Drutoloan: Cracking The MSME Financing Code

April 18, 2024

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Bangladesh has more than 10 million small and medium enterprises. The sector makes up approximately 23 percent of the country’s economy and generates 56 percent of the overall employment. Despite its immense potential and impact, the sector continues to struggle to realize its full potential.

MSMEs face a multitude of challenges. Access to finance remains on the top. Over 60 percent of MSMEs lack access to formal credit. Some sources put that number above 90 percent. A World Bank report suggests the MSME sector in Bangladesh has a financing gap of $2.8 billion. 

It is a complex problem. For financial institutions, MSMEs are a challenging terrain because of the high supervisory nature of the credit, both disbursement and loan recovery. In many instances, financial institutions need to deploy extensive resources to understand these MSMEs and prepare records for them. Loan recovery also takes a lot of effort. The intensive supervisory nature makes it expensive for financial institutions. Consequently, many financial institutions shy away from pursuing MSME lending at scale. 

On the other hand, many MSMEs feel discouraged and even intimidated to pursue bank loans. Many find banks unapproachable and out of reach. More importantly, many MSMEs lack documents such as trade licenses, TIN certificates, and financial records necessary to secure formal credit due to a lack of awareness regarding how formal lending works. 

Consequently, access to finance remains challenging and costly for a majority of MSMEs. Instead, these businesses rely on microfinance institutions, traders, loan sharks, and friends and family for finance. Loans that come at prohibitively high interest rates.

This is where Drutoloan, a Dhaka-based fintech startup on a mission to simplify and democratize access to finance for micro, small, and medium enterprises (MSMEs), comes in.

Founded in 2019 by Abdul Gaffar Sadi, Md. Tushar, and Md. Shahidul Islam, the company has emerged as a promising player in the country’s fast-evolving fintech landscape, tackling the long-standing challenge of financial exclusion faced by MSME entrepreneurs.

The Origin Story and the Thesis

The seed of Drutoloan’s inception was sown in Sadi’s personal experience of witnessing his father, a small business owner, struggle to grow his enterprise due to the lack of access to capital from traditional financial institutions.

As Sadi recounts, “My father was brilliant at his business, but he couldn’t grow because he didn’t have access to finance.”

This resonated with the broader reality in Bangladesh, where MSMEs contribute over 23% of the country’s GDP, yet 90% of them remain underserved by formal financing channels, creating a credit gap of around $2.8 billion.

Sadi and his co-founders recognized that the existing lending landscape was bureaucratic, too rigid, and often out of reach for MSME entrepreneurs, who lacked the specific creditworthiness criteria required by formal financial institutions.

With an optimism characteristic of youth, they embarked on a mission to disrupt the status quo and build a fast, efficient, and inclusive lending system for MSMEs.

“What happens with a 24-year graduate is that they’re relentlessly optimistic. Although there were so many negative points of view from my own teammates and from myself, we decided to move forward,” Sadi recalls.

The Product and Services Lineup

Drutoloan’s product suite has evolved significantly since its inception, reflecting the company’s agility and responsiveness to market demands.

Initially, the startup offered personal loans, including emergency, travel, maternity, and education loans, alongside a nano savings scheme targeted at lower-income individuals and small businesses. As Sadi explains, “We started with two major products: personal loans, and nano savings.”

As the company gained traction and trust, it expanded into nano business loans, catering to the financing needs of MSMEs with loan amounts ranging from BDT 10,000 to BDT 50,000.

Today, Drutoloan offers MSME loans ranging from BDT 10,000 to BDT 1 crore, tailored to the specific requirements of its customers. “Currently, we provide MSME loans from 10,000 to one crore taka. Depending on the amount and financial institutions, the rate of return, the repayment process, and the repayment tenure vary,” Sadi explains.

Drutoloan’s unique selling proposition lies in its “PHYSI-TAL” approach, a hybrid model that combines digital and physical operations to provide a seamless financial experience for MSME entrepreneurs. “Our products are fast, easy, and flexible, designed to simplify our customers’ lending journey. The application process, the verification process, and disbursement and collection all are fast, easy, and flexible and follow a hybrid model of physical and digital operation to provide the customers with a unique financial experience,” says Sadi.

This makes sense given that many MSME owners work alone, with one or two helping hands. Usually, the owner runs the business, which sometimes makes it challenging for them to spend time pursuing loans. With its PHYSI-TAL model, Drutoloan essentially came up with a solution that would provide at-location service, where an MSME entrepreneur can complete the whole lending process, from applying for a loan to verification to collection, from his shop or his home.

“We introduced an end-to-end digital platform where you can do everything from your phone,” explains Sadi. “However, we never put technology at the center. Technology is not important unless people use it. We had to teach them how to do it, what the benefits are, and how their money is safe with our application. This is how it started.”

The second important distinction of the company is its customer obsession. One of its core product design philosophies is a consistent “focus on how healthy the product is for the customer.”

“We design our product in a way that is beneficial for them [customers],” illustrates Sadi. “For example, if a shop owner borrows one lakh taka, he can circulate that money two or three times in his business in a month. If his margin is 10%, we design the installments in a way that his revenue is always more than our installment. In that way, at the end of the year, he will be able to repay me as well as create a small capital for himself from that loan. We believe that if his business is healthy, he will be able to repay us.”

The Operational Machinery

Drutoloan’s operations are meticulously structured, with co-founders overseeing core functions such as lending, operations, and accounts. Each function is independent without any undue influence in decision-making from others. As Sadi notes, “One of the reasons we do not have any default is that we never overlap each other’s boundaries. Our CLO alone has the authority to approve loans. I don’t have that authority or my other co-founder does not have that authority.”

