Local start-up Twiga Foods and tech giant IBM are bringing blockchain microfinancing to Kenya’s food retail and agri sectors. A successful pilot of the potentially revolutionary new platform points to a new credit lifeline for SMEs across Africa – one that could help such firms leapfrog into the formal economy and advance the flow of F&B business on the continent in the years ahead.

 

Agri-tech start-up Twiga Foods has teamed up with IBM Research – the innovation engine of the multi-national IBM corporation – to extend access for Kenya’s food stall retailers to much-needed microloans. Blockchain is the technology underpinning the innovative new financial platform – and that has been used to offer microloans to some 220 food stall retailers across Kenya as part of a first-of-its-kind pilot project. Yet its success, according to IBM, points to something much more wide-reaching, offering the potential to overhaul how the lion’s share of trade is conducted across the continent.

 

The $13m start-up & ‘Big Blue’

 

As far as partners go, Nairobi-headquartered disruptor Twiga Foods is certainly a good place to start, given the firm has already been lauded as an exciting new disruptor by many tech experts, including Facebook founder Mark Zuckerberg, who credited the firm with using mobile money solution M-Pesa to collapse the value chain in agriculture. Put simply, Twiga is a B2B food distribution company that builds markets for agricultural producers and retailers through transparency, efficiency and technology. The US$13 million start-up’s mobile platform connects food producers, pack houses and vehicles to supply and deliver produce directly from farmers to urban retailers.

 

The disruptive start-up, which raised US$10.3 million in a Series A funding round last year, has been striving to expand its logistic services into a total market ecosystem by adding financial services to the mix. In late-2017, after identifying a common interest with IBM off the back of numerous shared panel sessions at various forums, Twiga began working with ‘Big Blue’ to deploy a blockchain-enabled supply-lending platform that would help to scale the Kenyan firm’s reach.

 

However, there was a catch. How could loans be provided when most of the vendors lack a credit score? Luckily, IBM scientists know a thing or two about using machine learning and mobile data, and how to apply both towards developing credit scores – they’ve done it before. In a previous project with an African bank and mobile operator, more than $3 million in loans were distributed.

 

“What we’re trying to do here is to develop a platform that enables the thousands of SMEs serviced by the likes of Twiga Foods to access financial services,” clarifies Dr Abdigani Diriye, a Research Scientist at IBM Research Africa. “The way that we do this is to leverage the data that Twiga Foods generates when they are delivering produce and other goods to their customers.”

 

“After analysing purchase records from a mobile device, we used machine learning algorithms to predict creditworthiness – in turn, giving lenders the confidence they need to provide microloans to small businesses,” explains Isaac Markus, a researcher on the inclusive financial services group at IBM Research in Kenya. “Once the credit score is determined, we used a blockchain – based on the Hyperledger Fabric [an open-source blockchain for business] – to manage the entire lending process from application to receiving offers to accepting the terms to repayment.”

 

Halting fraud, accelerating lawful business

 

The beauty of blockchain in this instance is that the lending process becomes transparent to all parties involved – from the lending bank to the borrower’s bank and the loan applicants themselves. The fact that blockchains are immutable means that no single party can alter the ledger without consensus from the entire network, thus also helping to reduce fraud. Another major advantage to blockchains comes from their utilisation of a series of ‘smart contracts’ that can be executed in real time, offering the potential to significantly reduce the time it takes to manually process and issue a loan. 

 

“Previously, we were focused on helping farmers distribute bananas, tomatoes, onions and potatoes to 2,600 kiosks across Kenya, but we soon realised that we could help them sell even more produce with access to working capital,” said Grant Brooke, Co-Founder of Twiga Foods. “If the food vendors can sell more, we can distribute more, growing both of our businesses.” 

 

To test the new platform, Twiga Foods and IBM ran an eight-week pilot at the end of last year with 220 small food kiosks – known locally as ‘mama mbogas’ in Swahili – across Kenya. Impressively, those loans – each with an average value of around 3,000 Kenyan shillings (US$30) – increased the order size by 30 per cent, and the profits for each retailer by six per cent, on average. 

 

The terms of the loans were short – just four and eight days, with an interest rate of one and two per cent respectively. All such transactions were executed via mobile phone and went directly toward working capital for the businesses. When a retailer had an order delivered, they would receive an SMS with loan options for financing that order. They would then respond to the text to confirm their preferred loan option. 

 

“We had several iterations of the platform based on feedback from the retailers,” reported Andrew Kinai, lead research engineer on the project at IBM Research. “The SMS-based solution provided an effective channel for a diverse set of users – some with limited IT literacy – to access financing for their orders.” 

 

Leapfrogging into the formal sector 

 

Nor is the technology only of use to small retailers: it holds considerable potential to benefit those small businesses at the other end of the value chain (i.e., the smallholder farmers), as IBM Research’s Dr Abdigani Diriye points out. “The way we’ve framed this is that for any SME (and that can include farmers or distributors), we can essentially and effectively create a financial profile from all of the data that such entities are generating, in order to enable them to access other services – loans, asset financing or insurance, for example. 

 

“In terms of our research, we’ve deliberately been working very closely with SMEs – typically ‘mom and pop’ stores; vendors who sell various products on the high street – particularly due to the significant percentage of activity those businesses account for across the continent. We’ve also looked at fintech companies – firms offering more innovative payment solutions. Safaricom is a very interesting use case in that instance, simply because of the pervasiveness of M-Pesa. We’ve studied how people make use of that in order to inform the solutions we’re developing.”

 

With the informal sector in Africa accounting for around 75 per cent share of the overall market, Dr Diriye – who currently manages IBM’s Inclusive Financial Services Group – believes that technologies like blockchain offer an enormous opportunity. Such a solution, he says, has the potential to provide a form of disruption in that it would enable many financially excluded or informal businesses in food production or retail “to create the necessary financial profiles and footprints” required for them to make that transition into the formal sector. “Blockchain affords certain characteristics – such as immutability and transparency – so, when it comes to institutions like banks and insurers wanting to provide formal services, they can see this data trail and can then enable those informal businesses to become financially included. As a result, such technology can provide leapfrog opportunities that economies across the continent can seize upon.” Given such reasoning, the IBM Research executive sees significant potential for things to move quickly from hereon in. “We’ve just completed a deployment, which, as far as I know is one of the first of its kind on the continent – and now we’re looking to really scale this up,” he reveals.

 

“Given the market similarities in East and West Africa, we believe that it could be a real solution to the pain points that a lot of SMEs currently face, which are invariably around credit and documentation and data,” he notes in closing, adding that the success of the pilot in Nairobi has been such that the plan is now for the innovative platform to be rolled out to more SMEs across Africa by the end of the year. Beyond that, of course, all emerging markets where the informal sector plays a considerable role benefit significantly from such technology in the years ahead, advancing the efficient and equitable growth of both big and small businesses, and thus enhancing the broader economic progress of their nations in so doing.