Kadé uncles and aunties – they’re an irreplaceable resource in every area, and we’re often quite fond of them. How many times have you run out of soap, or toothpaste, or some other item, just to put a quick run to the kadé? They’re familiar with your favourite brands and flavours, and might even spark up a little conversation if you’re not in a hurry. In western countries, these ‘mom and pop’ stores have largely been edged out by supermarkets run by major retail chains. But in Sri Lanka and many other parts of Asia, these micro SMEs play a major role in the distribution of goods. Particularly in rural areas where they form a vital part of the economic backbone.
According to estimates, Sri Lanka’s FMCG market has room to grow by about 20-25%, adding around USD 250 million in value to the economy. Achieving this growth requires that small retailers have access to sufficient liquidity and working capital. However, this isn’t as easy as it sounds. Sri Lanka has a challenging environment where financial institutions suffer from high non-performing loans (NPLs). Additionally, a large section of the populace lacks access to banking services, small players – whether retailers or otherwise – find it difficult to prove their creditworthiness and secure the capital they need to expand.
Working to bridge this gap is iLoan: a blockchain-based, AI-powered FinTech platform. Through technology, it brings together retailers, suppliers, distributors, and financial institutions. In doing so, making credit more accessible. iLoan’s Co-Founders, Lakshan de Silva and Ningwa Lau explained how their platform can solve credit woes and benefit all stakeholders involved, strengthening the economy in the process.
The origins of iLoan
iLoan came about when Lakshan De Silva and Ningwa Lau, over a cup of coffee, began discussing the working capital issues faced by the construction industry, which they were both involved in at the time. “We were wondering how best to solve this,” recalls Lakshan. “A big part of it is that you need to inject liquidity at the right level because if you give credit at the industrial level, the prime borrowers could eat up that financial opportunity.”
They figured a system to inject liquidity into the bottom of the pyramid would be most effective. But realised that testing the idea with the construction industry would be risky, owing to its prolonged credit periods. Looking for shorter turnaround times, they decided upon FMCG as their vertical of choice, and after one and a half years developing the tech, the duo rolled out iLoan in March 2019.
They admit it wasn’t smooth sailing from day one – just a month after the launch, the Easter Attacks dealt a crippling blow to the economy. Still, the startup bounced back and when the pandemic struck, they were ready. Being a member of the 1st cohort of the HatchX programme, iLoan also received much support from the industry. Lakshan notes that the programme enabled them to meet and network with high-level industry contacts. Thereby, allowing the startup to secure investors and partner with financial institutions.
Balancing the equation
Lakshan noted that the issue stems from both fronts. MSMEs are often unable to secure funding as they lack collateral. For lenders, this is essential for their Know Your Customer (KYC) processes. Without collateral, lenders are unsure whether they will see repayment. However, blockchain tech has given rise to smart contracts, which are enabled by an underlying legal framework, and are more reassuring to companies and banks – and iLoan uses this to solve the lack of guarantees on either side.
“Through blockchain,” he explains, “we create a trade network where all participants involved in a loan are on one platform: the borrower, such as a retailer; the lender – a bank or financial institution; the supplier – such as Unilever or Nestlé; and the distributor. Putting them together, we tap into the information flow, so that nothing is missed or lost in translation.”
“Concurrently, we do a disbursement of funds based on invoices, so we ensure that no cash is given out, per se. What we do is when a retailer is given 14 days of credit from the supplier, we give them an additional 7 days. This expands the retailer’s working capital, and gives them access to more liquidity. When the retailer is to pay the supplier, funds are disbursed to the supplier on their behalf.”
These funds are either provided by iLoan itself, or through credit lines directly extended by the banks. In the latter case, iLoan simply functions as a platform through which banks can extend their services to retailers at the bottom of the pyramid, who lack access to traditional financing. Although partner banks provide financing, iLoan gauges the creditworthiness of retailers on board. This is vital when the platform disburses its own funds – although iLoan does not maintain the colossal loan book of a traditional bank, it sometimes provides retailers with up to 80% of the credit for their portfolio.
For this, iLoan ensures security through a very thorough KYC process, explains Lakshan. As it manages all invoice records between retailers and suppliers, iLoan keeps track of how diligently borrowers honour their financial obligations. Borrowers would not be recommended to suppliers and lose access to credit sources if they fail to make payments, although no retailers have defaulted on payments thus far, Lakshan adds with relief.
Credit amidst a crisis
While iLoan has seen healthy growth, with around 13,000 onboarded and 5,000 active partners, the platform was put through a trial by fire this year when COVID-19 struck. The founders noted that the pandemic’s onset forced them to stop onboarding retailers, to ensure their loan book could handle the massive demand for credit amidst stagnant cash flows in all sectors.
Meanwhile, they aligned with the Government’s mandate to financial institutions to extend further credit to the battered public, establishing payment plans for their partners and extending the time period before loans would be written off as non-performing. This strategy in the need of the hour paid off; with the new health guidelines and restrictions, people moved to stock up on supplies at home, boosting demand in the FMCG sector. The duo noted that not only did their debtors fulfil their obligations, but also sought to expand credit lines to keep up with the surge in e-commerce sales.
Looking towards the future, both Lakshan and Ningwa affirmed that they’re confident in what they created. “There was a practical problem, and we came up with a practical solution through tech. The whole purpose was to be an enabler of financial inclusivity, and to get the unbanked and underbanked onto the system,” stated Lakshan.
The scalability of their solution is another aspect they are confident about, as they see strong potential for the platform’s application in the ASEAN region and beyond – the lack of credit for SMEs in Asia is an issue estimated to be worth $600 million. Thus, while Lakshan manages iLoan’s operations in Sri Lanka, Ningwa works on international expansion.
Currently iLoan is aiming to expand into Asian markets with similar operating environments to Sri Lanka. Some examples are the Philippines, Bangladesh, Cambodia, and Myanmar. Unfortunately, as Lau explains, their expansion plans, though well underway, were put on pause by the COVID-19 pandemic, with travel restrictions leaving them unable to get on the ground to establish the links they needed to begin operations.
However, they foresee renewed impetus for their growth in the One Belt One Road initiative and hope to align with the programme to spread regionally. They are also looking at more advanced markets like Hong Kong and Singapore, although they concur that the platform will require some tailoring to suit the more evolved regulatory environment in such regions. This expansion will be backed by the lessons learnt from iLoan’s operations in the Sri Lankan market, where it continues to grow through increased partnerships with traditional financial institutions, FMCG suppliers – and of course, the friendly neighbourhood kadé uncles.