Nairobi — As the world groans under the weight of the global financial crisis, a new window of easy loans has opened in East Africa in the name of MYC4, an Internet-based group.
The group connects small and medium enterprises with a pool of small investors mainly in Europe, through a system referred to as peer-to-peer lending. Lenders and borrowers connect by logging on to www.MYC4.com portal, register and start transacting instantly.
The head of the groups' regional and African headquarters, renowned Kenyan business advisor Pete Ondeng, described it as an "Internet-based market place for loans."
Mr Ondeng credits the changing face of technology for the innovative borrowing and lending model.
He said the biggest risk taker is the investor as opposed to the receiver of the funds because of the uncertainties of doing business in Africa ranging from foreign currency swings, political instability, high inflation rates, poor infrastructure and high default rates.
Being purely an ICT-based group, businesses and investors online on a funding arrangement, and the borrower accepts to pay an agreed interest within a specific period of time.
The transaction is overseen by MYC4 partners -- micro-finance organisations and co-operative societies -- who do the business evaluation, receive the funds, disburse them to borrowers and follow up on repayments after which, the creditors are paid.
For example, if an agrovet firm in Uganda is looking for $1,500 for expansion, it puts in a bid for the amount at the MYC4 portal, indicating the interest and duration they will take to repay the money. Interested investors then place the amount they wish to put in and at what interest rate.
Once the bidding closes, a team of evaluators analyse the bids and allocates the money at weighted average. Any excess is returned to the investor. As little as $5-100 can be invested.
The bidding process is based on the Dutch auction principle, which basically means that the more investors that are interested in investing in a specific business, the more favourable terms the African business will get due to "underbidding."
The difference with conventional lending is that MYC4 operates like the stock market because many investors bid to put in amounts of their choice for a specific business and once the borrower pays back, all the investors share the interest according to the amount invested.
MYC4 was founded on the assumptions that there are a number of African businesses that represent viable investment opportunities but lack or cannot access capital.
Contrary to widespread belief in Africa, Mr Ondeng said that many small investors in the West, who are not driven by super profits are willing to invest in businesses on the continent, especially when they know that the investment will make a difference in poverty eradication.
Currently, the group operates in seven sub-Saharan countries, with $12.9 million having been disbursed to 4,700 businesses in Kenya, Uganda, Tanzania, Senegal, Rwanda, Ghana and Cote d'Ivoire.
Ugandan Ruth Atongoza says she borrowed euro 250 ($375) last year to buy more dryers and steamers for her hair salon.
"I was attracted to MYC4 by the flexible repayment terms and simple borrowing procedures," she said. She repaid the loan in five months at an interest rate of 14.98 per cent per annum (euros 259.80 or $389.7).
Aloysius Kimbugwe also of Uganda, borrowed euros 500 ($750) in 2007 to expand his bottled water firm.
He repaid the loan a month earlier than agreed, paying euros 526.66.
"The favourable interest rates and flexible terms of payment were important to me," he said.
Most of the already funded businesses are those owned by women and those focusing on the environment.
The investment is also driven by philanthropy, which should not be confused with charity, Mr Ondeng explained.
Of particular interest is that, such businesses are getting money from philanthropic individuals or firms who say they do not want an interest but only the principal back.
Interest rates range from about five per cent to 20 per cent per annum depending on the agreement between the investor and the borrower.
Founders Mads KjÃƒoer and Tim Vang believed that while investors are legion, they had no idea how to connect with business people, which led to the founding of MYC4 in May 2006 as a joint venture between KjÃƒoer, Vang and Kjaer Group A/S.
Its mission was to end poverty in sub-Saharan Africa.
In December the same year, it received a grant of euro 670,000 from the Danish Aid Agency (Danida) under the Ministry of Foreign Affairs to support the development of the MYC4 platform.
Mr Ondeng is a former chief executive officer of the Kenya chapter of the New Partnership for Africa Development (Nepad).
Early this year, the group was looking for someone with a Pan-African experience in development, with special emphasis in the working environment of the SMEs sector from any country in sub-Saharan Africa to sit on its board.
Mr Ondeng says at first he was sceptical of the idea. But after scrutiny, he accepted the offer in April after analysing the concept and going by his wide knowledge of the financing needs of SMEs.