Last year on International Day of Family Remittances, United Nations Capital Development Fund (UNCDF) announced two innovative partnerships with Pezesha and Strategic Impact Advisors, with the aim to promote inclusive digital economies.

Formal financial providers are reluctant in providing financial support to informal sector actors, given that the visibility over their business transactions remains unclear, hence increasing their risk profile. Through its mandate, UNCDF under the GrEEn Project wants to create the conditions for young entrepreneurs to tap into the formal sector: these two partnerships have the mandate to test crowdfunding platforms that connect youth, women and diaspora in the Ashanti and Western regions of Ghana (read full article here).

UNCDF is pioneering solutions for marginalized people. This blog is the first of the series ‘Lessons learned from practitioners: Crowdfunding in Ghana’. On a regular basis, the UNCDF GrEEn Team will publish articles and organize webinars to share knowledge and support the decision-making process of other stakeholders involved in the sector. These resources are developed to help development partners, government agencies as well as private sector actors, take investment decisions and adjust implementation.

The first step in understanding the crowdfunding concept is to get familiarized with its different business models. UNCDF is piloting two alternative crowdfunding business models: crowdlending and donation-based. The rationale behind these investment decisions under the GrEEn project is to test different approaches at the benefit of final users (both MSMEs as well as investors, including diaspora) who will have more options while increasing market efficiency. Let’s explore them in detail.

The Crowdlending Model

The crowdlending model acts as a marketplace that matches the funding needs of borrowers (small businesses) with the investment interest of investors (retail or institutional investors). The funding needs of borrowers are met in the form of debts, an alternative finance opportunity for underserved businesses. Instead of owning a share (e.g. equity crowdfunding) of the company’s stock, investors receive monthly, quarterly or annual payments. The most interesting part of this approach is that there is no need to agree on a valuation of the business and the returns come in sooner as compared to waiting for the business to exit.

​Figure 1: Crowdlending model

Pezesha Africa Limited (traded as Pezesha) is a Kenya-based FinTech that recently exited from the Kenyan regulatory sandbox and is now piloting its crowdlending platform in Ghana. Pezesha means “financial empowerment” in Kenyan Swahili. It provides a digital platform where micro, small and medium-sized enterprises (MSMEs) can tap into finance after being matched with investors – including banks, microfinance institutions and other retail lenders – seeking to foster productivity and growth among small businesses.

On the one hand, Pezesha vets and evaluates businesses/entrepreneurs on their creditworthiness and makes decisions on the financing parameters. Pezesha has a proprietary credit scoring and decision- making process and framework tailored to the needs of the different targeted groups. On the other hand, Pezesha has a vetting process for investors as well and a proprietary matching algorithm that matches their funds to the appropriate class of borrowers. The platform automatically selects investment opportunities for investors based on their risk appetites and expectations of risk-adjusted investment returns, allocating funds from investors to different loans, providing lenders risk diversification and borrowers quick funding.

The Pezesha ecosystem provides an array of services. Pezesha offers financial education to drive responsible borrowing, a network of account officers and access to local payment platforms to ensure accurate and robust financial management:

• The Pezesha Academy is a specific feature that Pezesha is testing in Ghana to educate MSMEs in their financial management and build their capacities to make better financial decision.
• Through a network of account officers deployed in the targeted regions of the GrEEn Project, Pezesha is investing in both digital and non-digital channels to ensure uptake and usage of the platform. From the MSMEs side, the account officers scout potential MSMEs that can apply on the Pezesha website in less than 2 minutes. Officers start a due diligence process of the applicants and complete a scorecard that will inform the credit scoring for each MSME and identify the loan parameters. Through this Pezesha matching platform, accepted candidates are automatically matched with multiple investors to fund their needs in a matter of minutes.
• As Pezesha is not a registered entity in Ghana, the team has partnered with local Payment Providers, regulated and licensed by the Central Bank. The funds are managed in a custodian wallet under the name of Pezesha and with multiple sub-accounts to ensure visibility and accountability of the funds managed, raised and lent using the highest standards of encryption and user authentication. This allows multiple payment/investment options, including mobile money and international cards.

For MSMEs seeking to raise capital but lack collaterals, crowdlending models offer lower interest rates on average than small business loans, which are hard to get and take a long time to pay off.

Go to PEZESHA GHANA and start your crowdlending experience!

The Donation-based Crowdfunding Model

For an entrepreneur who has a great idea for a new product or service or that struggles with his/her existing business as s/he does not have access to formal finance, donation-based crowdfunding offers an alternative way to raise money, as opposed to borrowing money through banks or by offering equity. Through donation-based crowdfunding, the entrepreneur can pre-sell their product to a large number of people who each donate towards the overall financial target for the campaigns, while retaining full ownership of their company being funded.
Donations represent a first relief for MSMEs that are struggling or that are lacking start-up capital especially during the COVID-19 crisis. MSMEs are often excluded from formal financial services, thus the collection of money flows from supporters – even if small amounts - is the first step towards financial inclusion. Often, young entrepreneurs receive financial support from family and friends which remains informal, preventing them from building their formal financial history.

Figure 2: Donation-model

Strategic Impact Advisors (SIA) is leading a consortium pioneering a donation based crowdfunding model. The consortium partners with a technology partner, innovation hubs and 5 financial institutions who will provide access to credit to the GrEEn project entrepreneurs. FundRaising Africa (FRA) currently operates a donation-based platform which enables individuals to donate money to support young entrepreneurs with the creation or expansion of their business. While FRA did experience some challenges in the past in user acquisition and validation, the consortium’s partnership structure allows a quality assurance and the submission of sound projects through the hubs located in the targeted regions, well-connected to the reality and strongly anchored to the communities. Their role is to ensure all the campaigns are vetted and that the campaigners go through the business incubation before uploading their campaigns onto the platform. Together with strategic marketing campaigns targeting donors in-country and abroad, the full package of skills and services that the consortium is offering, will provide entrepreneurs under the GrEEn project the much-needed boost to their campaigns and will enable them to receive donations locally or from the diaspora.

While donations represent a first step to encourage entrepreneurs to bridge their financing gap, UNCDF and SIA are committed to use the data and flows collected through the platform to facilitate access to affordable and accessible financial services, including savings and loans. The business model being tested includes five financial service providers willing to offer entrepreneurs an integrated journey towards their financial inclusion: after successfully reaching their fundraising goal or upon reaching the end of their campaign, entrepreneurs will have the option of using the funds raised to further access additional financial services. The objective is to pilot this integrated approach and de-risk the profile of women and young entrepreneurs lacking the prerequisites to access formal financial services.

Go to FUNDRAISING AFRICA and start your crowdfunding experience!

Through such innovative partnerships, UNCDF is leading the efforts of the European Union to bridge the financial inclusion gap in Ghana by providing access to innovative solutions that impact the lives of financially excluded people. UNCDF will continue its innovative agenda in Ghana under the GrEEn Project and will share insights and findings to inform partners and stakeholders.
Stay tuned for next episode of ‘Lessons learned from practitioners: Crowdfunding in Ghana’

Supported by: