A Light Bulb Goes On: A Major Innovation in Asset Finance: M-KOPA’s model could illuminate other sectors
As a caricature, microfinance lenders came up with the following process for loan securitization:
Get your borrower to find five to ten friends, make them wait in turn while each person in the group gets a loan in succession.
At the same time, borrowers must attend all attend a weekly meeting lasting 3-4hrswhere they monitor each other’s progress and count repayments.
Finally, when they get the loan, charge them 100 percent + APR to cover costs and overhead.
The fact that, as The MIX reports, nearly 200 million clients have signed up for this procedure speaks to the magnitude of the need, not the value of the service. There’s got to be another solution to an age-old problem: how to lend money to poor people to buy labor-saving or efficiency-enhancing equipment.
The creators of M-KOPA , which sells solar base stations that can charge phones, power lights, and other limited applications, also has come up with one of the coolest ideas I’ve seen in the mobile money space in some time.
So how does M-KOPA do it?
Its solar base station uses machine-to-machine embedded SIM chips to control activation of the device and to report real-time data on its operation. Because the company can turn it off (and because the devices are integrated with M-PESA) they can link the payment of daily or weekly fees to real-time activation of the device.
In other words, if someone hasn’t paid, M-KOPA will turn the machine off until they do. M-KOPA can then provide the device for a down payment at a fraction of the price and allow the user to continue to pay for the rest of the cost of the device while they use it, thus overcoming the need for a large sum up-front.
Essentially their technique collateralizes the loan to buy the device with the device itself (since it can be “repossessed” remotely and in real time.) This approach could likely be applied to any durable good with an integrated circuit, opening a whole new market.
Beyond that, even after the device has been paid off, users could still use it as collateral for future loans (essentially M-Kopa could send someone money over M-PESA to the client and reset the amount they owe so they then start repaying or lose access to the solar power device as before.) And they could potentially create a credit score of the person based on the usage data they have been collecting from the device, i.e. how they rely on the device could be a proxy for their willingness to repay to keep access to it.
All of this is automated, digital, and done without staff interactions that drive the high interest rates and fees associated with traditional microfinance.
It’s a model I am very interested to explore further. As the Kenya-based M-KOPA expands, here is one question for readers of this blog. M-KOPA has limited resources to develop new products, so what are the top two or three assets (beyond the solar base station they already sell) one would want to sell this way in order to empower microenterprise expansion, efficiency, and profitability? What data or trend supports your view?