With $7.5m in fresh funds, how is AdalFi enabling commercial banks to lend to their customers? 

LAHORE: In 1996, Salman Akhtar and Kewan Khawaja, both MIT graduates, established Techlogix, a software company that powers the systems of most of the top Pakistani banks through a partnership with Oracle. Under the partnership, Techlogix implements Oracle’s banking solutions such as core banking and digital banking systems.

A little over two-and-a-half decades later, Salman Akhtar is using the knowledge, relationships and the context of the Pakistani banking sector as well as data gained from Techlogix’s partnerships with banks to enable these financial institutions to do what they won’t, but are good at; that is lending to their own customers. 

According to Salman, even bank’s existing customers have abysmal access to finance. One of the reasons for this is that banks do not have sophisticated models to credit score its own customers and proactively offer them loans. As a consequence, access to credit for bank customers is an abysmally low number of 4%.

“There are 50 million bank accounts and out of the total number, only 2 million people have access to any kind of lending. That means 96% of the bank people have no access to lending,” Salman told Profit.  

“The high cost of loan origination driven by physical verification of identity, assets and financial health (in the absence of credit scoring) has restricted credit access to a thin, top tier of customers. AdalFi’s digital lending platform allows partner banks to instantly credit score the other 95% of their existing customers who have never been lent to and cross-sell loans to them,” says Salman.

AdalFi, which is a hybrid of Urdu word Adal (justice) and Fi (short for finance) that translates as equal access to finance, is enabling banks to be able to lend to their customers through proprietary credit scoring models. On Thursday, the financial technology startup announced closing a $7.5 million funding round to ramp up this business. 

AdalFi’s funding round was led by Middle-Eastern COTU Ventures and Chimera Ventures, and Pakistan’s Fatima Gobi Ventures and Zayn Capital. The round was also joined by angel investors including executives from US-based financial services company Plaid.  

“AdalFi does two main things: one is building a credit scoring engine which did not exist in Pakistan before. The second is pre-built digital customer journeys which integrate with the core systems of the banks and the digital systems so that it is a plug-n-play thing for them,” says Salman. 

If you are a certain Pakistani bank’s customer and have started receiving messages from your bank that you are now, all of a sudden, qualified for a certain loan amount, chances are that the system that is doing that is AdalFi. It has credit scored your profile based on some data points such as history of financial transactions at the bank to qualify you for a certain amount of loan based on that credit scoring. 

All you, as a customer, have to do, is agree to the loan and the amount will be disbursed in your account within minutes, without any human interaction. 

This arrangement, Salman argues, has expanded the universe of customers within a certain bank that they can lend to now by about 15-30%. From the active accounts at a bank, the credit scoring system of AdalFi qualifies between 15-30% of additional bank customers for loans. 

In the initial phase, AdalFi is enabling banks to give out unsecured loans, which will be followed by credit scoring for loans that are collateralised. The startup does not lend any money itself.

AdalFi’s monetisation model is also what sets it apart. From whatever income the bank earns from the loan disbursed using AdalFi’s credit scoring system, the fintech company gets a percentage share from that which forms its income. But since those loans are being given on AdalFi’s credit scoring model, if there is a default on any of these loans, the outstanding principal amount, on a pro-rata basis, is deducted from the fee that is due to AdalFi. 

“What that means is we really have skin in the game. If our models blow up, we wouldn't make any money. We only make money when bank loans are actually repaid. This creates a tremendous alignment of interests,” says Salman Akhtar. 

So far, AdalFi has signed up 14 commercial banks to power them with such lending system. The number of loans disbursed so far is 70,000 using the fintech company’s credit scoring model, with the NPLs (non-performing loans) significantly below 0.1%. “That doesnt mean it is going to stay this way. 0.1% is in itself too low an NPL but that’s the data right now.”

Part of the reason why AdalFi might have such low NPL’s is because it is data-rich because of Techlogix’s partnership with banks. 

From conventional commercial plans, AdalFi will soon be moving on to signing partnerships with digital banks. “For the digital banks, we are very natural partners because they will only start making serious money when they start giving out loans. Transaction fee income is not going to add up to much. We are a very natural fit for all the digital banks,” Salman says. 

Since AdalFi does not do any lending, the bulk of the funding will go towards increasing the team size and operational expenses. The startup also seems highly sustainable since it has virtually no customer acquisition cost, all of which is done by the banks it works with. 

In the long term, the startup aims expansion into the Asia-Pacific (APAC) region.