Unlocking Business Growth with Xhantela’s Group Structure & Social Bonds

Lenders aim to assess individuals’ financial responsibility regarding matters under their influence. They seek to identify those who can repay their debts on time and those with the financial means to do so.  In addition, they try to identify individuals who possess resilience in situations where they lack control but can still exert influence. This involves examining their job stability, position within their company, and the industry in which they work. Finally, some factors are beyond the borrower’s control that must be considered by credit risk management, such as economic fluctuations, loss of income resulting from layoffs, injuries or illnesses, and even death.

When evaluating an individual’s credit risk, conventional methods rely on several key factors. These include their monthly income, which must be verifiable through a payslip or employment record, and an analysis of their spending patterns using bank statements. Moreover, lenders consult credit bureaus to assess an individual’s previous debt exposure and repayment history.

Documentary proof and third-party verification such as pay slips, bank statements, employment verification, and bureau records are necessary for all the information provided to ensure accuracy and validity.

Statistical models use the information provided to assess a person’s credit risk. Based on this information, credit providers decide whether to approve the loan and determine the loan’s associated cost.

Limitations of Conventional Credit Risk Assessment

While conventional credit risk assessment methodologies are reliable for those with documentary evidence and transaction history, they fail when such information or evidence is absent.

What if there’s no documentary evidence available? For instance, when someone operates in a cash economy and doesn’t use a bank account? Or when they’re self-employed and no repayment history is available through credit bureaus?

When conventional credit risk assessment methods need more information about individuals, evaluating the risk becomes difficult. This often results in credit not being extended to these individuals.

The lack of access to affordable credit disproportionately affects the informal sector, a substantial part of the South African economy.

Why does this matter?

Unlocking business growth relies on access to credit, regardless of the business size. Businesses need access to affordable credit to invest in infrastructure or improve their working capital. In South Africa, the informal sector employs approximately 18.9% of the employed population. Unfortunately, most in this sector lack the documentation conventional credit risk assessment methods require. This lack of documentation excludes them from affordable credit, hindering their growth potential. The absence of affordable credit has led to the rise of loan sharks, or “mashonistas”, operating outside credit legislation. These loan sharks offer extortionary loans that target micro-businesses.

Unlocking business growth: Exploring Alternative Credit Risk Assessment Approaches

Is there a way to lend at a large scale while still being responsible, even if conventional credit risk assessments are not applicable? Is there a different approach to solving the questions that conventional risk management models attempt to resolve through statistical modelling? At their foundation, these questions are human — questions about human behaviour and reputation.  The statistical models analyse the evidence of these behaviours to create a statistical impression of the individual’s reputation. 

In addressing the limitations of conventional risk assessment, Xhantela believes that social bonds and interpersonal relationships are vital to evaluating creditworthiness and managing credit risk effectively. Xhantela recognises that the trader next door can easily observe their neighbour’s behaviour, work ethic, financial habits, and reliability. Unlocking business growth is possible if we leverage these social interconnections.

The people who trade next to you know your behaviour.  They can see whether you are at work with dedication or loitering about every day.  Your neighbours see whether you are living within your means, looking after your family or trying to be glamorous.  They build up a relationship of trust (or distrust) with you. 

What if the people trading next to you are part of the credit risk assessment? 

Xhantela credit risk assessment 

Xhantela harnesses the potential of both conventional and social models to maximise the efficacy of credit risk decisions. Credit bureaus offer crucial details about current debt, repayment history, and identity verification. However, when credit bureaus need more information to inform conventional methods, Xhantela integrates the power of social bonds. We ask our clients to create groups with reliable individuals they trust and believe can repay the loan. This will assist in evaluating credit risk.

The Xhantela loan product requires that our clients (whom we refer to as “members”) choose each other and hold each other accountable. We further evaluate affordability by analysing a business plan.

How Xhantela’s Group Model Works 

Xhantela members form groups of four independent businesses. These groups establish interdependence without requiring surety by vouching for each other. Weekly face-to-face meetings serve as a platform for accountability, repayment discussions, and mutual support. During these meetings, loan disbursements occur with a sequential loan payment process that establishes financial interdependence.

