In Mongolia, where the average monthly income is $390, informal loans between friends or family members are commonplace as credit and small bank loans are hard to get. On the other hand, small informal loans are almost expected to not be paid back.
“There is no leverage system for people to repay, so in the worst case they lose their friends,” says Anar Chinbaatar, 35, CEO of fintech startup AND Global.
He and two friends cofounded the company in 2015 after, one day out for a smoke, he finally got tired of friends asking to borrow money from him. His startup, which launched the mobile app LendMN, introduced mobile-based microlending to the North Asian country where borrowers are blacklisted from significant financial services such as mortgages if they default on a small loan from the bank.
But the lending industry is fractured, and AND — meaning “friend” in Mongolian — wants to work toward accessibility, transparency and accountability in microlending, the CEO says.
After raising $1 million in seed funding in April 2016, the company received another $4 million with a $30.8 million valuation in August from influential backers in Mongolia and Japan including former Japanese parliament member Takami Yuichi, investor Satoshi Matsumoto and his wife Yasuyo Matsumoto. It is also advised by Oko Davaasuren, an influential Mongolian investor from TechStars.
The company, which has issued over $1.9 million in loans as of this month, plans to use the new investment to fuel expansion into the Philippines and Japan and develop new technology such as a blockchain project while preparing for an initial coin offering in December.
“Our main target is serving underbanked people who cannot get financial services and who are paying loan sharks,” Chinbaatar says.
Fractured Lending Industry
Mongolia’s archaic banking industry lacks a credit scoring system, with banks and financial institutions instead sharing a spreadsheet-like database of customer info to evaluate borrowers, he says. Traditional bank loans of any size require lengthy paperwork, collateral and five days to process. Collecting collateral from the borrowers — which could range from cars and houses in the capital Ulan Bator to flocks of sheep in the countryside — is costly for banks, he added. People often resort to loan sharks, which charge a high interest rate of 10% per week — but smaller loan sharks commonly even charge that rate per day, according to Bayar Volodya, 37, cofounder and chief operating officer.
AND wants to do away with loan sharks and raise customers’ financial education and responsibility. They seek to fill the cracks of Mongolia’s fragmented lending system through human interaction and artificial intelligence. The biggest problem to solve was accurately assessing borrowers’ creditworthiness.
“In the first year, we were advised by almost 100 bankers, risk managers and loan appraisers, and 99 of them says it was an impossible, stupid thing,” Chinbaatar says. Only one person, a broker for Mongolia’s biggest bank, saw a possibility and advised them on a concept for a credit scoring model.
AND developed a machine learning-based system that assesses a range of data points from conventional information like banking, income and expense records to unconventional sources like social media, smartphone use and education and employment history.
The company sought to introduce cross-border peer-to-peer lending with funds from Japan, but found the plan infeasible as investors didn’t want to take such a risk for a low return. Nonetheless, lending with its own funds, the company’s lending operation turned a profit within two months of commercial launch in April 2017, and now claims some 8,000 credit-approved active users.
LendMN’s initial customers surprised Chinbaatar. While at first he thought people would borrow small money for drinking, buying cigarettes or other entertainment, current data shows they are more financially responsible, using it for special needs to make ends meet.
Claiming a low 1.5% default rate, transaction sizes average around $70. Interest rates range from 3%-10%, compared to Mongolian bank and credit cards that charge 3.5% for prime borrowers. In contrast with banks, AND does not require collateral for its personal and business microloans — stirring concern over disruption in the industry.
“When we launched, all the Mongolian banks had an emergency meeting over the weekend about how to tax or block us,” Chinbaatar says , but suggests it turned out to be a good thing for competitive innovation in the local industry. “Right after that, a lot of banks started working on new products, creating innovation departments to work on Facebook and chat bots.”