Unlocking the potential of the informal sector through access to credit

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1 case study: EDGARS Unlocking the potential of the informal sector through access to credit Edgars successfully extended credit to the previously untapped informal sector, which constituted 18% of all its new accounts. Increasing access to retail credit for Zimbabweans with no formal proof of income Zimbabwe s largest clothing retailer, Edgars, identified an enormous untapped market within its customer base: informally-employed customers. This segment represents 84% of employed Zimbabwean adults who are, for the most part, denied access to credit. EFL enabled Edgars to assess risk and to safely expand into this important market.. Categories: Expanding retail credit to the informal sector Region: Southern Africa (Zimbabwe) Partner: Edgars Stores Limited the Challenge Edgars, Zimbabwe s largest clothing and credit retailer, recognized a need for low-risk methods of extending credit to customers with no formal proof of income (no pay-slips), who make up the informal sector. the Engagement Edgars and EFL partnered for the no pay-slip project in 2014 and rolled out EFL applications with the goal of opening credit lines for the informal segment while accurately differentiating risk. the Results and Project Evolution Over 15 months, Edgars established lines of credit for 6,000 no pay-slip customers, representing 18% of all new accounts at Edgars for the last 12 months. Edgars extended the partnership based on its success and is now rolling out EFL scoring across its national store network.

2 Edgars by the numbers 6,000 10,000+ 6X 15% 6,000 customers working in the informal sector gained access to lines of credit. More than 10,000 EFL applications were administered within 15 months. Borrowers in the bottom quintile of scores were nearly 6 times more likely to default. The clients with no pay-slips constituted 15% of Edgars revenue from new accounts for the 12- month period ending June The no pay-slip accounts represented 18% of Edgars new accounts for the 12-month period ending June This would not have been possible without EFL, whose methodologies gave us the confidence to enter the informal sector segment that was largely ignored by many credit providers and into which we would otherwise not have ventured. Linda Masterson, Group MD, Edgars Stores Limited Zimbabwe ZIMBABWE COUNTRY STATISTICS According to government estimates, only 16% of the employed population is formally employed 1. Only 4% of Zimbabweans (age 15+) were able to borrow from a formal financial institution, while 55% borrowed from family and friends 2. ZIMBABWE RETAIL CREDIT SEGMENTS INCOME WITHOUT EFL 16% FORMAL SECTOR EMPLOYEES Retail Financial Products available WITH EFL INCOME 84% 0% SERVABLE INFORMAL SECTOR Retail Financial Products made POSSIBLE through EFL assessment UNSERVABLE INFORMAL SECTOR Retail Financial Products deemed IMPOSSIBLE due to lack of objective information

3 Country Overview Credit in Zimbabwe s informal economy Since the early 2000s, the Zimbabwean economy has undergone several macroeconomic shocks that have taken a toll on the population. In 2012, an estimated 72% of the population was living under the poverty line 3. Employment rates are amongst the lowest in the world and the government estimates that 84% of the employed population is today employed by the informal sector (Figure 1). Formally Employed 11% Not classifiable 5% 84% Informally Employed Figure 1: Employment Composition in Zimbabwe (2012) Source: Zimbabwe National Statistics Agency (Zimstat) The informal sector s disproportionately large role in the Zimbabwean economy has had significant repercussions at all rungs of the economic ladder, but perhaps the most important effect has been the tightening of credit to individuals and small businesses. Without a verifiable proof of income, individuals are often unable to demonstrate their credit-worthiness to formal credit providers. However, without a way to assess the repayment potential of borrowers who lack a formal proof of income, financial institutions remain understandably hesitant to move down-market. Hence, while many of those individuals would be fully capable of repaying credit facilities if they were given the opportunity, just 4% of adults in Zimbabwe are able to access loans from formal credit providers. Partner Overview/ Partner Challenge A leader in Zimbabwean retail Edgars Consolidated Stores (Edcon) is Southern Africa s largest clothing retail chain, with over 1,100 stores across South Africa, Botswana, Namibia, Swaziland, Zambia and Zimbabwe. Edgars expanded into Zimbabwe in 1946, launching its first store in Bulawayo, the country s second capital city 4. Edgars Zimbabwe subsidiary now incorporates both the Edgars (middle to upper consumers) and Jet (lower to middle income consumers) segments and has a total of 53 stores across the country selling predominantly clothing, footwear, textiles and accessories. In part because of Zimbabwe s economic uncertainty, Edgars has relied heavily on credit offerings to attract and retain customers. Edgars credit allows customers to make purchases in Edgars stores up to a pre-approved credit limit, and repay in monthly installments with options of 6 months to pay, 9 months to pay and 12 months to pay credit schemes. As customers repay, the credit line revolves, similar to a traditional credit card. Today, up to 90% of the Edgars chain s annual sales are on credit. Historically, Edgars has approved lines of credit using a combination of qualitative scores and applicant s proof of income. By comparing an applicant s observed monthly cash flow with the size of their requested credit line and monthly installments and also by considering a few qualitative scores, Edgars can easily determine if a credit rating is affordable or not. But as Zimbabwe s informal sector grew, Edgars recognized a need to include this massive untapped market in their credit offering.

