Challenge Fund insights: Our latest initiatives catalysing inclusive growth

 
Mahbub Bhai.jpg

In this blog post, Business Finance for the Poor in Bangladesh Deputy Challenge Fund Manager Mahbubur Rahman discusses insights from our previous challenge fund rounds.

He also highlights 10 innovative projects receiving Challenge Fund co-investment support. These projects are transforming the financial landscape for small businesses and inducing inclusive growth.

The Challenge Fund component of BFP-B invites private sector investors to come up with innovative business propositions that will catalyse inclusive growth and improve the market scenario for small businesses in Bangladesh.

This risk and cost sharing mechanism allows the private sector to innovate, test risky but potentially viable solutions that will facilitate financial inclusion.

BFP-B has completed three rounds of Challenge Funds and we have gathered valuable insights from the projects in which we have co-invested.

Ventures supported by the BFP-B Challenge Fund include mobile financial services, agent banking services, agricultural insurance, credit scoring, alternative investments, and more.

LESSONS CAPTURED FROM PREVIOUS CHALLENGE FUND ROUNDS

Our experience of previous Challenge Fund rounds mirrored global trends in the financial sector. Bangladesh-based startups are innovating with freedom which a lot of established organisations are unable to. The stringent challenge fund proposal submission requirements allowed BFP-B to make very few investments in these startups. We have introduced a flexible engagement tool to support the startups from the new round.

Majority of BFP-B’s previous investments are in companies who have already come through a testing phase and possess adequate financial strength to enter the market. Established companies are easier to manage and generally rigorous procedures and policies in place. The projects being implemented by these companies have a footprint across the entire country and generating vast amount of data which can be translated to actionable business intelligence. This however is not being tapped into by most companies.

REVAMPING EXISTING PROCESSES

We took lessons from our previous Challenge Fund rounds and worked towards improving the entire process. To resolve issues impacting the pipeline development process, we redesigned and added three different tools:

Rolling round

The rolling round tool compressed the existing challenge fund round process to enable decision making to be completed within 4 months from a proposal call is published.

Bootcamp

The bootcamp tool has been designed targeting startups to pretotype solutions through extensive mentorship and training. Solutions with great potential will be considered for pilot phase funding.

Data Strategy Development

Despite evidence that data analytics can derive returns, analytics are still underutilised in Bangladesh’s formal financial sector. The BFP-B will implement a targeted programme of data strategy development to support the growth of data analytics in the financial sector.

OUR KEY INVESTMENTS UNDER EACH OF THE TOOLS

ROLLING ROUND

Retailer Financing by IPDC

Product transfer between Fast Moving Consumer Goods (FMCG) companies, distributors and retailers are generally executed through upfront cash transaction. This not only limits a retailer’s ability to acquire sufficient product stock to meet market demand but also hinders a financial institutions ability to assess loan applications from retailers.

IPDC, with support from BFP-B will collaborate with FMCG companies to use transaction data between FMCG distributors and associated retailers to determine the credit worthiness of respective retailers. IPDC will establish a trade credit line for each retailer with their associated distributor which will enhance a retailer’s ability to stock and re-stock. 150 MSEs will receive financing worth GBP 1.1 through this initiative

Ease access to equity financing for small and medium enterprises (SMEs) by Dhaka Stock Exchange (DSE)

The listing process requirements in existing stock exchange boards of Bangladesh limits the ability for small firms to raise flexible long term finance from the capital market. 

DSE with support from BFP-B is setting DSE SME exchange board with appropriate guidelines to allow small companies to raise capital from qualified investors. The board will also drive equity investments as it will provide a structured exit route to private equity investors.

During the project implementation phase, DSE will provide business development services to SMEs to streamline financial reporting standards, governance practice and to become listing ready. DSE will also enlist 20 enterprises who plan to raise GBP 5 million from the capital market.

Alternative Credit Scoring & Digital Customer Point Verification by Credit Rating Agency of Bangladesh (CRAB)

A lot of medium and small enterprises do not receive formal financing due to complex KYC verification methods and conventional risk assessment processes. CRAB aims to fill this gap by launching an alternative credit scoring tool for the financial sector. CRAB has partnered with Live Technologies (technical partner) to collateralise non-banking financial transaction data, human capital, social capital and more.

The basic design of the ACS (Alternative Credit Scoring) model will use different telecommunication data sources coupled with transaction data through a machine learning approach. This model will also encompass a number of artificial intelligence aspects in its design. The credit scoring generated through this will be used by different financial institutions to extend credit to clients and businesses.

