Tez promised Rs5,000 in 15 minutes, and its fee left little room for bad loans
The Karachi nano lender was among Pakistan's first licensed fintech lenders. A calculation from its fee range shows the default rate it could afford, and what its sale to ZoodPay left unsaid.
A borrower who took Rs5,000 from Tez Financial Services and paid a fee of 15 percent owed Rs750 for a month. That sum shows how little room a nano lender has for bad loans: on a loan of that size, one default wipes out the fees from about seven good ones. Tez, a Karachi company that began lending in 2018 to people with no credit file, was sold to the Swiss lender ZoodPay in May 2022 for a price it never disclosed. It published no accounts, so the arithmetic of its fee is the clearest way to see what the business needed in order to work.
A licence before a loan book
Tez was started by Nadeem Hussain, the founder of Tameer Microfinance Bank, with two credit risk specialists, one of them Naureen Hyat. Dawn reported in October 2018 that the company had begun lending at the start of that year. ZoodPay's release says Tez was the first fintech in Pakistan to receive a non bank financial company licence, in 2018.
On 23 October 2018 the company announced a seed round of $1.1 million led by Omidyar Network, with Accion Venture Lab and Planet N. The money was meant to build a credit portfolio, improve the mobile platform and secure a non bank microfinance licence. Dawn reported that the lending technology was outsourced to the Karachi software firm VentureDive, and data and analytics to Nexdegree. A lender that rents both capabilities keeps its payroll small but depends on its suppliers for the credit model, which is the part that decides its losses.
How a Rs5,000 loan was made
The application ran on an Android phone. The borrower photographed a national identity card, took a selfie holding it and answered 12 questions on income and circumstances. A scoring system set a credit limit, the borrower chose a term, and the money went to a mobile wallet such as Easypaisa, from which it could be collected as cash from an agent. Tez said the process took no more than 15 minutes and needed no collateral, against a month at a commercial bank. Hussain told Dawn in 2022 that the firm built an alternative credit history for borrowers from their phone data.
The product sat in a narrow band. Dawn explained in 2018 that nano loans run from Rs1,000 to Rs5,000 for up to a month, while microfinance loans start near Rs10,000 and run for four to 24 months. In 2022 Dawn put Tez's instant loans at up to Rs5,000. Dawn put the going cost of nano finance at around 15 percent a month and reported a Rs20 fee charged upfront. MENAbytes, reporting the ZoodPay deal, said Tez charged a fixed one time fee of 10 to 20 percent depending on the loan size and the customer's profile.
Hussain said in 2018 that the company would have to bear with high default rates for the time being, and expected both defaults and markups to fall as it gathered data. The seed announcement also listed life and health insurance with EFU Life and Jubilee General, savings committees, investment plans and branchless banking partnerships with Easypaisa, UBL Omni and SimSim.
The arithmetic of a nano loan
The figures below are the magazine's own working. They use the fee range above and a Rs5,000 loan with a one month term, and they illustrate the structure rather than report Tez's results.
First, the cost. A fee of 10, 15 or 20 percent on a one month loan is Rs500, Rs750 or Rs1,000. The Rs20 upfront charge adds 0.4 percent on a Rs5,000 loan, but 2 percent on a Rs1,000 one. A borrower who rolled the loan over every month would pay the fee twelve times; compounded, that is 214 percent a year at 10 percent a month, 435 percent at 15 percent and 792 percent at 20 percent. Most borrowers take a loan for one need and then stop, so these are not typical customer costs. They show why the price is quoted monthly, and why a one time fee reads so differently from an annual rate.
Second, the tolerance for losses. Assume the lender recovers nothing on a defaulted loan. Each good loan earns the fee and each default costs the Rs5,000 principal, so the lender breaks even, before funding costs and overhead, when the default share p satisfies p times 5,000 equal to (1 minus p) times the fee. That gives a break even default rate of 9.1 percent at a 10 percent fee, 13.0 percent at 15 percent and 16.7 percent at 20 percent. The real tolerance is lower, because customer acquisition, wallet and agent charges, the two outsourced technology contracts and the cost of the capital lent all come out of the same fee.
Third, the size of the book. At about Rs130 to the dollar, the magazine's approximation for late October 2018, the $1.1 million seed round was about Rs143 million. That is enough for about 28,600 loans of Rs5,000 outstanding at one moment, if every rupee were lent and none spent on the platform. A one month loan returns its capital quickly, so the same money can be lent several times a year, but the sum shows that a seed round of this size was sized for a book of tens of thousands of borrowers at a time, not hundreds of thousands. Tez said it served more than 160 cities by 2022.
Why a foreign lender bought it
ZoodPay announced the purchase on 25 May 2022 and called it the first fintech merger or acquisition in Pakistan. It said Tez was backed by Planet N, Flourish Ventures and Accion. ZoodPay, a buy now, pay later platform operating in the Middle East and Central Asia, had raised close to $50 million from Zain Ventures and Sturgeon Capital, according to MENAbytes. Its chief executive, Michael Khoi, said in the release:
“Pakistan is a market brimming with potential given the number of people seeking access to credit facilities.”
The release put Pakistan's population at more than 230 million and said fewer than 5 percent had access to credit. On those figures, more than 218 million people sit outside formal credit (95 percent of 230 million is 218.5 million). ZoodPay said its lending approach combines several customer acquisition channels, data from its own ecosystem and proprietary credit scoring. A licensed lender with a repayment record on people who have no bureau history fits that approach.
There is a difference in product. ZoodPay's core business is lending around purchases, where the lender sees what the money is for. Tez lent cash into a wallet with no purchase to anchor it. The first is easier to underwrite; the second reaches people who have no card and no online basket, which is the gap Tez targeted.
What the sale left unsaid
Tez said in 2018 that it hoped to raise a Series A by June 2019. The 2022 sale was described as a full acquisition by one buyer, at a price withheld under a non disclosure agreement, so an outsider cannot say whether Omidyar, Accion and Planet N made a return. Tez has published no figures for loans disbursed, active borrowers, default rates, revenue or profit.
The test for any nano lender is the one the sums above point to: the share of loans repaid on time, split by loan number. A borrower on a second or third loan has already shown a record of repaying, and for that customer the break even rates of 9 to 17 percent become comfortable. For a first loan to a stranger, they do not.
