High Tech Microlending — And Why Chickens Hatch Great ROI

The World Bank distributes about $25 billion a year to countries through governments that identify areas where investment is needed and capital can be deployed to build infrastructure.

Traditional conduits of lending, including banks and other entities, issue trillions of dollars to keep the wheels of commerce growing.

But for roughly 2 billion individuals around the world who lack access to banking services, the road to getting capital to finance new businesses and improve their standards of living can be a long and difficult one. That’s because these individuals may not have credit histories or financial stability that might make them attractive candidates for loans.

One Tokyo-based firm, Gojo & Co., seeks to cut out the middleman (that would be the government in this case) by using advanced technologies and go directly to the financial services providers who can fund nascent businesses.

As Taejun Shin, CEO of Gojo, told Karen Webster in a recent interview, the firm operates effectively as a holding company of microfinance institutions around the world — a private sector version of the World Bank.

The average loan size, said Shin, is about $300, and the average lending term is about 18 months.

The company said last month that it raised $22 million in Series D financing. Seven Bank, Credit Saison, SBI Group and several individual investors, including existing shareholders, participated in the round.

“We raise funds from private investors and directly provide capital to low-income households in developing nations,” said Shin.

He said that Gojo’s microfinance companies also operate with local presence in the countries it serves — with a current focus on Asia, in Sri Lanka, Myanmar, Cambodia and India — in order to better gauge the needs of its end customers.

The Data

The firm’s lenders use a combined credit risk scoring methodology that uses traditional models such as the Altman Z score and deep learning model (leveraging neural networks, for example) to assess loans. Crowdfunding, according to the company, and P2P payments, are cost efficient means of raising and distributing capital.

On a large scale, Shin said all financial institutions (FIs) act as pipes to connect those who provide capital and those who receive it — and the pipe should operate as efficiently as possible. The credit policy and getting money to borrowers should be based on a deep understanding of local behaviors and how individuals prefer to repay loans. In one example, New Delhi-based microfinance firm Satya MicroCapital, in which Gojo is an investor, has found that half of its borrowers repay their microfinance loans using biometrics.

With that type of attention to detail, and data-driven credit risk scoring, he said, the default rate has never been higher than about 50 basis points. Unlike purely digital players, he said, Gojo visits borrowers and gets a sense of how the loans are being deployed and how incomes are rising (typically 20 percent to 30 percent as a result of using the loans to fund various initiatives).

The Borrowers

As Shin recounted, most borrowers have, or intend to start, their own businesses. Borrowers may use funds to buy sewing machines or raw materials that are in turn used to make souvenirs for tourists. Shin noted that many of the firm’s clients are working mothers seeking to raise their families’ living standards by buying food or paying for education.

Investing in loans with microfinance clients, he said, tends to throw off higher returns than might be seen elsewhere. The all-in net return for a high-end restaurant in Japan might be 25 percent, where a $1 million investment returns $250,000 annually. But a $5 chicken can lay pennies’ worth of eggs every day, generating triple digit percentage returns. Gojo also issues certificates to its borrowers to demonstrate their creditworthiness, which in turn can springboard into new employment opportunities and increase their income.

“After repayment,” he said, “about 80 percent of the customers come back to us. After the third, fourth or fifth ‘cycle,’ they basically ‘graduate’ and have reached the business scale that they want.”