Capitai AI Solution

Financial exclusion in South Africa has a historical context and is severe, with an estimated 11% of the adult population being financially excluded (2016 FinScope South Africa survey). The government has started a consultative process via National Treasury that is expected to formulate policy to address this financial exclusion. Capitai has stressed the point about financial inclusion in its engagement with the regulator and, as such, is on the right side of the expected policy development over the next few years.

In South Africa, the Treasury defines financial inclusion as the provision and delivery of financial services at an affordable cost to vast sections of the population that are historically excluded or under-served by the formal financial sector.

Financial exclusion has been shown to have negative socio-economic effects on citizens, especially at the bottom of the economic pyramid. South Africa suffers from high levels of financial exclusion, disproportionately at the bottom of the pyramid (An investigation into factors impacting financial exclusion at the bottom of the pyramid in South Africa, John P Wentzel). Therefore, the developmental impact of addressing financial inclusion in South Africa is high. Capitai is proposing a scalable solution that can be replicated, at speed, to address financial exclusion.

The banking sector is dominated by a limited number of players in South Africa, according to the statistics and reports released by the South African Reserve Banks’ Prudential Authority in the annual report for 2019/2020. The five largest banks hold about 90% of the total banking assets as at 31st March 2020. Smaller banks collectively hold about 4% of the total banking sector assets, and local branches of international banks hold about 7%.

As access to finance is the second biggest obstacle for Firms in South Africa, according to The World Bank, Enterprise Survey, there exists an opportunity for the provision of innovative banking solutions, focussed on the low-to-middle-income population. Despite the rise in competition in the banking sector over the last few years, the five largest banks still dominate, leaving end users vulnerable to non-competitive financial services products.

The solution is to provide an innovative funding solution that utilises revenue data from MSMEs to predict the ability of the MSME to repay the funding obligation. This technology-based solution uses cutting-edge artificial intelligence (AI) to create a funding solution for MSMEs that is flexible and  improves over time. The solution is to build a model that accurately prices credit risk and advances funding to MSMEs, in return for a percentage of the future revenue of the MSMEs. We aim to Partner with our MSME clients to ensure that they remain a going concern, as our repayment terms are directly linked to their future revenue performance. 

Capitai’s aim is to offer solutions that are tailor-made for previously financially excluded groups of the population. Technology helps deliver cheaper banking products to previously financially excluded groups in the country. Capitai will leverage technology to deliver customised solutions for the financially excluded groups and provide access to products that traditional banks do not venture into. In particular, we will offer funding solutions to MSMEs without collateral obligations, without a long history of trading and credit risk performance, and with flexible repayment terms linked to revenue performance.

The customisable way in which the products are offered is the differentiator because the innovative financial solutions that will be rendered will be based on a high level of confidence that is guided by the AI model. This predictive power that our technology will be able to harness will create value and help address financial exclusion in South Africa.

1) MSMEs that cannot access finance through traditional banking channels. This could be because they do not have a long trading history, appropriate credit history, or they do not have collateral to post, all of which are a current bank requirement to lend money to MSMEs.

2) MSMEs that prefer flexible payment options that are linked to the revenue that they will be making. We will partner with MSME's as their success is inherently linked to ours. We are repaid when the MSME generates revenue. 

3) Emphasis will be on impacting women and, by so doing, addressing gender inequality and increasing women's participation in MSMEs development.

The impact is to catalyse the growth of MSMEs as critical engines for accelerating the implementation of sustainable development goals related to employment creation, the eradication of poverty and hunger, the empowerment of women, youth, persons with disabilities, and reductions in inequality.

The CEO and Co-Founder of Capitai is an Oxford University graduate with vast experience executing and implementing strategies for start-up businesses. Through his experience running businesses in private equity, he identified a gap in the market that could be solved by utilising technology and quantitative skills to address financial inclusion issues.

The solution of creating a repayment model tied to a business's performance comes from MSMEs that are excluded from participating in the financial sector. When MSMEs participate and get products from the banks, these products are often at exorbitant price points because banks typically use old credit scoring models to price credit risk, especially for MSMEs without collateral. This does not need to be the case in a world where data can be used to guide and predict cash flows. This is the solution that Capitai is bringing, and this is borne to cater to the needs of MSMEs by definition.

Risk management is an important aspect of Capitai’s business model, and the CRO and Co-Founder is a quantitative analyst with over 10 years' experience in developing complex credit risk models in the spheres of impairment, capital and pricing. He is also experienced in the technology component of the solution, developing out the AI component of the Capitai proposition and implementing the solution in a cloud based environment. 

The wider team brings together AI skills, technology skills, finance skills, and strategy and execution skills.

