Helping millions of Pakistanis get credit with AdalFi for the first time

Pakistani banks have a chicken-and-egg problem when it comes to lending money to their customers. They lack the customer credit history data they need to decide whether or not to borrow; but until they start borrowing, they’re not going to collect any of that data. Enter AdalFia Lahore-based fintech, which has developed a technology-driven solution to help break the deadlock.

Announcing a $7.5 million round of funding today, AdalFi is the brainchild of founder and CEO Salman Akhtar. Akhtar, who spent years learning Pakistan’s banks inside and out when he ran an IT services company specializing in financial services, is on a mission to open up the country’s credit market.

“The usual conversation about financial inclusion is about the number of people who don’t have a bank account, but in my opinion we should also talk about access to credit,” says Akhtar. Pakistani banks serve 50 million consumers and small businesses, he points out, but only 2 million of them have a credit product – just 4% of the market.

The main reason for that is that Pakistan, like many other emerging economies, does not have any sort of credit score or rating infrastructure. Therefore, in order to lend to a customer, banks must perform a series of manual checks, from verifying their identity to assessing their financial health. The cost of such work means that it only makes commercial sense to lend to a small number of wealthier clients. “Lending in Pakistan is fundamentally broken,” Akhtar added. “Before we came, no bank had ever automatically issued a loan.”

In 2021, AdalFi tried to solve the problem by building the credit scoring model banks need to make automatic credit decisions. Akhtar and a small team spent much of the Covid-19 crisis perfecting their approach; by borrowing anonymized datasets from two banks, they built a model that assesses customers’ credit history based on all their previous financial transactions with the bank.

“Essentially, we built better underwriting models for banks,” Akhtar explains. “With our model, the bank can give its customers a credit score without having to ask them for additional information.”

The effect is dramatic. Each bank will have customers for whom there is not enough financial transaction data to allow the model to assess their credit risk, as well as a segment that is not considered suitable for lending. But Akhtar estimates that the average bank finds that 15% of its customers are perfect candidates for products such as personal loans and credit cards. That is more than seven times the number of customers they currently lend money to.

In fact, AdalFi takes a conservative approach. “We want the banks to be responsible lenders,” Akhtar explains. While Pakistani regulations allow clients to lend to a point where repayments do not exceed 40% of their income, AdalFi suggests that banks limit this figure to around 8% for lower-income clients. “We think credit is a long game,” says Akhtar. “You shouldn’t blow up your customers – or the bank – by lending too much.”

AdalFi is also keen to point out that it has skin in the game. It simply provides the model banks use to give their customers a credit score, where the bank does the actual lending. But AdalFi takes its fees as loans are repaid — and if there’s a default, the lender can recoup some of those fees. “That gives the banks the confidence that we believe in our models,” Akhtar adds.

It is an innovation that could change access to credit in Pakistan. In less than two years since its launch, AdalFi has persuaded 14 of Pakistan’s 23 banks to join its service, and seven of those banks are already providing loans based on the model. Together they have issued 75,000 loans using the model so far, with 6,000 loan agreements in January alone.

Investors are taking note. The current $7.5 million fundraiser is led by COTU Ventures, Chimera Ventures, Fatima Gobi Ventures and Zayn Capital, with participation from a number of angel investors. The funding will enable AdalFi to further build its team of engineers and modellers. The company also has a specialist team that advises banks on how to market their new lending options.

Amir Farha, managing partner of COTU Ventures, says the company can be truly transformative. “The fact that they have already forged partnerships with the largest banks in the country and have already facilitated new unsecured credit channels for their clients in such a short space of time gives us confidence that they have an incredibly exciting future ahead of them.”