Drutoloan has created an innovative credit scoring engine, which triangulates data points across three critical categories: financial discipline, business performance, and compliance.

“We have more than 100 data points in our credit scoring engine across three basic categories that include financial discipline, business performance, and compliance,” Sadi elaborates.

The model is inclusive and allows MSMEs to use alternative metrics to submit if they don’t have one particular data point. For instance, if someone doesn’t have an annual sales figure, they can submit their supplier data to use in its stead, and so on. Drutoloan’s comprehensive credit scoring allows it to be flexible in evaluating these businesses depending on their nature while also covering any loophole by using a broad range of complementary data. The method has proven effective. The company says it has an impressive repayment rate with a 0% default record. This is one of the aspects that differentiates Drutoloan from mainstream financial institutions that have to maintain rather rigid credit scoring criteria that MSMEs can’t meet in many instances.

The company runs a Murabaha-type business model, where it earns from the markup instead of interest. “Let’s say, a garment factory needs a machine, which costs 100 taka”, explains Sadi. “We buy that machine at 100 taka, add a markup, and sell it to them at 110. They repay accordingly. This is how our business model has evolved over time.”

After years of fine-tuning its model, Drutoloan has been looking to expand of late. It has forged strategic partnerships with banks, non-bank financial institutions (NBFIs), and microfinance institutions (MFIs). “We have been trying to find a common model for all. For instance, if a bank disburses a one lakh taka loan, we buy the product, add a markup of 15% and sell to that person for 115,000, and from that, we give the bank 9,000 and we keep the rest,” Sadi explains.

Forging strategic partnerships with relevant financial organizations has been a meaningful evolution for the company. After running for almost four years with its own funds and fine-tuning its model, Drutoloan started to reach out to potential financial institutions that have products for MSMEs but don’t have field expertise and resources to execute these products. Drutoloan now partners with these financial institutions to help them reach new customers while helping MSMEs access better and larger capital.

The company says its business model has also evolved because earlier it was working with the customers for both savings and lending. Since it now works with banks and other financial institution partners, it creates new policy maintenance requirements. It has created customized models for each of its different partner organizations such as banks, MFIs, and cooperatives.

“For example, MFIs can share revenue with us because their interest rate is higher,” suggests Sadi. “However, for banks, it is tough to share revenue with us. So we work with different models for different institutions. For banks, we have one model. For NBFIs, we have another.”

The Current State and Challenges

Since its inception, Drutoloan has facilitated over BDT 28 crore across 3,200 loans, serving more than 10,000 MSMEs and a savings deposit of more than BDT 15 crore.

However, the current economic and political uncertainties globally and within Bangladesh have posed challenges to Drutoloan’s expansion plans. As Sadi acknowledges, “The systemic risk is increasing for every entrepreneur. That’s the main challenge we are facing.”

Another challenge stems from the inherent nature of the lending business itself. “In every other business, when you sell, your tension goes away but in lending, the tension starts when you start selling,” Sadi notes.

The company says it has been working to develop a hedge against these challenges. One remedy it has been working on is building for the long term. Longevity solves many problems, particularly when you are in business finance. The company has a lean operation and has maintained consistent profitability throughout its journey. It in fact bootstrapped for the first four years of its journey, only raising external capital towards the end of 2023.

The Market Opportunity and Competition

Despite these challenges, the market opportunity for MSME financing in Bangladesh remains vast and largely untapped. “The market is huge, the credit gap in the MSME sector is USD 2.8 billion, and growing at a 9% rate annually,” Sadi asserts.

While acknowledging other players in the space, Sadi believes true competition is scarce. “I think we do not have any direct competitors at this moment. Moreover, we want to collaborate with everyone,” he states, advocating for collaboration and specialization within the industry.

MSME digitization has been a hot vertical in emerging markets over the last decade. Bangladesh has seen an emerging cohort of startups working to empower MSMEs and digitize their operation by offering a suite of products and services. There are B2B ecommerce players, there are fintech players, and players are trying to do both at the same time. Drutoloan says it is one of the only players exclusively focusing on lending and it wants to continue doing that. The company says lending is a complex business and one can’t do it part time. And that lending remains its sole focus giving it extraordinary competitive advantages.

The Future Roadmap

Drutoloan’s ambitions are audacious yet grounded in a steadfast commitment to its mission. “The ultimate vision for the company is to make business loans available at the fingertips of entrepreneurs. And we want to do it for entrepreneurs anywhere in the world,” Sadi says.

Sadi’s vision, however, transcends mere financial metrics. “I don’t want to build a unicorn. I don’t want to raise lots of funds. I want to build a multi-generational startup that’s what our country needs right now. We want to build a company that will last a long time,” he adds.

However, the journey ahead for the company is not going to be easy. Finance is a complex market and fraught with challenges. MSMEs is largely an untested market. The regulatory landscape for new fintech companies is still unclear. There is a growing number of platform players looking to disrupt MSME landscape including finance. The current local and global economic and political realities add further color to these complexities. Drutoloan will have to find ways to navigate these challenges skillfully as the company scales.

Drutoloan has so far shown excellent focus on customer centricity, and a commitment to financial inclusion. It has demonstrated that it can execute innovative approaches and operate resiliently. If it can scale its execution muscle proportionally to its ambition, Drutoloan stands to redefine the MSME financing landscape in Bangladesh.

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