About 60% of the population in Uganda is employed in the so-called “informal” sector. In addition, it is common for people in formal employment to have an informal business on the side. These businesses can be anything from a corner shop to a clothes resale, from a hardware shop to a private school or a private health clinic. Most of the initiatives are family businesses with only a few employees, but together they employ more people than any other sector in Uganda, apart from agriculture. When you talk to the business owners, their single most pressing problem is access to credit, either to expand infrastructure, buy an expensive machine, connect to the power or water grid or to buy stock. A number of credit options exist for the so-called micro-businesses, normally one-person undertakings. The amounts are small and mainly help to cover cash flow needs. But businesses that are more established need bigger sums, yet they do not qualify to get loans from commercial banks because this requires collateral and several years of audited accounts.
Both micro-finance institutions (MFI) and commercial banks are looking at this segment as a significant growth area, however, their biggest challenge is the lack of financial records. The businesses cannot afford to hire credible and established accounting firms, so records are kept only where absolutely necessary and mainly in paper books. Most do not have a bank account or carry out bank reconciliation, and most do not separate between cost of sales and operating costs, or expenses and investments. Consequently, the MFIs have to put in a lot of work to establish the adequate size of a loan and its repayment plan to a particular business. Very often it results in a business getting a loan that is too small, or too big. Both is a disaster for the lender; the first is a loss of potential revenue and the second a likely default.
The Fintech industry has seen this opportunity. Many parties are interested in information generated from this segment; marketers, large distributors of consumer products, regulators, policy makers, banks, MFIs and of course the Uganda Revenue Authority. Finally, better records and the resulting reports and analytics can be a huge benefit for the business owner himself, by informing business decisions, planning and saving.
Several initiatives exist to capture this information, for example mobile phone apps where the business owner can enter information him/herself. However, field trials show that there is a huge capacity gap in financial accounting and business management in the informal economy. Also, it is difficult to have the discipline to record transactions every day, while dealing with all the other pressing activities of running a business. There is also a higher incentive to report accurate information when this is going to be reviewed by a third party, as opposed to self-reporting. Only if the information is updated, consistent and accurate the analysis will bring value.
Commercialis developed an approach to solve these problems; collecting financial records while adding little work for the business owners. Every month, a Commercialis employee visits the business. The “transcriptionist” is trained in accounting and collects the information from all available sources such as books, verbal answers, bank statements and loan agreements. The information is transcribed with plenty of notes and comments for explanation. At the Commercialis office the data from the field is entered into a system where it is reviewed by an accounting expert. The expert will also make some changes based on comments and notes in an attempt of reflecting the situation as best as possible, even if transaction data is missing. The result is a monthly report with a balance sheet, profit and loss and some key ratios such as profit margins, operating expense ratio, current ratio, quick ratio, debt to equity ratio and interest coverage. The reports also track payables and receivables, and provide trend analysis from month to month.
The monthly report is shared with the business owner, but most importantly it is available to MFIs. The beauty of the system is that inaccurate and incomplete data is transformed and presented in a way that it can make sense. The system’s flexibility allows the Commercialis team to make changes based on the unique situation of each business. All this would not have been possible with a conventional accounting system, which are not designed to accommodate gaps in accounting information.
Commercialis plans to sell its services primarily to MFIs or other programmes or funds that lend money and would like to follow up their clients closely. The service can also be used as a monitoring and evaluation tool in cases where grant or debt funds are disbursed and recipient companies lack the administrative capacity to produce regular financial reports. Eventually, the company hopes small businesses will see the value and be willing to pay a small fee, which is still cheaper than hiring an accountant. To date, Commercialis has worked with over 40 unique small businesses, clinics and schools. About 15 are served as part of service contracts with local lenders and NGOs where Commercialis is asked to provide regular reports on the beneficiaries. In addition to reducing the risk for MFIs and making credit available to more small businesses, Commercialis also guides the small businesses in improving their record keeping and hence their financial management. Other experiences with micro finance shows that in cases were the lenders are followed up monthly the rate of re-payment is much higher.
In the long term, Commercialis could be in possession of vital market intelligence that can be used to create tailored credit products and be very valuable for financial institutions. This would be the result of having a large enough database of SME clients with detailed information about their financial performance by sector, location, owner demographics, etc. Analysis of this information would allow the lender to create more accessible, lower risk products for a market segment where credible market intelligence is currently very hard to find.
The software system used by Commercialis was developed in Uganda by the Fintech company Laboremus Uganda Ltd. Laboremus Uganda is an offshoot of a Norwegian company, which has delivered innovative and customized solutions to banks in Scandinavia for 15 years. The company has a large team of developers in Kampala, who also work on “outsourced” projects from the Norwegian partner. “It was crucial for me to find a technical partner locally”, Brendan Cronin, founder of Commercialis remarks, “the Laboremus team has been great, and they have shown a lot of enthusiasm for my idea”.
Photos: Fontes Foundation