Pakistan’s banks face a chicken-and-egg problem when it comes to lending money to their customers. They lack the data on customers’ credit histories that they need in order to decide whether to lend; but until they start lending, they won’t amass any of that data. Enter AdalFi, a Lahore-based fintech, which has developed a technology-driven solution to help break the logjam.
AdalFi, which is today announcing a $7.5 million funding round, is the brainchild of founder and CEO Salman Akhtar. Akhtar, who spent years getting to know Pakistan’s banks inside out when running an IT services company specialising in the financial services sector, is on a mission to open up the country’s credit market.
“The usual conversation about financial inclusion focuses on the number of people who don’t have bank accounts, but to my mind we should be talking about access to credit too,” says Akhtar. Pakistan’s banks serve 50 million consumers and small businesses, he points out, but only 2 million of them have any kind of credit product – just 4% of the market.
The most significant reason for that is Pakistan, like many other developing economies, lacks any kind of credit scoring or rating infrastructure. To lend to a customer, banks must therefore complete a range of manual checks, from verifying their identity to assessing their financial health. The cost of such work means it only makes commercial sense to lend to a small number of wealthier customers. “Lending in Pakistan is fundamentally broken,” Akhtar adds. “Before we came along, no bank had ever made a loan automatically.”
In 2021, AdalFi set out to fix the problem by building the credit scoring model that banks need to make automatic lending decisions. Akhtar and a small team spent much of the Covid-19 crisis perfecting their approach; borrowing anonymised data sets from two banks, they built a model that assesses customers’ credit history on the basis of all their previous financial transactions with the bank.
“In essence, we have built better underwriting models for banks,” Akhtar explains. “Using our model, the bank can credit score its customers without having to ask them for any additional information.”
The effect is dramatic. Each bank will have customers for whom there is not sufficient financial transaction data for the model to assess their credit risk, as well as a segment deemed not suitable for lending. But Akhtar estimates that the average bank discovers 15% of its customers are perfectly good candidates for products such as personal loans and credit cards. That’s more than seven times the number of customers they are currently lending to.
In fact, AdalFi takes a conservative approach. “We want the banks to be responsible lenders,” Akhtar explains. While Pakistani regulation allows lending to customers up to a point where repayments don’t account for more than 40% of their income, AdalFi suggests that banks limit this figure to around 8% for lower-income customers. “We think credit is a long game,” Akhtar says. “You must not blow up your customers – or the bank – by lending too much.”
AdalFi is also keen to point out that it has skin in the game. It simply provides the model that banks use to credit score their customers, with the bank doing the actual lending. But AdalFi takes its fees as loans are repaid – and where there is a default, the lender can claim back some of these fees. “That gives the banks confidence that we believe in our models,” Akhtar adds.
It’s an innovation that has the potential to transform access to credit in Pakistan. In less than two years since its launch, AdalFi has persuaded 14 of Pakistan’s 23 banks to sign up to its service, with seven of those banks already making loans on the basis of the model. They’ve collectively issued 75,000 loans using the model so far, with 6,000 credit agreements signed in January alone.
Investors are taking note. Today’s $7.5 million fundraising is led by COTU Ventures, Chimera Ventures, Fatima Gobi Ventures and Zayn Capital, with participation from a number of angel investors. The finance will enable AdalFi to continue building out its team of engineers and modellers. The company also has a specialist team that advises banks on how market their new-found lending capabilities.
Amir Farha, managing partner of COTU Ventures, says the company can be genuinely transformative. “The fact they have already secured partnerships with the leading banks in the country, and have already facilitated new unsecured lending channels for their clients in such a short space of time, gives us confidence they have an incredibly exciting future ahead of them.”