No Credit Score? No Problem. Using Tech to Initiate Upward Social Mobility
A case study of Grameen Bank and Tala
Sequoia Capital brings to mind a startup idea of my own that I’ve recently been building on. Two particular success stories, namely Grameen Bank and Tala serve as role models for my experience.
Let’s say we want to buy a home, start a business or otherwise improve our lives. The catch is, what if we don’t have a credit score? Banks use credit scores to determine if you’re trustworthy, but there are around 2.5 billion people globally without one to begin with. So how can they get a loan to otherwise improve their lives?
Enter Grameen Bank in the 1983, where founder Muhammad Yunus had a vision for enabling the poorest of the poor to self-support and manage their own financial development. The solution was microcredit: small long term loans on easy terms. The microcredit system excelled in the sense that it was simultaneously an opportunity and a motivation for the poor to improve their financial situations. Borrowers attain confidence and fulfilment in their own self-sufficiency when they pay back their loans. Which in contrast with charitable donations alone, this system encourages effort with rewards away from blind reliance on welfare or charities.
Grameen Bank has since been a source of inspiration for many similar microcredit institutions worldwide. While Grameen makes small loans of microcredit without requiring collateral, the Tala mobile app addresses a second, more pressing need in today’s world. How do we transition an individual from the microfinance system into the formal credit system?
Established in 2012, Tala creates credit profiles out of mobile usage data and location data, and can approve loans on the app within 5 minutes. As everyone now has a cell phone, Tala aggregates 10,000 data points on each customer, from GPS tracking of trends of movement, to financial transactions, as well as number of social contacts. This reveals the size of the applicant’s network and support system, and their consistency attests to a customised profile akin to a credit score.
Additionally, one of the most illuminating factors is whether an applicant can pay their phone bills in time, thus shedding light on financial credibility. This effectively creates credit scores for under-banked people in emerging markets, and Tala is currently servicing Kenya, Philippines, Tanzania, Mexico. Convenience is key to this emerging market, where users can secure small loans ranging from $10 to $500 using only an Android smartphone app.
“Grameen Bank – Facts”. Nobelprize.org. Nobel Media AB 2014. Web. 6 Jul 2018. <http://www.nobelprize.org/nobel_prizes/peace/laureates/2006/grameen-facts.html>
“About Tala”- Tala.co. April 2018. Web. 6 Jul 2018.
<https://tala.co/about/>
