Data over collateral: Why digital transactions are the future of informal credit
A street vendor engages with his mobile phone, potentially managing digital transactions for his small business. This scene reflects the growing intersection of technology and informal economies. Photo/Courtesy
Traditional banks often fail small traders because they lack collateral. The expansion of data driven lending is changing this by using daily transaction history to prove creditworthiness.
By John Wambugu
For decades, the banking system in Africa has spoken a language that the informal trader simply could not understand.
If you wanted a loan to grow your business, you needed a title deed, a logbook or a set of audited accounts.
For the fruit vendor at Muthurwa market in Nairobi, Kenya or the hardware shop owner in Gikomba market, these requirements were brick walls.
The system was designed to reward those who already had assets, while ignoring the millions who had something arguably more valuable: consistent, daily cash flow.
A shift is occurring. The expansion of digital merchant credit systems is rewriting the rules of engagement. We are moving away from rigid, asset-heavy banking toward a model where software identifies the health of a business through its digital footprints. Instead of a balance sheet, the system looks at the rhythm and frequency of daily trade across the busiest hubs on the continent.
Rewriting the language of risk
In the traditional world, risk is calculated by what you might lose if things go wrong.
In the digital economy, risk is increasingly calculated by what you are actually doing right now. When a trader in the Alaba International Market in Lagos, Nigeria, uses a mobile money till for every transaction, they create a living record of their business health. This data shows that they have twenty customers every morning, pay their suppliers every Tuesday and grow their revenue steadily.
By layering algorithms over these transaction flows, lenders can build a profile of a merchant that is much more accurate than a static bank statement.
The daily pulse and operational consistency of the business becomes the collateral. We are finally seeing technology that respects the hustle of the informal trader by translating their hard work into a digital score that banks can trust.
From Cash silos to growth engines
This transition is about capturing the liquidity that used to vanish into thin air or under a mattress. When a small business owner in the Makola Market in Accra, Ghana, can access a loan based on their mobile money history, the speed of commerce moves from weeks to seconds.
They do not have to wait for a bank manager to approve a file. The system already knows they are good for the money because it saw them earn it yesterday and the day before.
This immediate access to capital allows traders to respond to market demands in real time. Whether it is stocking up for a holiday rush or repairing a critical piece of equipment, digital credit provides the flexibility that paper-based banking never could. It turns simple payments into a ledger of creditworthiness for the vendor who has worked in the same stall for ten years but never owned a piece of land.
Bridging the economic gap
For a long time, being informal meant being invisible to the financial system.
You could be making a significant profit in Nairobi or Lagos, but you were still treated as a high risk ghost.
By using transaction data to unlock credit, we are giving these businesses a formal identity without forcing them to adopt the overhead of traditional corporate structures.
Governments and policymakers should take note. Financial inclusion should not be about forcing every small shop to look like a multinational corporation.
Instead, we should be building digital infrastructure that meets them where they are. If we can use data to prove that a local vendor is a reliable borrower, we do more for economic growth than any traditional subsidy program ever could.
The road ahead
As we expand these merchant credit systems, we must ensure the logic remains fair and transparent.
The systems that determine creditworthiness must be designed to include rather than exclude. Security and data privacy are the foundation of the trust that makes this entire system work.
The era of the title deed as the only gateway to capital is coming to an end.
In its place, we are building a world where your daily effort, captured in digital transactions, becomes your greatest asset. This is how we build a truly inclusive digital economy.
We do it by making sure technology works for the person who is working the hardest.
John Wambugu is a technology, innovation, and digital economy leader dedicated to building Africa’s Informal & Digital Economy through technology, entrepreneurship, ecosystem development, and community-driven innovation
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