Flow48: SME lending in the UAE & South Africa
Flow48 is building SME lending infrastructure from scratch.
Biography
Idriss Al Rifai is the co-founder of Flow48, a UAE-based startup filling the credit gap for SMEs in emerging markets. Via Flow48, SMEs can apply and receive non-dilutive funding in a couple of days.
The company just raised a $69M Series A round (mixing equity and debt) and has disbursed thousands of loans across its 2 key markets: the UAE and South Africa.
Prior to Flow48, Idriss was Glovo’s chief strategy and data officer. Previously, Idriss founded an e-commerce delivery startup (fetchr). He was also a part of the French Special Forces.
What problem is Flow48 solving and why hasn’t anyone solved it?
SMEs in emerging markets face a severe funding gap, especially on the credit front. The IFC estimated the size of the gap to be around $4 trillion.
This is damaging because SMEs contribute massively to countries’ GDP, yet they aren’t sufficiently served by banks. In South Africa, one of Flow48’s markets, SMEs represent around 40% of national GDP. If they were better funded, the economy would grow with them.
Why don’t local banks lend to SMEs?
There are multiple reasons, many of them reasonable.
First, there is a lack of quality data about SMEs in these markets, making it hard for banks to gauge creditworthiness.
Second, banks are regulated and report to central banks. They have strict KYC and AML processes. These processes come at a cost. The lack of data combined with lower deal size for SMEs means that the time-to-reward ratio doesn’t always make sense.
Third, if we take the UAE as an example, local banks were expected to support the emergence of local, national winners (DP World, Emirates Global Aluminum…). SME lending wasn’t a priority and the two aforementioned challenges didn’t help their case.
What did your MVP look like?
Our initial challenge was access to data. Before lending money to SMEs, we had to model their credit scores from 3rd party sources. These include tax returns, open banking data, their ERP systems, public records on the salaries they pay… We crunch that data into an algorithm that gives us a decent idea of whether we can lend to them, and how much.
We started off behaving like a small SME bank, building the data infrastructure required to make rational lending decisions.
RO insights: Flow48's model, but B2C
In data-scarce markets, lending to businesses and individuals poses the same problem. Namely, the need to build credit scores from nothing.
In a B2C context, one way to do it is by creating that data from scratch. In Uzbekistan, lending fintech Zood launched an e-commerce site before launching its lending product. The buying data recuperated from customers on the e-commerce site helped credit score them later on.
Here’s how Laurent Sciboz, Zood’s CIO, explained it:
“Our goal is to provide credit for the masses. In countries like Uzbekistan, the lack of credit histories, coupled with inefficient capital distribution by local banks, foster low credit penetration. Before offering local credit, we had to build up local credit histories. A good way to do so was to build an e-commerce marketplace, which, opportunistically, Uzbekistan lacked when we launched.
The marketplace allows us to aggregate consumers and merchants while gathering valuable data on both. Marketplace consumers can purchase items using interest-free Buy-Now-Pay-Later (BNPL), akin to a product-based loan. Their repayment patterns enable us to credit score them and usher them into interest-bearing, longer-term loans. Today, interest-bearing loans constitute the vast majority of our loan portfolio.
We aren’t an e-commerce platform. We’re building an ecosystem geared towards lending products for the vast majority of consumers traditional banks don’t want to serve. Adjacent ventures, such as the marketplace, fuel our consumer acquisition and refine our credit scoring processes.”
Excerpt from Zood: reviving the Silk Road, originally published in The Realistic Optimist
What elements of your previous experiences give you an unfair advantage in building Flow48?
My innate understanding of country risk. I knew we’d have to serve many countries to reduce the risk of one country’s macro situation wiping us out.
I also build teams better. When recruiting, there’s a tension between privileging hunger over experience, or vice versa. I’ve thought through that tradeoff hundreds of times, so my picking skills are sharper.
Lastly, investor relations get easier with time. I’m more efficient because I know what investors want to hear and I have a network I can quickly tap.
What does the Flow48 product look like today?