As I walked through Alaba International and Idumota markets on a recent trip to Lagos, I was in awe of the bustling scene. Not even the rainy season’s torrential downpours could silence the Afrobeat music thumping in the background as buyers and sellers jockeyed for a better deal. Alaba International and Idumota markets reign supreme in Lagos, offering all the goods one can imagine. Alaba International, on the southeastern edge of the city, bursts at the seams with satellite dishes imported from China, secondhand PlayStations shipped in from the UK, and other electronics. Idumota buzzes on Lagos Island, just south of the city center, and is a shopper’s delight replete with wax print hauled over from Ghana, locally produced Nollywood movies, and so much more.

Amidst the action in the markets, I interviewed 22 small business owners who are clients of <a href="https://www.accionmfb.com/">Accion Microfinance Bank</a> (AMfB) to learn more about their financial health and capability. This research will guide us as we develop a framework to help micro, small, and medium enterprises (MSMEs) better understand and achieve financial health. The framework is part of a project we’re undertaking with the support of the <a href="https://www.mastercardcenter.org/">Mastercard Center for Inclusive Growth</a> to increase the <a href="https://www.centerforfinancialinclusion.org/what-financial-health-means-for-small-business-owners">financial health and resilience of individuals and businesses</a> around the globe.

Through my conversations with business owners, I learned about what owners viewed as determinants of their success. We hypothesized that MSME financial health rests on three pillars — earning a profit, having access to capital to seize opportunities, and being resilient to economic shocks. The interviews suggest that our framework is on the right track. For instance, limited and slow access to working capital was commonly cited as a barrier to taking advantage of fleeting business opportunities. We also learned that resilience is not as much about cash-on-hand as it is about being able to quickly shift to other income-generating activities to fill an immediate need.

But arguably, the most eye-opening thing I learned from these interviews had to do with financial capability and the path to entrepreneurship, specifically how owners were able to get the know-how and capital to start their businesses. I had assumed that a commercial bank or <a href="http://www.iosrjournals.org/iosr-jbm/papers/Vol17-issue6/Version-2/J017626267.pdf">esusu</a> — a rotating savings and credit association common in Nigeria — were the first two places that a budding entrepreneur would turn to raise seed funding. However, nearly all the merchants and traders I spoke with started their business with a lump sum they earned after spending several years as apprentices in their trade. This practice is part of the centuries-old Igbo apprenticeship model, <a href="https://pdfs.semanticscholar.org/c77a/7e79ec3fb7ce5c9eccdc72d181205251dfb2.pdf">Imu-Ahia</a>.

The roots of Imu-Ahia date back to the European colonial era when the Igbo ethnic group native to southeastern Nigeria started to gain a reputation as highly-skilled traders and merchants. Today, the apprenticeship model has been widely adopted across the country. Most apprentices-to-be meet their “boss” — someone who is already well-established in a trade — through a family member or close contact. Reasons abound for why one might become an apprentice. Several entrepreneurs I spoke with decided at a young age that they wanted to be masters of a trade, so becoming an apprentice was always part of their plan. Others became an apprentice as a last resort, often after financial constraints forced them to put off academic or other pursuits.

During their tenure, which can range anywhere between three and seven years, apprentices observe and take notes on the tricks of the trade. They are assigned a variety of responsibilities, and eventually, they’re charged with promoting sales and store management. Although most apprentices aren’t paid, they are afforded accommodation, transportation costs, food, and clothing. Once the agreement — which can be either informal or formal — has been fulfilled, the newly anointed entrepreneurs are provided a lump sum to help them start their shop. One interviewee — a vendor of computer and phone accessories — was compensated with N800,000, the equivalent of approximately US$2,200, after spending five years as an apprentice. This is a decent payout considering he currently spends N350,000 (US $970) a year to rent his shop.

So what exactly does Imu-Ahia tell us about how these entrepreneurs perceive the determinants of their success? Many interviewees captured it perfectly when they shared advice for aspiring entrepreneurs: one must meticulously study and practice the skills needed to run a business before diving into it.

This advice resonates with our team at CFI because it positions financial capability — the knowledge, skills, attitudes, and behaviors necessary to make sound financial decisions — as <a href="https://www.centerforfinancialinclusion.org/four-reasons-focusing-on-financial-capability-is-good-business">an essential contributor to business success</a>. The apprenticeship model serves as a learning and testing ground for those who are set on eventually running their own shop, much in the <a href="https://guardian.ng/technology/apprenticeship-and-mentorship-the-key-to-technology-talent-development/">same way</a> that the modern-day business incubator serves as a testing ground for startups. By the time individuals “graduate” from the apprenticeship model, they will have developed the knowledge and skills to manage business revenues and expenses. They also have plans to take advantage of investment opportunities and experience observing how businesses respond to the ups and downs of the market.

