricom, and Equity Bank, will implement and rigorously evaluate an innovative trade credit product for small-scale entrepreneurs in Kenya. The credit product leverages two technologies to dramatically lower the lender’s cost of monitoring and to make repayment more optimal for the borrowers.
The first technology is an electronic inventory management software system developed by a Kenyan software company. The software system provides real-time inventory data and enables efficient, automated, flexible and centralized monitoring of inventory levels and credit repayment histories—which lowers the cost to small firms of building a reputation for repayment.
The second is a mobile phone-based money transfer system, which lowers the transaction costs to the borrowers making repayments. They can send small and frequent payments for the price of a text message.
The DIV grant will fund a randomized control trial involving 1,200 Kenyan retailers selling Coke products in and around Nairobi, Of these, two thirds will receive the trade credit. While all credits will be repayable to Equity, the distributors of Coke products will be given explicit incentives to ensure repayment for half the retailers to whom the credit is offered. The study will assess the commercial viability of the product, the role of distributors in administering it, and its impact on business development and employment creation. If the intervention is profitable for lenders and borrowers, the project partners are keen to expand the credit product at a much larger scale and to other suppliers.
Last updated: February 19, 2013