CASE STUDY-Blossom Finance serving the unbanked with interest-free profit-sharing microfinancing solutions

OVERVIEW

Blossom Finance is a microfinancing platform that facilitates interest-free, profit-sharing investments to small businesses. These provide investors with high-return investment options, from which Blossom earns a share of funds raised. The company was founded in 2014 by Matthew J. Martin and graduated from a U.S.-based incubation program before relocating operations to Indonesia to access a sizeable market opportunity.  

ACCOMPLISHMENTS

1. Graduated from the Boost VC Incubation program in 2014
2. Launched its first fund that was an undisclosed amount open to private investors, which is expected to close within a few months, and on track to achieve a 12 percent return, according to founder Matthew J. Martin

OPPORTUNITIES BEING ADDRESSED

There is a fundamental funding gap in Muslim countries, with a high proportion of unbanked citizens. According to a 2014 World Bank Report, 38 percent of adults worldwide did not have access to basic financial services, including bank accounts, predominantly in Southeast Asia and Africa. Several high-population OIC member states fall within these regions. Blossom Finance seeks to address this fundamental demand.

STRATEGY

Solving a fundamental need for Shariah-compliant finance and capital market access, based on personal experience

The company was founded to help solve a critical gap in the availability of Shariah-compliant finance in Muslim markets. This was a problem Martin himself experienced as he was seeking to raise funds for several of his business ventures.

Discussing the market gaps, Martin commented, “My original plan [was] to launch the microfinance platform in the U.S…However, as I studied where the major opportunity was  I realized Indonesia was a huge market. I learned that 80 percent of the population does not have access to retail banking or financing.” Echoing this datapoint shared by Martin, South Asia accounted for 31 percent of the 2 billion adults globally without access to bank accounts or basic financial services, according to 2014 World Bank data.

The crowdfunding platform offered by Blossom Finance is an efficient, scaleable way for investors to earn attractive returns. They also achieve a positive social impact and provide funds to those who need it.

Boots on the ground with its operating partners

Five operating partners help Blossom Finance to effectively manage risk and ensure a high repayment and business success rate for the loans.

The partners visit borrowers prior to lending to evaluate their needs. After disbursing the financing Blossom Finance’s partners will continue to visit borrowers on a regular, oftentimes daily basis, to provide support and to ensure the borrowed funds are being deployed sensibly. . This approach is often needed in Indonesia, where it is a significant challenge to verify creditworthiness. Discussing the partnership model that Blossom Finance uses, Martin commented, “In the U.S. you have credit scores but in Indonesia, that kind of approach doesn’t exist. In Indonesia, it’s hard to do that and there are substantial differences in underwriting requirements throughout [the country]. We don’t have the experience to evaluate individual borrowers or a group of borrowers, but our microfinance partners bring that experience – we’re thrilled to get access to them.”

Peer-to peer-finance, an alternative to crowdfunding where individual borrowers and individual lenders are directly matched through a technology platform, is considered more challenging to execute in markets such as Indonesia due to the high risks of fraud and non-repayment.

“The ticket size is too high [for peer-to-peer finance] and the cost of living [in Indonesia] too low. Economically there is an incentive to rent someone’s ID, take a loan and disappear – a very difficult risk to manage,” said Martin.

Accessing well-developed capital markets

The company is registered in the U.S. and began life as part of the Boost VC seed-stage accelerator program, which primarily supports financial technology startups with investments between $10,000 and $15,000 in return for 5-7 percent equity. Blossom Finance received funding in this range. Although originally accepted onto the program with a different business idea, Martin’s concept for Blossom Finance was accepted and supported by Boost VC.

 “After experiencing some difficulties with my first business, I told [Boost VC] that I had another idea and came back with a demo and pitch for a Shariah-compliant crowdfunding platform, which they liked, and I received support over eight weeks to build the product and then pitch to close to 200 VCs to try and raise money,” Martin explained.

The company sees a substantial benefit from being incorporated in the U.S and having access to the well-developed venture capital and crowdfunding ecosystem in the country. “Following the JOBs act in 2008, the U.S. government has sanctioned crowdfunding. The Indonesia regulator has acknowledged crowdfunding, but the U.S. is much further along,” added Martin.

OPPORTUNITIES

Blossom Finance plans to expand its operations in Indonesia, but also sees significant growth opportunities across the OIC, in particular in Pakistan, North Africa, as well as non-OIC countries with large Muslim populations such as India.

Martin commented, “I see another five years of strong growth in Indonesia alone – over 100 million people without access to bank accounts. It’s an incredibly hard market but [we] see Pakistan[’s] central bank has made microfinance a priority… India is the other big one... [and] North Africa is incredibly underdeveloped. Morocco [just] announced their first Islamic bank.”

CHALLENGES

Martin noted the challenge in raising capital from angel investors who had approached him and realized that being proactive and seeking out the right people was a much better strategy to raising capital.

He commented, “I wasted a lot of time talking to Muslims who claim to be Angel Investors. Don’t waste your time there. I found that exactly zero percent of those who came to me invested. But for the people I active[ly] sought out – a much higher proportion became investors. Be cautious of wasting time. Do research on the investor.”

© SalaamGateway.com 2016