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Friday, September 22, 2023

CapitalSavvy: Empowering SME Financing in Uganda

Small and medium-sized enterprises (SMEs) in Africa are usually informal, so banks often do not properly recognize them as businesses—and this makes it difficult for them to secure financing. Borrowers who use collateral receive nine times the amount of credit, payback periods that are up to eleven times longer, and interest rates that are 50% lower than borrowers who do not have collateral.

Implementing mobile asset registries increases access to bank credit by roughly 8% and access to loans by about 7%. Even if they do list, SMEs may not gain enough capital market financing since investors in these markets prefer large, less risky and more liquid enterprises. CapitalSavvy is a Ugandan-based firm that is using blockchain to alter this approach to SME financing in an effort to level the playing field and make it more inclusive.


Flexibility at the Hands of SMEs


A 2018 study showed that respondents were highly concerned about interest rates and costs in SME financing. Rigid payment terms put off nearly a quarter of them (24.2%), and a previous poor experience made more than one in ten (13.9%) hesitant to even consider typical bank loans. And SMEs that do not have collaterals to show are at a more disadvantaged position to secure a loan.


Fortunately, CapitalSavvy uses smart contracts to represent an invoice (or any analogous financial document) and presents it as collateral to back a loan. Smart contracts are collections of data that can be securely communicated to a network via cryptographically signed transactions. They allow for minimal credit risk, lower costs and the removal of trade obstacles.


In principle, the parties can include lending regulations in smart contracts. Contract digitization in a secure environment enables lenders to authenticate transactions, verify the legality of the parties, and complete all loan administrative procedures in a fraction of the time necessary for traditional lending.


Blockchain‘s collateral securitized assets can be sold or swapped more quickly using a new technology, boosting efficiency and transparency throughout the chain. CapitalSavvy also eliminates data revalidation and decreases the time to trade and settle, resulting in significant cost savings for enterprises in the secondary market that would further help them develop a more stable portfolio of securities.


Each CapitalSavvy deal is time-stamped and includes the encrypted signature of the transaction’s executor for all blockchain participants to view. This creates information symmetry between borrowers and lenders in lending markets. Borrowers can be certain that it will not cancel the funds they are getting. Lenders can check the borrower’s transaction history to determine the possibility of repayment.


Collateral: A Means to An End


Affordability is a major issue in Africa, where local bank interest rates are in the double digits, occasionally exceeding 20-25%. Alternative finance providers, such as microfinance banks or digital lenders, may charge rates of 40-50%, discouraging SMEs from seeking loans and limiting SMEs’ growth in the African economy.


SMEs are typically owned by low-income entrepreneurs and families who lack real, valued and liquid collateral. And even when they can supply collateral, financial entities find it difficult to determine its market worth. Because of a shortage of funds, many small businesses cannot maintain operations, much alone expand and hire new personnel.


“What we have tried to do… is to sort of be a bridge between the money in Europe and Africa—especially on our end in East Africa. Because of a relatively low interest rate environment in Europe, we are able to mark that up and sort of get to a position where finance is a bit more affordable,” CapitalSavvy CEO and Founder Reginald Tumusiime explained.


And this is made possible with blockchain technology. Smart contracts, which are only possible on a blockchain, already do relatively simple functions like shifting money for payment in response to a triggering event and imposing financial penalties if any party did not satisfy the objective requirements. 


However, as the use of blockchain grows, so will its possibilities. For example, smart contracts may soon be capable of establishing subjective legal criteria, such as the product or service quality in a contract. This will allow users to lend money to each other via the blockchain, and earn interest on the loans they make. For instance, should a user be unable to repay their loan within a certain period, the smart contract will liquidate their collateral and reassign it to the lender.


Most of all, operating on the scalable BSV blockchain guarantees the SME financing transactions’ integrity and security compared to a traditional lending setting. Considering that SMEs are more agile than their corporate counterparts because of informal organizational structures, Uganda will see its sector flourish before they know it.


“I love the fact that the BSV blockchain has positioned itself as a blockchain that is solving for enterprise challenges and there is a lot of utility in that. And then of course there’s the fast transactions, scalability, security, and no downtime which really attracted me to the BSV blockchain,” Tumusiime shared.


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