4 Project Overview The informal sector challenge For most of Edgars history, however, the informal sector has proven as elusive as it was attractive. No pay-slip customers lack of verifiable income and limited credit history data 5 made it impossible for Edgars to measure risk and calculate affordability. By integrating EFL s alternative credit rating technology into its already established credit vetting process, Edgars could now predict repayment and lend to a new market while carefully controlling risk. Integrating EFL Edgars engaged EFL in February 2014 to help extend credit to no pay-slip customers. In order to boost volumes in this new portfolio, Edgars tested the EFL tool in 11 branches across the country, launched a vernacular marketing campaign targeted at the 2 main ethnic groups in Zimbabwe themed Come all (see picture), and employed dedicated agents that were sent to informal business premises to find clients. Zimbabweans working in the informal sector also want access to nice things. People are so surprised when we come to the informal settlements as they thought Edgars wasn t for them. -Simon, no pay-slip Account Agent Applicants Low DECLINE EFL Assessment Store staff administers EFL assessment to applicant and syncs assessment upon completion. Edgars Application Applicant completes Edgars application with identification, employment and verification details. Score Cutoff Regional Credit Officers (RCO) decline applicants with scores below a pre-determined cutoff. ADVANCE High EFL Score Note: Applicant score Bell Curves are not typically standard 4 Application Review For those who scored above the EFL cutoff, RCOs review and verify reported credit information. Simon after winning a certificate on behalf of Edgars, wearing the no pay-slip t-shirt Come all. Edgars introduced the EFL survey as one of the first steps in the application process. Individuals who scored below a pre-determined cut-off score were declined without further review, thereby removing the highest risk applicants from Edgars portfolio. Those who scored above the EFL cut-off rate are further vetted using Edgars internal vetting process. Upon satisfying both Edgars internal vetting processes and EFL s cut-off rate, a credit rating is determined and approved (Figure 2). 5 6 Figure 2: EFL + Edgars process Credit decision RCOs use a credit granting rubric to determine size of approved credit line. Account Opening Edgars staff communicates decision and dispenses credit cards to approved applicants.

5 Results Impact on Edgars bottom line and branding In only 15 months, Edgars administered more than 10,000 EFL surveys and extended lines of credit to over 6,000 customers working in the informal sector. This directly impacted Edgars sales, representing 18% of all new accounts. In the process, Edgars successfully expanded its service offering to a previously inaccessible market segment and rebranded itself as a retailer for all Zimbabweans as well as a leader in financial inclusion in the clothing retail sector. Safely expanding credit Central to the success of the program was extending credit to individuals with the highest likelihood of repayment. The EFL tool succeeded in differentiating credit risk within the credit-receiving population, meaning that borrowers who received lower scores defaulted more often than those who received higher scores. Specifically, borrowers in the bottom quintile of scores were nearly 6 times more likely to default than customers in the top quintile. 18% BRACKET 1 9% BRACKET 2 Bottom quintile were nearly 6 times more likely to fall into arrears than top quintile 8% BRACKET 3 6% BRACKET 4 3% 20% 15% 10% 5% BRACKET 5 By enabling Edgars to screen out the riskiest clients, EFL enabled objective risk control in Edgars new portfolio while reaching 6,000 previously financially underserved clients. Moving forward Given the strong results yielded by the partnership, EFL and Edgars have outlined ambitious targets for the future: The no pay-slip product will expand to 3 new Edgars stores and 21 new Jet stores across the country, projecting a 200% increase in new credit accounts. Edgars is planning to use the EFL tool as a riskbased pricing tool, enabling greater value to be captured for potential clients. Edgars will pursue cross-sell opportunities, offering a range of insurance and credit products that have never before been made available to the informal sector. Finally, Edgars plans to offer good borrowers a reference letter acknowledging their good payment record, which could be the first step in granting them access to formal credit in Zimbabwe s financial institutions. With the expansion of both the scale and scope of credit products to be offered to Zimbabwe s informal sector, Edgars and EFL are aiming to prove that what was often viewed as a risky consumer segment and therefore denied access to credit by many credit providers, can be transformed into an opportunity for high growth and profit, helping thousands of people in the process. Figure 3: Default rates per score bracket The EFL score therefore allows a lender to optimize lending through better risk segmentation. For example, Edgars learned that extending credit to 100% of applicants would have resulted in a 9% default rate, while accepting the first 4 brackets of applicants, or 80% of clients, would have brought their default rate down to 6.6%. 1 Zimstat, 2011 Labour Force Survey, May 2012, p In a pilot study with the Zimbabwe s Financial Clearing Bureau, EFL found that 49% of Edgars credit applicants had no bureau history, and many of those that did had thin or incomplete records. Using the EFL tool as a complement to bureau data can help lenders gain a holistic view of applicant risk.