Tugende: Analog Credit on Digital Wheels
Tugende, an asset financing company which helps motorcycle taxi drivers own their means of income, is located on a dusty, unpaved road in Kampala. On a recent day, the parking lot was filled to capacity with motorcycles. Drivers sat on benches under a tree in the courtyard – adult students absorbed in lessons. The company’s core guiding principles are posted throughout the compound: Empathy, Integrity, Teamwork.
Motorcycle taxis, or boda bodas, are everywhere in Kampala, transporting passengers around the sprawling city, and they are a growing economic force in towns and rural areas across East Africa. Yet only 20-30% of the Kampala’s 100,000 drivers own their bikes. The remainder rent informally, a perpetual expense that halves their earnings and denies them stability. The few banks and microfinance institutions (MFIs) that do finance boda bodas usually require a land deed or other secured collateral, effectively disqualifying most potential borrowers.
Tugende (motto: “Drive to Own”) has helped over 3,000 drivers get on the path to ownership. Established drivers acquire a motorcycle through a hire-purchase scheme: A $120 down payment gets them a bike, and 82 weekly payments of $22.5 earn them the deed. Up until the 82nd week Tugende retains ownership of the bike and can repossess for non-payment or other violations (like law breaking), but once the last payment is received ownership transfers to the driver.
Tugende is part of a larger wave of African companies that are leveraging new technologies to offer a time-honored service: the ability to purchase a desired asset over time. A recent visit to Tugende’s headquarters and a conversation with CEO Michael Wilkerson revealed four keys to their nascent success:
1. Asset ownership matters
Ownership of a bike can be transformative for drivers who have graduated from the program. At a minimum, they are able to significantly increase their take-home earning and improve their quality of life. But ownership can open other doors as well. Some drivers choose to re-finance with Tugende, a lender they trust and who trusts them. Others sell their bike back to Tugende, capitalize on their investment, and use the money to buy land or start another business.
This finding has empirical support. CGAP (through our work on the Graduation Approach) and the Brookings Institution have both identified asset accumulation as one of the keys to escaping poverty. One of the keys to the unprecedented success of pay-as-you-go (PAYGo) solar companies like M-KOPA and Mobisol is their lease-to-own strategy. It is expensive to be poor, and early returns suggest that companies financing a path to ownership will not face a shortage of demand.
2. A cheap alternative to cash is a must
Lending to lower-income, unsalaried young men is difficult enough. That they are motorcycle taxi drivers, a traditionally dangerous profession, adds another risk factor. But if collections had to be made in cash, it might well be impossible. The time cost of payments, the expense in establishing collections points, and the ever-present risk of theft all make cash an expensive medium of exchange in Uganda’s urban centers.
Because of this, over 95% of Tugende’s monthly payments are processed through PayWay, an electronic payments platform operating in Uganda since 2010. PayWay has built a robust payments infrastructure throughout the country: self-service kiosks, mobile POS devices, smart phone applications, and USSD integration provide customers with multiple payment options. Although not as widespread as mobile money, the service is considerably less expensive; Tugende’s drivers make their payments for free, with the company paying a flat fee directly to PayWay. And by integrating the digital payments with Tugende’s backend software via an application program interface (API), the company is able to do analysis on repayment rates and risk profiles, which will help it to fine-tune its lending and scale more profitably.
Again, this echoes lessons from Bridge International Academies and various PAYGo solar companies, as well as the larger theory behind Digital Finance Plus: The ability to securely collect small payments from geographically distributed customers will enable new business models.
3. Lending to men = good development practice
Tugende is predominantly leasing to informal, unsalaried, working-age men, not a group that development funds typically support. But Wilkerson argues that profitable employment for these men is critical for economic and political stability. Women may be a safer option—Tugende has had one female motorcycle customer and would like to have more—but ignoring men is not a solution. Drivers in Kampala and Tugende’s other two branches, Mbarara and Jinja, have shown that given the opportunity to take control of their economic livelihoods, they will work more consistently, abide by their lease terms (e.g. no driving at night), and manage their finances.
4. Digital financial services targeted at the ‘real’ economy can have powerful effects
At the end of the day, financial inclusion is only as valuable as the problems it solves. As mobile money penetration increases, more people will be able to access digital credit and savings products. Yet access to these products does not, in and of itself, convey tangible benefits. The true measure of digital financial services is if and how they catalyze ‘real’ economic activity, defined by the Financial Times Lexicon as “the part of the economy that is concerned with actually producing goods and services.”
We have seen an increase in the number of companies – like Tugende, M-KOPA, and Bridge – using digital payment channels to extend access to essential services, and we hope to see more. These companies unlock economic potential in the most tangible ways possible for customers: education, light, a productive asset. A driver renting a motorcycle in Kampala may pay the cost of his bike twice over in three years, with no equity to show for it, and the constant fear of having the landlord cancel the rental. The benefits of owning his source of income, of accessing reliable electricity and education, can be enormous. Analog services delivered via digital rails have the potential to transform livelihoods.
Right on point. Financial inclusion must come with benefits to economically disadvantaged households, otherwise we will be pursuing a cause in futility or a cause that will further increase the poverty of the active poor.