Why We Invested in Lidya: Supporting the Growth of MSMEs across Africa

by Ameya Upadhyay and Yaw Mante

Globally, micro, small, and medium enterprises (MSMEs) contribute to an estimated 50 percent of total employment. In Africa, MSMEs are estimated to contribute an even higher 70 percent of the region’s total employment. However, in several surveys and studies, access to credit consistently comes up as the leading barrier to growth for MSMEs. A study by the International Finance Corporation (IFC) assessed the credit gap for formal MSMEs to be more than $100 billion across Africa.

This persistent credit gap slows down many promising businesses. For example, an online fashion retailer in Lagos may be forced to forgo sales growth because it cannot get credit to purchase more inventory. Similarly, a medium-sized logistics company in Kumasi may not be able to win lucrative contracts because their working capital is tied up for 90 days due to customers’ late payments. These examples represent lost opportunities for growing productive businesses and for hiring more web developers and drivers.

Because lending to MSMEs is riskier than lending to larger businesses — they generally do not have sufficient assets to pledge as collateral or verifiable income data in the form of audited financial records — this segment ends up with a lot less formal available capital and higher interest rates. In addition to not being able to accurately assess the creditworthiness of most companies in this segment, traditional banks have also been hampered by their existing business models, which are built around branch networks that have limited reach and are costly to expand.

This scenario is confirmed by the numbers: lending to small and medium businesses represents between 5 and 20 percent of traditional banks’ loan portfolios in five sub-Saharan African countries — while the ratio among OECD countries ranges from 20 to more than 60 percent. In Nigeria alone, less than 1 percent of commercial bank loans are made to this segment.

Addressing the credit gap to MSMEs in Africa is a stepping stone to achieving general economic growth and increased opportunities for personal advancement. This is why we invested in Lidya.

Lidya is addressing the MSME credit shortage in Africa, starting in Nigeria, by providing short-term, working capital loans to the large cohort of companies in this segment that are currently not served by traditional banks or underserved by microfinance institutions. Lidya offers MSMEs a free digital account where they share or load bank account or transaction information to the platform — the app then manages cash flows, customer data, and creates and sends invoices digitally.

Lydia offers MSMEs a free digital account where they can share or load bank account or transaction information to the platform — the app then manages cash flows, customer data, and creates and sends invoices digitally.
If the business needs a loan, Lidya uses smart algorithms to analyze their transaction data — nearly 100 data points — and builds a unique credit score. Businesses can apply for loans ranging from $150 to $50,000 and applications are processed within 24 hours. Once approved, funds are disbursed on the same day. Repayment schedules and fees are agreed upfront and with total transparency.

This data-driven approach allows the company to offer loans without the need for hard collateral — a requirement that has hindered MSME financing in Africa. In the process, Lidya gathers insights that help expand its product portfolio to become a holistic partner to small businesses.

Since inception in 2016, Lidya has made over 2,000 business loans to help MSMEs in farming, hospitality, logistics, retail, real estate, technology, and health to get the capital they need to grow their operations.

Lidya is driven by a strong team of cofounders: Tunde Kehinde, the former managing director of Jumia Nigeria, the largest eCommerce platform in West Africa, and Ercin Eksin, the former chief operating officer of Jumia Africa, responsible for operations in six of the largest economies in Africa. Tunde and Ercin also cofounded Africa Courier Express, the largest direct-to-consumer delivery provider in Nigeria.