Microlending 1 – The Beginning

I know that micro loans can be highly profitable because, in real life, I personally know a few people who are involved in this asset class. They specialize in consumer loans, lending small amounts to a large number of people. The default rate is actually very low, and the profit margins are insanely high—so high that if someone told you about it, your first reaction might be to think it’s a scam. Naturally, opportunities like this are typically closed off to outsiders. Since they’re so lucrative, there’s no need to advertise or invite others in. It’s usually a private game...

Microlending 2 – Where Are They Lending?

To put it simply, this microloan company operates in Kenya. Each loan ranges from $30 to $50, and the borrowing term is only 30 days! Reportedly, they receive nearly 8 million applications per month, but only approve around 1 million new borrowers monthly due to capital constraint. So far, they’ve been able to lend out about $55 million each month. When I heard “Kenya,” my first reaction was: Is lending in Africa even safe? That’s where understanding the mechanism of microloans in Africa becomes important. The person I spoke with, Ruddy, started out as a lender himself. After making money...

Microlending 3 – Who Are the Borrowers?

Continuing from the last post, I mentioned that most of the borrowers in this lending model are street vendors. Why do they become street vendors? Ruddy explained something interesting: the majority of their borrowers are business women who lead their household. Numerous studies have shown that when women participate in economic activities, the chances of lifting a household out of poverty are significantly higher. When the women in a household begin to improve their financial situation, the entire family tends to make progress in both economic stability and education. This benefits not only the women themselves but also their families...

Microlending 4 – How Does the Underwriting Process Work?

Continuing from the last post, today we’ll talk about the entire loan process from the borrower’s perspective. How does microloan approval work? How do they repay the loan, and what happens to their lives after repayment? Understanding the full loan cycle is fascinating, and once you grasp it, you’ll have a better sense of the risks and returns associated with this model. According to Ruddy, the process starts when borrowers have a clear idea of what they want to do. Many people use the loan to start small businesses, such as selling homemade food on the street or becoming a...

Microlending 5 – Default Rate?

Continuing from the last post, the default rate is one of the simplest and most straightforward metrics for evaluating the quality of a loan portfolio. In North America, the default rate for consumer credit is generally over 3%, and in the aftermath of the 2008 financial crisis, it even exceeded 6% at its peak. In Kenya, the default rate for traditional credit is reportedly in the double digits. But guess what the default rate is for the microloans issued through the M-Pesa system that Ruddy’s company operates? 2.7%! Yes, you read that right—just 2.7%, which is actually lower than the...

Microlending 6 – Return and Term?

Continuing from the last post, Ruddy explained that lender returns depend on the lending amount. If you lend less than $10,000, your annualized return is 12%. For investments over $50,000, it jumps to 36%, and for those putting in over $1 million, it goes up to a whopping 39% 😂. Moreover, after keeping the money invested for 13 months, lenders can decide each month whether they want to continue investing or withdraw their money starting from the 14th month. Later, when I talked to others, I learned about another option they offer—one that allegedly guarantees principal protection (how they guarantee...