The role of mobile-based trade credit on business development

Small and medium-sized enterprises (SMEs) are the backbone of most economies. They are flexible in responding to new opportunities and possess potential for rapid growth.  As a result, SMEs are believed to serve as engines for innovation, employment, and social mobility. In developing countries, SMEs represent a particularly large part of the economy.

However, data suggests that very few small enterprises in developing countries grow into medium or large businesses. Credit provided by upstream suppliers to downstream firms (trade credit) has the potential to relax the working capital constraints experienced by small businesses. But, the provision of trade credit may be limited by high transaction costs, upstream liquidity constraints, insufficient information on firms’ inventories and transaction history, and concerns over repayment.

This research study aims to use a Randomised Control Trial (RCT) in Kenya to understand the impact of a low transaction cost trade credit product on the growth and expansion of micro and small enterprises. It will be conducted in partnership with Safaricom, a leading Kenyan mobile network operator.

Trade credit will be offered to a group of retailers who currently have very limited access to financial services. This intervention will address the commercial viability of offering trade credit to SMEs from the perspective of both lenders and borrowers. Tracking repayment behaviour on the one hand, and assessing the impact on business development at the retail level on the other. A combination of mobile payments technology and electronic inventory management systems will be used to reach a large set of small retailers.

Therefore, the RCT will achieve two goals:

• Assess the feasibility and sustainability of delivering trade credit at scale.
• Provide evidence on the extent to which such trade credit has the potential to increase incomes of small scale entrepreneurs in Kenya and other low-income countries.

Potentially the project will expand the availability of credit to small-scale entrepreneurs in developing economies by offering a practical tool for lenders and borrowers. Experience with the product is expected to broaden understanding of the benefits and implications of expanded trade credit to underserved sectors of the economy. Immediately, a viable product would be scaled in-country by Safaricom. Additionally, the increasing availability of both inventory management and mobile payments systems in other countries means the product is scalable well beyond Kenya.