The concept has been developed and is currently test phase, using real-life data to prove the concept. There has been engagement with the regulators to go live with the product.

None.

Once regulatory approval is granted, the solution will serve MSMEs that do not have access to traditional financing solutions from banks, and MSMEs that have sales history that can be inputted in Capitai's pricing engine to enable the accurate pricing of risk for the MSMEs.

Capitai wants to join the esteemed network of impact leaders who will help our start-up catapult the business idea that we have from the prototype stage we that we are in to go live stage, and throughout the process, enhance our value proposition by tapping into the Solve and MIT networks for guidance with scaling into other markets.

There is also the part of giving back as part of the Solve community to other future Solve participants.

The solution is innovative because it allows MSMEs to:

1. Access capital when they do not have collateral, credit or long trading history;

2. Have a repayment model that is aligned to the revenue that the MSME is generating, thereby linking the repayment to the performance of the business;

3. Utilise cutting-edge technology for pricing of their credit risk.

Gender inequality: minimum of 60% of the portfolio to be dedicated to catering to women-run businesses;

Decent work and economic growth: Deploy USD$100 million in South Africa

Decent work and economic growth: Count the number of direct and indirect jobs our interventions create.

Gender inequality: minimum of 60% of the portfolio to be dedicated to catering to women-run businesses;

Decent work and economic growth: Deploy USD$100 million in South Africa

Decent work and economic growth: Count the number of direct and indirect jobs our interventions create.

Our Inputs: Capitai will use AI technology to collate and analyze data from various sources, including historical transactional data and other publicly available data to determine the creditworthiness of MSMEs. The trading information the MSMEs will have to date will be used as part of the information required for the innovative credit model.

Our Activities: Capitai will deploy proprietary AI algorithms to evaluate the risk and creditworthiness of MSMEs based on their specific data. The objective is to price risk appropriately using a proprietary engine that Capitai will build and enhance over time. Capitai will provide funding to MSMEs that meet the creditworthiness criteria. The activities are based on Capitai's ability to manage credit risk appropriately. As such, approval for funding will be done in a manner that seeks to educate MSMEs that do not meet the approval conditions so that those MSMEs can have a clear path for their specific requirements to get credit approval. The information provided by MSMEs will be retained and used to enhance the AI model.

Our Outputs: Capitai will then provide appropriately priced financing and customised funding solutions to MSMEs that typically face funding challenges due to limited credit history. Clear communication is to be given to MSMEs that are not approved on improving their applications.

Desired Outcomes:

Enable Financial Inclusion: Capitai will enable financial inclusion by providing funding to those previously excluded from accessing credit.

Sustainable and Financially Resilient Businesses: Our technology will drive the growth and expansion of MSMEs, leading to job creation, increased tax revenue, and economic growth.

Our Desired Impact

Short-term impact: Capitai’s intervention will enable South African MSMEs and Start-Ups to grow and expand, immediately impacting economic activity and job creation. 

Medium-term impact: In the medium term and as a result of Capitai’s intervention, MSMEs will be able to increase headcount contributing to growth in overall employment and ultimately growth in the tax base. 

Long-term impact: Our long-term impact will manifest in the contribution to the achievement of several sustainable development goals (SDGs). Access to finance is a critical factor in poverty reduction and food security, and Capitai addresses this through the enablement of financial inclusion to previously excluded groups. The participation of MSMEs in the broader economy has many spillover benefits for society including reducing the adverse effects on unemployment, e.g. reduction of the crime rate in the country, which is relatively high on a global comparison.

Capitai also has a unique opportunity to impact gender inequality positively. Historically, women entrepreneurs have faced additional barriers to accessing finance, including cultural and social biases. Capitai’s solution evaluates creditworthiness based on real data, and this will help to overcome prior biases and level the funding playing field for women-led businesses, thereby positively impacting women's economic empowerment and the achievement of SDG 5, which focuses on gender equality. As part of the Capitai's objective, a minimum of 60% of the capital that will be disbursed is targeted at women-run businesses.

Artificial Intelligence and a cloud based solution implementation

Have more representation from minorities, especially women, on the company's board and management team. The composition of women is targeted at the 50% mark on the board and management team.

Financial product that targets MSMSEs who do not have access to finance from traditional banks.

These products are provided via an online application.

MSMEs want the product because it is cheaper than traditional banking products, and is customised to fit the MSME's requirements, including a flexible repayment model.

Raise money to pilot project. This is likely going to be via grants and bootstrapping.

Raise more money to scale the proposition upon successful pilot run.

Manage risk conservatively.

Price risk appropriately.

We are still to raise funds. We plan to raise funds once we have regulatory approval to operate.