Peer to peer lending has been in practice since the beginning of civilization. When someone needed to start a trade, members of communities would lend money to them, and it worked.
People would provide funds to business men using a community monitoring system that relied on social capital, a form of trust measurement.
When things went wrong, the lender would report to guarantors and peer groups. A resolution would be arranged afterwards. It was effective, but not as efficient.
As modernization continued to take dominance, people began to migrate and communities began to disperse. Social capital eroded and peer to peer lending for business became even more inefficient. Then everyone turned to traditional banking, the ones we have today.
But the problem with banking comes in many forms. Sometimes banks are simply unable to meet customers’ needs.
Other times they are just too big to cater to everyday money problems of the small guy. A large number of micro businesses are still financially excluded.
But today, financial technology is giving rise to the development of platforms that provide financial inclusion for entrepreneurs by promoting peer to peer lending – thus connecting people in virtual communities where social capital can be leveraged efficiently and effectively.
This is the mission of OG Capital, a digital micro lender that is redistributing wealth by allowing ordinary people provide structured financing to micro businesses in Africa. The company was founded in January 2020.
The company is working with a demographic that is underbanked and unable to receive assistance from traditional financial institution due to a lack of an articulate business model, collateral or credit history.
OG Capital is championing the cause for local economic development in Nigeria through simple lending.
According to OG Adoga, the company’s founder; “We want to hack the poverty problem from the bottom of the credit pyramid. For local economies to thrive, the survival of micro businesses is crucial especially knowing that they employ over 60 million Nigerians. One way to do this is to make capital more accessible and affordable for local entrepreneurs; and lending safer and more rewarding for ordinary people who lend”
Apparently, the company’s core values speak to incentivizing lending and making it safer. This provides the opportunity for a micro entrepreneur to easily get capital for business, something that banks are rarely able to do especially in Nigeria.
OG Capital has transacted well over $130,000 in 18 months with a loan to default ratio of 1.9% and zero customer acquisition cost from its Abuja brick and mortar location.
This is the proof of concept that has validated the development of its mobile application which is set to be deployed in September 2021.
“What we are building is a structured system to provide and retrieve loans from micro-businesses. We have also designed a business planning framework and a blog for micro-businesses in key industries to allow them make better financial decisions” OG says.
The company understands the problem, and the solution as well. For example, micro businesses are still unable access loans from financial institutions to operate and scale. On the other hand, the average person is unable to find safe and reliable places to invest their money and grow wealth.
“We want to turn lending into an attractive investment with enviable returns “
Since the company is penetrating the bottom of the pyramid where poorest borrowers can be found, it has also devised means to effectively handle debt recovery and reduce loan to default ratio. At the bottom pyramid, businesses do not have tangible legal structures and proper valuations. Apparently, the risk of increasing NPL is a major reason why banks aren’t so well known in this demographic.
Risk is properly managed as all loans are insured against death and natural hazard. Furthermore, borrowers are screened using IP flagging algorithms, that weed out perpetual loan defaulters. An applicant is also required to provide two guarantors who would be responsible for the loan in the event that it is defaulted.
With this, the company is adding layers of security, and creating additional data sources to support Nigeria’s frail credit infrastructure.
The Difficulty of Getting Business Loans in Nigeria
Business borrowers now have a way out of their funding problem. It is nearly impossible for the average business man or woman to get a loan. Banks do not even bother with outright rejection anymore, they just ignore applications that do not meet the billing. A big reason is that many banks would rather invest their deposits in tax-free government securities because of its predictable outcomes and asymmetric information.
OG Capital solve this problem by allowing entrepreneurs get funded from an endless pool of funds which come from ordinary people. The funding process isn’t thoughtless either. Individual applications are screened with a credit assessment test and an applicant is assigned an OG score, a rating that signals their creditworthiness.
From experience, the increase in the adoption of mobile technology shows that this kind of lending can grow rapidly in Nigeria.
Lenders like OG Capital are leading us back to “village life” where entrepreneurs can experience easy borrowing, and where lenders can grow wealth and help people without worrying about how to get their money back.