I only interviewed former apprentices who found success in the business world, so there’s still more to learn. We need to do more to understand the relationship between financial capability and business outcomes, especially business failures. Nevertheless, these qualitative findings echo the findings of other research. The <a href="https://www.nber.org/chapters/c8222.pdf">National Bureau of Economic Research</a> conducted a fascinating study that showed the differences in the psychological profile of wage workers, own-account workers, and small and medium enterprise (SME) owners. It found that “ability, motivation, and a competitive attitude are very important in differentiating SME and microenterprise owners.” The World Bank launched a project to measure <a href="http://documents.worldbank.org/curated/en/884291527663849364/pdf/126687-18-6-2018-9-32-12-InvestigatingSMEFinancialCapabilitiesFINALWEB.pdf">financial capability of SMEs</a>. Their analysis showed a positive correlation between financial capability and a firm’s size and level of sales.

The striking thing about what we learned in Lagos is not so much that financial capability contributes to business success, it is how, in the Nigerian system such capability is learned: over a period of years, through experience, and under the watchful eye of a knowledgeable mentor.

Keep reading the <a href="https://www.centerforfinancialinclusion.org/blog">CFI Blog</a>, where we’ll share future findings as we conduct surveys around the world on MSME financial health!

What an Apprenticeship System May Reveal About the Financial Health of Small Business Owners in Nigeria

Mastercard Center for Inclusive Growth

Nigeria

Sub-Saharan Africa

Credit

Financial Capability

Financial Health

MSME/SME Finance

Resilience

Blog Post

Emma Morse

Shannon Dwyer

Bolivia

Colombia

India

Latin America and The Caribbean

Mexico

North America

South Asia

United States

Delivery Channels

Digital Credit

Digital Financial Services

Entrepreneurs of MSMEs

Financial Service Providers

Fintechs

Neobanks

Partnerships

Underserved Groups

Article

Report

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

Most of Mexico’s people lack access to a formal bank account. Accion has worked in Mexico for decades to create a thriving and competitive financial sector that embraces innovation and protects its clients.

Though Nigeria’s government has set ambitious goals for financial inclusion, the majority of its people lack a formal bank account. Accion has worked in the country since 2007 to expand access to financial services.

We know from our work that digital technology can be a powerful tool for financial inclusion.

Yet, despite advancements in mobile connectivity, improvements in payments infrastructure, and investment in new technologies, cash is still used in the majority of transactions around the world. In fact, the use of cash is rising.

Cash is slow, expensive, and exacerbates a broader issue: without digital tools to record transactions, store owners struggle to build the credit history they need to obtain financing. That, in turn, keeps merchants from expanding their business and limits inclusive, sustainable growth.

In the past year of our ongoing project with<a href="https://www.accion.org/mastercard-and-accions-partnership-to-unlock-millions-of-underserved-microbusinesses"> the Mastercard Center for Inclusive Growth</a>, we have built partnerships and shaped strategies to drive the digital transformation of millions of microbusinesses and the financial institutions that serve them. We are excited to be working with institutions that are making the digital economy more inclusive by developing meaningful and responsibly designed products and services. Our current partners, Accion Microfinance Bank in Nigeria, Bancosol in Bolivia, CÍVICO in Colombia and Mexico, and Sub-K in India, already serve more than 2 million microbusinesses.

As we think about what successful digital transformation looks like, we look to the small business owners that our partners serve for insight and inspiration. Their stories bring to light how microentrepreneurs benefit from financial technology innovation and digital transformation.
<h3>Promise appreciates a faster loan process in Nigeria</h3>
[caption id="" align="alignleft" width="527"]<img class="" src="http://content.accion.org/wp-content/uploads/2019/10/Promise-AMfB.jpg" alt="" width="527" height="351" /> Promise owns a business importing leather for making shoes and bags and has been an AMFB client for 11 years.[/caption]