BRAC BANK Cattle Shield – Livestock Credit with Cattle Insurance

The livestock sector is subject to a considerable element of uncertainty arising from death, disease or depreciation caused by natural disasters, sickness or accident. These uncertainties induce substantial income risks to small and poor cattle farmers in our country. Small livestock farmers in Bangladesh do not have enough resources or capital to give collateral to financial institutions against livestock loans.

To secure the credit amount and to expand farmers’ capacity, BRAC Bank Limited, in conjunction with Green Delta Insurance Company Limited, is planning to implement livestock insurance coverage.

In this project BRAC Bank will provide loans covered by insurance policy Green Delta Insurance Company Limited. Near Field Communication (NFC)-collar based technology will be used to supervise and monitor the cattle through a technology platform. 200 cattle farmers will be financed and insured with at least BDT 200 million of financing by 2020.

Financial Inclusion through the Risk Protection of MSEs- A 360 Degree Insurance Solution by PRAGATI

Pragati insurance is launching a composite insurance product covering life, asset and outstanding credit which will be bundled with SME loan products of banks and Non-Bank Financial Institutions (NBFI). The project aims to minimise the risks of loan portfolio of banks and NBFIs and encourage them to take more risk with their lending.

It is expected that once this project is implemented, over 6000 MSEs will benefit during the project cycle.

Chaldal vegetable network by Chaladal Limited

Bangladesh’s vegetable market has an annual revenue of GBP. 1.4 billion with 22,000 small and medium retailers in Dhaka and surrounding areas selling these vegetables.

During the retailing phase, the products purchased at midnight and early morning from wholesale markets are packed and carried to retail stores for selling to the end user. This system is very inefficient. To ensure efficiency, Chaldal aims to provide timely delivery of seasonal vegetables and grains through a strong delivery network. This will also safeguard the interest of small and medium vegetable suppliers as they will receive competitive prices.

Chaldal plans to create a digital transaction profile for each beneficiary and offer suitable financial services. This project will be a significant leap towards digitisation of highly unstructured market.

Sheba Briddhi by Sheba.xyz

Approximately 95% of the services are provided by small businesses and individual sole proprietors in Bangladesh. However, there is an inadequacy of market-relevant business development support. Moreover, minimal understanding of forward market dynamics, lack of practical opportunities to accelerate growth, insufficient knowledge about the latest technologies, and limited market linkages hinder the progress of small service providers.

To solve this, Sheba Platform Limited launched Sheba Briddhhi, a last-mile B2B financial solutions for service-MSEs growth.

It packages access to market, business development, account and books management, banking products and financial services, all through one ERP. The project aims to provide forward market linkage to 10,000 MSEs and will provide finances worth approximately GBP 150,000 to 150 MSEs within the first year of operation.

BOOTCAMP

Cash Recycling Program by D Money

Liquidity management in the mobile financial service chain is a challenging process. This leads to a high cash-out charge where distributors and agents take approximately 75% of the total cash-out charge. D-Money will launch a predictive platform in partnership with an MFS provider to match cash-in and cash-out customers in real time thus minimising liquidity management challenge which will in turn reduce the MFS cash-out charge.

The project, sourced through BFP-B’s bootcamp pipeline, will pilot the initiative to test out the viability of the idea.

DATA ANALYTICS

BRAC Bank data lab and data strategy development

Owing to limited availability in Bangladesh, the majority of financial services are designed using a top-down approach whereby internal experts use their market knowledge to create new products. As a result, service updates tend to be mediated through a relatively inefficient process of trial and error. To establish a greater sensitivity to actual market demands, BRAC Bank has partnered with the BFP-B to establish a Data Lab, which will house its analytics initiatives.

The project will be implemented in two phases.

The first phase will focus on a robust Business Intelligence platform, which will deliver up-to-date market information to product design teams. In doing so, they will be able to move towards customer-centric product design. It will also enable product design teams to diagnose and address emerging problems across the entire product portfolio.

The second phase of the project will use data-driven credit scoring to maximise the chance of accepting viable loan applications, even when the applicant lacks a credit history or collateral.

Data analytics to enhance Bank Asia’s agent banking

Agent banking operators face challenges to their growth and sustainability. As the size of the agent banking network increases, selecting where to recruit agents and which agents to work with becomes increasingly difficult.

To assess gaps in service provision and to better understand the drivers of agent success, Bank Asia aims to establish a business intelligence platform. Bank Asia will create a dashboard which will deliver performance-related information to encourage improvements in outreach.

These platforms will help run the operation at scale, enabling more automated decision-making and interaction. Bank Asia also aims to introduce a greater emphasis on automated credit scoring by using machine learning techniques to assess incoming credit applications.