At the first meeting, the first person receives their loan, followed by the second person if the first pays their first weekly instalment at the second meeting. The third person receives their loan at the third meeting, if those with loans pay their weekly instalments, and the fourth person at the fourth meeting. Starting from the fifth meeting, individuals who have completely repaid their loans become eligible for a subsequent advance (in their turn) provided that all participants fulfill their weekly installment obligations.

Individual loans vary in size based on affordability, and timely repayment qualifies members for re-advancement. Failure to pay affects the entire group, incentivising responsible selection, responsible use of funds, and consistent repayment.

Xhantela’s Success and Research Supporting the Model

Based on Xhantela’s experience, their methodology has proven to be effective. We have disbursed over R1.3 million in loans to more than 60 clients, with only two loans written off due to the unfortunate passing of two of our members.

Before launching Xhantela, we conducted extensive research, taking inspiration from the microfinance model of Grameen Bank in Bangladesh. The study revealed that entrepreneurial propensity and social capital (the strength of social bonds and networks within a society) were essential pillars of implementing the model in South Africa. Surprisingly, the findings showed that although ample entrepreneurs existed in the kasi-economy, social capital was weak. One of the key outcomes was that social capital could be strengthened through work, potentially unlocking business growth in return.

In our series about our members, we have noticed a recurring theme – Xhantela teaches people the importance of working together. Sometimes it’s stated generally, while other times, it’s explicitly mentioned. When you work alone, it can be hard to know how to work with others to get things done. But in formal jobs and businesses, working with colleagues to reach goals is common.

Those with a management education background would recognise the “syndicate” work in MBA and other management courses, where attendees are constantly required to collaborate to complete assignments. As we interview our members for articles, we find that having social structures to support you in business is of great benefit. A group can be extremely valuable, holding you accountable, providing practical assistance, and offering support.

As South Africans, can we collaborate to unlock business growth?

One of the topics that often comes up in conversations among South Africans is whether we can work together efficiently.

When searching for potential customers, it can be enlightening to witness their responses to a shift in perspective from the familiar (loan sharks charging exorbitant interest rates of 300%-1,000% annually) to Xhantela’s group structure, enabling reasonable credit options. While they appreciate the concept of accessible credit, they may have reservations regarding the group structure.

Some of our most frequent responses include:  “I don’t trust other people”, “You can trust me, but I don’t trust other people.” 

One of our prospective clients even once remarked:  “I have a lot of respect for these [Xhantela] people.  They saw we can’t work together, so now they force us to make groups.”  The statement recognised the importance of strong social connections and highlighted that South Africans are lacking in this area. 

Speaking to business owners in the kasi-economy, it is often mentioned that foreign business owners work together while South Africans don’t. These collaborations are often cited as contributing to this industry’s high number of foreign-owned businesses.

I do not intend to add another uninformed opinion on the reason for this.  The question is instead:  Is this a fate we are doomed to have, or can we do something about it? 

Explore the Power of Xhantela’s Approach to Credit Risk Assessment

Xhantela was established to promote the growth of the kasi-economy and drive the transformation of the South African economy. To achieve this aim of unlocking business growth, we believe it is essential to make affordable credit accessible to these businesses. Additionally, we have incorporated two vital elements into our business model – providing business education and fostering social bonds and networks.

However, we believe that our social responsibility extends beyond economic development. While economic growth in the kasi-economy can lead to prosperity for millions of South Africans, our society faces various other challenges.

What if we can help the process of learning how to work together, like the business school syndicates? Consider the possibilities if this learning is taken further into society so that we can stand together.  Where could we be if we can take accountability for solving the problems we have as a society? What could South Africa look like if we learn to come together rather than pointing fingers and casting blame?

Suppose we are successful in achieving this broader societal impact. In that case, the effects will be far-reaching and more significant than merely unlocking business growth and financial prosperity. We will have made a genuine contribution to building a better South Africa.