Accion Microfinance Bank in Nigeria (AMFB), an Accion partner, has invested in systems that make it easier for small business owners to get the funding they need. AMFB is using mobile tablet devices, SMS payment reminders, automatic loan deposits, and other digital features to make applying for and managing a loan much more convenient for its busy entrepreneur clients. And those clients notice the difference. Promise, a microentrepreneur, who has a business in which he imports leather for making shoes and bags, has been an AMFB client for 11 years. He appreciates the new digital banking service. For example, he says, the time it takes to apply for a loan has decreased dramatically. “I don’t have a lot of paperwork anymore because it’s all done digitally,” he says, adding, “Before, you waited for more than a week for your loan, and it would make you angry. But now I get it in three days.”
<h3>Alfonso is going digital in Mexico — and bringing the whole market with him</h3>
[caption id="" align="alignright" width="523"]<img src="http://content.accion.org/wp-content/uploads/2019/10/Alfonso-Civico.jpg" alt="" width="523" height="392" /> Accion CEO, Michael Schlein speaking with Alfonso Lopez Carmona, a merchant in the Medellin market who sells candies and beverage among other items.[/caption]

CÍVICO, a digital platform that maps micro and small businesses and connects communities in Colombia, Mexico, and Chile, is working with Accion to provide credit services to merchants. In Mexico City, Mercado Medellin (also known as “The Little Habana”) has over 500 market stalls, offering products from across Latin America. One of the merchants in the Medellín market, Alfonso López Carmona, sells international products, such as candies and beverages He appreciates CÍVICO’s efforts to bring Medellín market into the 21st century. He actively uses the platform to promote his business and also uses CÍVICO Pay and QR codes to receive payments. Alfonso hopes to leverage CÍVICO to increase the digital presence of his business. He believes this will enable him to attract more customers, sell a greater variety of products from other countries, and grow his business. He also actively promotes the adoption of CÍVICO among other merchants in the market.
<h3>In Bolivia, Carolina's clothing business is powered by tech</h3>
[caption id="" align="alignleft" width="530"]<img src="http://content.accion.org/wp-content/uploads/2019/10/Carolina-BancoSol-1.jpg" alt="" width="530" height="354" /> With BancoSol's help, Carolina was able to afford the machines and staff she needed to grow her business.[/caption]

Bolivia, like much of Latin America, has lagged behind other countries in the <a href="https://www.globalinnovationindex.org/analysis-indicator">Global Innovation Index</a>. To boost innovation in the country, Accion is working with BancoSol to create an innovation hub that would offer meaningful financial products and services to BancoSol’s nearly one million customers.

Carolina Yesica Rodriguez Alcon, an entrepreneur who runs her own clothing company under the “Jhonny Dey” trademark in Bolivia, has been a BancoSol client for several years. The loan from BancoSol helped her buy machinery and recruit staff to run her company. Carolina is a driven and ambitious entrepreneur — she is working towards expanding her brand nationally and internationally. She appreciates that she can manage her finances and grow her business with financial technologies offered by BancoSol, including AppSol and SolNet — BancoSol’s mobile and internet banking platforms. She even uses QR Pay to conveniently and swiftly collect payments from customers and make payments to suppliers. By prioritizing innovation, BancoSol will be able to help more entrepreneurs like Carolina spend less time at the bank so they can focus on their customers.

As we continue to work with Mastercard and partner with more forward-thinking institutions around the world, we hope to equip millions of microentrepreneurs with the tools and technology that accelerate the growth of their businesses and help improve the quality of their lives.

Arisha Salman contributed to this article.

Three small business owners who show why we need better digital tools

Accion Microfinance Bank

BancoSol

Civico

Sub-K

Financial Inclusion Practitioner

Financial Service Provider

Institutional Funder

Accion Global Advisory Solutions

Done right, financial inclusion shouldn't just be about making financial tools available to all — we need to ensure that those tools are useful and make a positive impact on customers and their financial health. Building financial health is especially critical as the future of work takes shape, bringing with it both flexibility and uncertainty.

The newest addition to the <a href="https://www.accion.org/how-we-work/invest/accion-venture-lab">Accion Venture Lab</a> portfolio, <a href="https://joust.com/">Joust</a>, is a neobank targeting microentrepreneurs, freelancers, and self-employed workers in the United States. It has set out to tackle many of the financial pain points associated with a shifting economy. Joust offers a suite of financial services tailored to the needs of freelancers, including a business bank account, payments processing, and invoice factoring — all in a single mobile app.

I recently sat down with Lamine Zarrad, the co-founder and CEO of Joust, to discuss what he believes is driving the current economic shift, the issues it creates for the self-employed, and Joust’s unique positioning to solve them.

Q: There are over 57 million freelancers in the US, and Freelancer’s Union projects that by 2027 over half of the American workforce will freelance in some capacity. In your eyes, what is driving this shift?

