Innovative impacts with social lending

• Rukula enriching lives financing needs of underprivileged segments 

By Darshana Abayasingha

Into its fourth year of operation Sri Lankan Social Impact Lender, Rukula, is enriching lives amongst low-income groups across Sri Lanka with its innovatory approach to microfinance. Rukula lends assistance to low income earners who do not qualify for formal banking services – the unbanked – to obtain small consumer items such as gas cookers, mobile phones and other essentials. 

Since its inception, and 25,000 loans later, Rukula has grown beyond expectation, and was recently enlisted as a Catalyst Fund Company a global philanthropic grant fund providing capital and advisory engagements to fintechs. 

Rukula is the brainchild of Reza Zarook from wOw.lk fame and drew inspiration for the social lending venture through his experience and interactions at the digital commerce outlet he started. The company provides consumer goods to its customers with 40% interest – or service charge – which is capped over a six-month period with absolutely no collateral. No matter how long the customer takes to pay back the loan, he or she pays the fixed fee. Over 75% of customers finish on time, whilst the longest one had taken was a whopping 1,053 days. 

“Rich people have more ways of getting benefits than poor people. It’s expensive to be poor and that’s very unfair,” avers Zarook. On the bottom side, monthly instalments to Rukula can be as low as Rs. 220, whilst current company policy states a customer cannot owe them more than Rs. 30,000 a month. 

“I wish we could add a refrigerator to the product list, because that makes a massive difference to people’s quality of life. The ability to store food makes a huge difference, but the cost is restrictive. We could do secondhand, but then the issue of the warranty comes up,” he remarks. Rukula has also helped households in plantation communities migrate to gas cookers. The island still has over 600,000 families using firewood, and Rukula is helping them to obtain cookers and the programme is growing at over 300%. 

Looking ahead, Rukula will continue to serve the bottom of the pyramid with life-changing financial services and tools, and the company is also looking at stock-financing for small and medium scale entrepreneurs, whilst admitting that a comprehensive model to evaluate a merchant is still in the works. Micro-insurance is also an area the company is interested in but is posed with huge regulatory challenges. “I don’t want to sell insurance; I want to fund it as we are a heavily uninsured country.” However, regulations state that insurance can only be sold by a regulated insurance broker, plus, concerns also remain over payment terms and corresponding coverage. Rukula is currently looking to take on additional capital to fund and research some of these new ventures. 

At present, Zarook adds his best customers hail away from Colombo mentioning Jaffna, Seethawaka and Trincomalee. Colombo scores badly. “For instance, in Torrington Colombo we have two ladies, who apparently handle drugs. They got late on payments, then when our recoveries guys visited them and challenged that we would have to go to the police if they didn’t pay… they said so you go, we pay them more than you could. At the inception, Colombo 5 or 7 was a great place to be to qualify, but not anymore. These areas in a normal scale scores high, but our customers from there live under very different circumstances,” Zarook reveals lending broader perspectives. From his customers, 93% finish full payments within two years, with a six-month plan averaging at 15 months. 

Rukula has also extended its reach to merchants, who now do the marketing for them. Once a potential sale is identified and cost becomes a point of negotiation, merchants recommend customers to try Rukula for purchase options, as they get paid full price immediately by the Company. Reminiscing the outset of the wOw store and then Rukula, Zarook describes both as challenging but states the latter is more fulfilling as it’s helping people from different walks and it’s a lot harder to do. 

He summarised the Rukula story as below: 

“Before I left the wOw store, we noticed a lot of customers window shopping and walking in, which included chauffeurs and three-wheeler drivers some of whom we employed for deliveries. They look around and said this is very cheap can we buy too? I said of course. But, we don’t know this internet they said, and I said we will teach you. But we don’t have credit cards they said; we said its ok pay in cash. Then the final question is do you have instalments schemes, and the answer was yes but only if you have credit cards, which they don’t have.”

“I wanted to check, why can’t these people buy product on credit, and my banker friends apprised me they are not in the system. What about microfinance? But, microfinance is not so micro anymore; they are lending fairly macro sums. So, what if you are a trishaw driver Rs. 32,000, and your gas cooker breaks which is Rs. 5,000 and that is roughly 15% of your monthly income, and nobody will help them do that. So, I asked my banker friends, what if I find a way to bring them into the system, I will credit score them? Still they said they will not lend to them, as poor people can’t be trusted. That really hurt.”

“So, if I lend them money, how do I make them pay me. At Rukula, we have two fundamental assumptions. We believe that our customers want to finish paying off their loan. Second assumption we make is, we know they are going to get into trouble with their finances, and therefore we have a concept of a financial crisis, which for them happens once every two weeks and that could be nothing more than the brake cable snapping on his trishaw. Build a model that accepts and knows that he will pay me back, but I know he is going to get late and miss payments. But, when that happens we are not going to hit him with a stick.”

“We credit score somebody based on how well they are going to deal with this financial crisis and come out at the end. It’s nothing to do with how much you earn. So, it is just what we feel a proxy for your stability as a family unit. Government workers get weighted more as they never leave. On the other extreme, a 30-year old lady married with kids under the age of 13; why under the age of 13 because kids don’t change school which is kind of our culture unless they move hundreds of kilometres away. They own a tiny plot of land which is given by the Government – that family is not going to run away. They will suffer through the crisis and come out at the ends of it. That’s the family we want to lend to. It doesn’t matter when they finish they will finish paying. We built a model around identifying a stable person.”

“When payments are late, customers are allowed to pick the next date. We have an agreement – it’s a promise to pay. If they fail on this you get two chances to pay, then we start a small legal note, which can eventually lead to a police entry eventually. So, we tell them to try not to start that process. Sure, they can run away and I cannot go to court for Rs. 5,000. But, we remind them that we are the only ones who are willing to lend to them. If he has paid us back in full, and if he comes back and asks for another product, we will give it to him. But the difference is to the guy who finishes on time gets discounts. We don’t give cash, everything is a product. We don’t do jewellery, we don’t do medicine, we don’t do clothes but school uniforms yes. Toys for children are also and yes, because as a child one should have toys.”

“From the day we started operations, the market has changed but we have almost no competitors from the traditional sphere. We only have 24 people here. All our payments come via mobile payments or institutions that work with us. We can process a Rs. 200 payment a month, but a bank cannot do that. It costs them much more to do that. There is a place for the banks and there is a place for us, we can work together. We are not regulated because we are not a finance company. We are legally a retailer of products and our customers own that product from day one.”