How IBM Scientists are using Machine Learning and Blockchain to help distribute microfinance loans for small food stands across Nairobi

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In the recent past Blockchain Technology has become a buzz word in the industry with many organisations and Governments, moving to have a feel of the technology.

Blockchain landed on Gartner’s Top 10 Strategic Technology Trends list in 2016. Around the same time, analysts at PWC called it a “tech breakthrough megatrend” for CIOs.

Worldwide spending on blockchain solutions is forecasted to reach $2.1 billion in 2018, more than double the $945 million spent in 2017, according to the inaugural Worldwide Semiannual Blockchain Spending Guide from International Data Corporation (IDC).

IDC also expects blockchain spending to grow at a robust pace over the 2016-2021 forecast period with a five-year compound annual growth rate (CAGR) of 81.2% and total spending of $9.7 billion in 2021.

In February Sierra Leon became the first country globally to use blockchain Technology in elections, while Rwanda was applying Blockchain to enhance land ownership in the country. This goes far to show that the technology, which was first viewed as an underlying technology for Bitcoins is getting a grip across all industries be it the transport industry or the FMCG, blockchain is disputably one of the technologies that will create impact in the way things are done.

However, Small and medium sized entreprises (SMEs) in Africa are often left out when it comes to emerging technologies, yet they contribute largely to Africa’s GDP. SMEs in African countries often have difficulty accessing sufficient credit due to the complexities of financing processes, high loan costs, collateral requirements and lack of a credit score. This can make it difficult for these organizations to scale their businesses or implement new processes or technologies.

To help impact SMEs through blockchain technology, IBM Research and Twiga Foods, a business-to-business logistics platform for kiosks and food stalls in Africa, announced that they have extended access to microloans to 220 small food retailers across Kenya using a blockchain-based financing system.

Twiga is Africa’s largest grocer. The company uses a mobile-based, cashless, business-to-business (B2B) supply platform to access distribution into the millions of small and medium size vendors in African urban markets.

This allows Twiga to drastically lower their daily costs of goods by exploiting latent value in broken, informal, value-chains and wholesale providers. Nairobi alone has at least 18,000 small and medium size vendors buying $55 a day in stock.

Being an SME Twiga Foods, was looking to expand its logistic services into a total market ecosystem by adding financial services. The company’s goal is also to be their single source of supply and expand the the platform to at least five African markets.

To achieve this, last year the $13 million start-up began working with IBM Research to deploy a blockchain-enabled supply lending platform to help scale its reach.

To address this, scientists at the IBM Lab in Nairobi determined that they can use something most people in Africa do have access to, mobile phones, to accurately calculate credit worthiness.

“After analyzing purchase records from a mobile device, we used machine learning algorithms to predict credit worthiness, in turn giving lenders the confidence they need to provide microloans to small businesses,” said Andrew Kinai, Research Scientist at IBM Lab and the Lead Engineer of the Project during an interview with CIO East Africa at the IBM Research Centre at The Catholic University of East Africa (CUEA).

Andrew Kinai, Research Scientist at IBM Lab and the Lead Engineer of the Project.

He added that once the credit score is determined, we used a blockchain, based on the Hyperledger Fabric, to manage the entire lending process from application to receiving offers to accepting the terms to repayment.

Citing the impact, the project will have on Twiga Foods, Kinai said that through, the lending process blockchain platform will enhance transparency to all permissioned parties involved, from the lending bank to the borrower’s bank and the loan applicant themselves.

He added that the different transaction blocks are immutable, thus helping reduce fraud, since no one single party can append the blockchain without consensus from the entire network.

“Finally, blockchains employ a series of “smart contracts” which can be executed in real time, having the potential to significantly reduce the time it takes to manually process and issue a loan,” he said.

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

Having started some time last year Kinai explained that the project pilot took close to eight-weeks and processed more than 220 loans with the average loan around $30, which increased the order size by 30 percent and profits for each retailer, on average, by 6 percent.

The loans were for four and eight days with an interest rate of one and two percent, respectively. All of the loans were executed via mobile and went directly toward working capital for the businesses. When a retailer had an order delivered, they would get an SMS with loan options for financing that order. They would then respond to the SMS confirming the loan option they preferred.

“We had several iterations of the platform based on feedback from the retailers. 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,” added Kinai.

Based on the success of the pilot, the platform is planned to be rolled out to more SMEs across Africa by the end of the year and expanded into new sectors.

Blockchain Taskforce

The move by IBM and Twiga Foods also comes at a time when the Kenya’s ICT ministry formed a taskforce that will look into the possibilities of blockchain technologies. From enabling micro payments systems to digital identity management to smart contracts, blockchain based solutions can leapfrog traditional or non-existent technology infrastructures in African nations and drive a new era of more inclusive growth.

Twiga Foods now joins the likes of Walmart and Nasdaq-listed Chinese retailer JD.com together with Tsinghua University National Engineering Laboratory for E-Commerce Technologies, who announced a Blockchain Food Safety Alliance collaboration to improve food tracking and safety in China last year.

Through the latter initiative, ten food suppliers and retailers – Dole, Driscoll’s, Golden State Foods, Kroger, McCormick and Company, McLane Company, Nestlé, Tyson Foods, Unilever and Walmart – have signalled their intention to collaborate. And, Walmart’s food safety solution has been working with IBM and its Blockchain Platform.

That initiative is designed to bring the requisite efficiency, transparency and authenticity to food supply chains around the world. The solution from IBM is global – reflecting the global nature of supply chains.

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