A: There are several factors we believe are driving this shift. First, we believe there is a seismic shift in labor economics, with the paradigm of the corporation eroding through the advent of new technologies. These technologies are giving individuals the ability to engage with parties across the globe. This leads us to point number two — freelancers value flexibility. Seven out of 10 freelancers are interested in moving somewhere other than a large city, allowing them to optimize for cost of living while participating in the work available in a city hub. Finally, self-employed individuals value the work life balance and job fluidity the type of work often allows.

Q: How do you think this new form of working impacts the way individuals engage with financial institutions?

A: The microbusiness has very similar needs to any other business when it comes to banking. They need access to somewhere they can store funds, the ability to accept payments from clients, and access to liquidity to perpetuate growth. However, because they’re often new, small, and sometimes insignificant to large financial institutions, they struggle to utilize or afford the comprehensive services that are designed for large corporations. As such, freelancers end up piecing together 10 different tools to run their business, while still missing out on some critical financial offerings.

Q: Can you give a brief overview of the product you provide, and which part of that offering you’re most excited to be bringing to market?

A: As a first step, Joust offers a fully functioning business bank account, with streamlined onboarding and no monthly fees or minimum balances. Through the account, users can accept payments and utilize our fully integrated invoicing tool, allowing them to send and accept invoices directly through the app. We are also planning on launching new features later this year based on feedback we’ve received from existing customers.

Last but not least is the PayArmour tool, which we’re especially excited by. PayArmour allows our customers to instantly fund a sent invoice, if they need access to capital, or guarantee invoice payment within 30 days, if they need to manage cash flows. PayArmour is what we believe to be the single most exciting part of our platform and gives us an interesting differentiation from other players in the market.

Q: For this product suite that you’re offering, who is that target customer?

A: When we were building this product, we wanted to help the most vulnerable of this freelancing population. In our eyes, that is not necessarily the individuals who work for a platform, but rather the individuals who are running and managing their own business. Consequently, a lot of the folks in this population fall into the creative side of things —ranging from a marketing consultant to a musician. We work to help our customers feel confident in their operations, and not anxious about the ability to collect.

Q: How is Joust uniquely positioned to address its users' financial health needs?

A: As mentioned before, freelancers need several tools in order to run their business. They often have a bank account with a traditional provider, a payments product, like PayPal or Stripe, an analytics tool like Mint, a bookkeeping tool like Xero or Quickbooks, an invoicing tool, a timekeeping tool, and more. Joust has consolidated a number of these tools into an “all-in-one” app, designed to solve freelancers’ pain points and simplify their operations.

Additionally, by integrating all of this into a single platform, we can glean into the financial health of our users and create a holistic picture. Consequently, we will have the ability to underwrite our customers in a way traditional institutions cannot. We hope to eventually develop a risk score — imagine FICO for the freelancer — that will allow our users to obtain services they otherwise wouldn’t qualify for.

Q: What are your thoughts on the future of work, both in the US and potentially even globally?

A: It’s most certainly a global phenomenon — the US is not alone. While the US and Western Europe are most similar in their dynamics today, a lot of developing countries’ freelancer populations are also growing. When you look at platforms like Upwork, their users are spread across the globe. Technology continues to bring job opportunities to a lot of new places, spurring freelancing activity.

&nbsp;

 We're working with <a href="https://www.mastercardcenter.org/">Mastercard Center for Inclusive Growth</a> to bring <a href="https://www.accion.org/mastercard-and-accion-partner-to-unlock-growth-for-millions-of-underserved-microbusinesses-around-the-world">more small businesses and individuals into the digital economy</a> by partnering with companies in communities around the world to better leverage digital financial tools.

The future of work is here, and financial health is more important than ever

Entrepreneur

Impact Investor

Accion Venture Lab

Micro, small, and medium enterprises (MSMEs) constitute the foundation of the global economy – from New York to Lagos to Jakarta. While the range of their activities spans the spectrum of agriculture, manufacturing, and services, all MSMEs face the same challenge in finding the money they need to hire new employees, purchase inventory, or upgrade their equipment in order to grow. This Accion Insights paper explores how innovative, tech-enabled lenders are using niche marketing, digital or mobile platforms, and enterprising partnerships – and often a combination of all three – to make financing available to underserved MSMEs. Informed by its investments and work with more than a dozen fintech start-ups in the MSME finance space, Accion Venture Lab charts a course for investors, regulators, microfinance institutions, and entrepreneurs to seize today’s opportunity to close the gap.

Venture Lab developed this report with the support of the Mastercard Center for Inclusive Growth.

Bridging the Small Business Credit Gap Through Innovative Lending