EFTA’s Innovative Lending Model Provides Equipment Loans to Tanzanians

Coy Buckley, CEO of EFTA (Equity for Tanzania), explains how the company manages to achieve a very low NPL (non-performing loan) ratio of only 5 to 6% of the loans ending in repossession.

“In the SME sector in Tanzania, approximately 80% of the businesses are informal. This means they don’t have formal accounts and they don’t usually have sufficient collateral to take a loan. This lack of formality can be a significant barrier to obtain finance to help the business grow. An equipment lease is a way for us to access these small businesses when customers do not have sufficient collateral, as the equipment serves as the security. We’ve not only developed a financing lease that has helped us overcome the collateral barrier, but also a method of assessing the credit-worthiness of a business that doesn’t require formal accounts. Generally, formal accounts would help us to understand the amount of an SME’s leverage, the turnover and the amount of cash they have in the bank but if companies don’t have this we have to find other ways to access this information. We use a variety of methods that make sense for an informal customer such as talking to their suppliers, talking to their key customers, looking at their order books, getting high quality references and having a gauge for the amount of turnover the business has and the amount of turnover that is needed to service the loan. It’s a unique approach and we spend a lot of time getting it right. Another tool is the Credit Reference Bureau which is credit risk tool introduced a few years ago by the Central Bank. In a modern economy, this would be quite standard. You would know what someone’s credit score is and you could lend to them or not. But in Tanzania, with relatively low transparency into the credit market, the Credit Reference Bureau is gradually increasing the visibility of customers with poor credit histories. They’re telling us: “this is a serial defaulter”, which means we need to stay away. Or “this person is unbanked”, so we have to do a bit more work around their credit worthiness, but we know they don’t have a history of defaulting which just makes it easier. There are a variety of tools that we can use but really, the core things are, taking the time to assess an informal customer, using what is there, not looking for something that is not there and then having a good understanding of the sector. The other part of what we do is to create deep sector knowledge. Our team spends a lot of time looking at sectors where we see there are a large number of transactions to understand the gross margins, the volumes and the key risks. How difficult is it for them to get raw materials? What’s the seasonality of the business? Then we can gauge how this business, for instance a brick business, compares to another brick business. If we see a lot of variations between those two businesses we can say: “something is not quite right”. So it sort of gives us a Rosetta stone of a bricks business and we can compare them across and say: “ok this looks like we would expect and therefore the risk is lower”. Those are the three primary ways that we look at it”, says Coy Buckley.