There is a way to make a positive impact in the world by combining business, community and crypto. This is the story of Sapling’s birth.

Twenty-three years ago I worked for a non-governmental organisation (NGO) delivering medical relief in Tajikistan. In the aftermath of a five-year-long civil war the country was a mess. As stability was slowly restored, NGOs descended to aid in the rebuilding efforts. Though appreciative of the positive impact our medical relief project delivered, I began to feel frustrated as the quasi-political motivations of these NGOs grew increasingly apparent to me.

Despite their name, non-governmental organisations are, in fact, funded significantly by governments on a direct and indirect basis. Although many donations to NGOs come from private individuals, significant funding comes from for-profit companies, philanthropic foundations, local governmental agencies and even foreign governments, all of whom are driven by political motivations to some degree. In order to ensure a steady income, NGOs are forced to deliver projects that cater to their donors' demands but which, I discovered, are not always what is most needed on the ground. I left Tajikistan somewhat jaded by the experience, thinking there must be a better way to help society recover and develop.

Financing a Startup With Personal Credit Cards

Upon my return to the UK, I set about starting an internet business. Working from my bedroom with absolutely no track record meant that equity funding was out of the question for me. So instead I asked multiple UK banks for a small business loan, but without anything to offer as collateral their answer was always “no”. In the end, I  financed my start-up using my personal credit cards, ironically issued by the same banks that wouldn’t give me a business loan.

I began to wonder why these banks, who were so willing to offer me endless high-interest credit card debt, wouldn’t issue a small business loan backed by a personal guarantee? Surely the same regulatory framework that gave these banks the licences to operate, must also commit them to behave in a responsible manner towards their customers and foster economic growth? Unfortunately, I found this not to be the case.

Luckily, the credit cards and no shortage of hustle did the trick. My business grew and morphed into many other internet and investment adventures. Like many entrepreneurs, once my businesses were well established and I’d built some breathing space for myself and my family, I started spending time on projects that I hoped would have some positive impact. I wanted to give something back. Stories of the Grameen Bank and its microfinancing in Bangladesh (has any other bank in history won a Nobel Peace Prize ?!?) lit sparks of inspiration for me, and I decided to see for myself if responsible lending could be the solution to help people in developing nations.

Hands-On Microfinancing in Uganda

In 2007 I took a trip to Uganda to support a friend, Rob, who was building a school for orphans. It was a great opportunity to try microfinancing myself, and I arrived with dollars ready to lend to villagers to help get their businesses up and running. My plan was simple: lend to the people I met who presented both a credible business plan and showed enough commitment to make it happen. To my disbelief and surpassing all my expectations, business plans were thrust through our car window as we drove around the village !!

We looked through the applications and chose around 8 projects, 7 of which were classic microfinance: a small mushroom farm, a few pigs for breeding and so on. Then on Rob’s guidance, we lent the bulk of the money to an eighth project run by Ausicrey, the owner of a farm who had been instrumental in the construction of the school and had already proven that he could get things done. The loans were paid out and a local intermediary, Travis, was engaged to oversee the repayments and keep us informed of each project's progress. However, over the next year, Travis reported that things were not going great. Some of the smaller projects had defaulted, although the large farm had continued to make repayments. Or so we thought…

On returning to the village with Rob a couple of years later I discovered that Travis, our intermediary, had been fraudulent. It turns out that although a lot of the projects had struggled to get any traction competing against similar easy to start local businesses, the loans had mostly been paid back. The problem was Travis had pocketed a lot of the repayments and had told us that the borrowers had defaulted! More importantly, the larger-scale loan to Ausicrey had resulted in considerable success. The village was filled with pineapple fields Ausicrey was farming with the money we had lent. The benefits were being enjoyed not just by the farmer, but by all the villagers that he had been able to employ on his farm as a consequence of the loan. The loan was quickly repaid and resulted in a sustainable, positive impact on the village .

Yes, It’s All About The Entrepreneur

My experiences in Uganda taught me that when lending to the right business person, repayment was rarely a problem.  Where capital is constrained, a loan to the right person like Ausicrey can produce value and assets, which both generates a good return on the lender’s investment and delivers massive benefits to the community. It seemed the best way to help people build their businesses and provide wealth for their community isn’t to issue high interest loans to micro-businesses which inevitably ends up in fierce competition amongst themselves (after all, a village only needs so many hairdressers!), but to back the entrepreneurs that create the most value through job creation, building assets, and driving local economic growth.

Flying out of Uganda I had time to reflect. From the plane window everywhere I looked I could see hundreds of villages with the same problem. Surely there had to be a way to solve this at scale and overcome the two principal roadblocks: a lack of capital and trusted intermediaries.

Roadblocks To Growth: Lack of Affordable Capital & Trusted Intermediaries

I saw from first-hand experience in Uganda that without access to initial capital, obvious and much-needed business ideas were stopped in their tracks. Sometimes the villagers couldn't even afford to take their produce on a truck to the regional market, where they could achieve prices that were two times higher.

However, equally significant was a lack of trust; our intermediary had been fraudulent, and we had no idea this was the case until we got on the ground ourselves to see how the projects were going. Unlike the availability of capital, trust is a harder problem to solve and it permeates all aspects of finance: international banking, regulations, payments, credit control, etc. As I turned the idea over in my head it almost felt that it was too hard to solve - there were just so many barriers to scaling.

Small Business Lending in the UK

And these problems are not unique to developing nations. I have also experienced this funding gap as the owner of an established UK SME. A previous business of mine sold a Software as a Service (SaaS) solution to small UK governmental organisations. With over 700 happy government customers, the business was growing quickly and so we decided to invest all the spare cash flow into sales and marketing. To further speed our growth I searched for debt finance from traditional lenders, shadow banks, and other sources, to enable us to hire and train another 10 employees. Yet the only funding we could secure was low-value and highly-predatory. Every organisation I approached  was quick to load figures from the business into a computer model and make a decision on what the number-crunching algorithm spat out, but none took the opportunity to meet with us or spared the time to really understand what we did and what potential the business had. Had we enjoyed an established relationship with an old-school bank manager I’m positive that we would have been awarded a loan, grown faster and hired another 10 employees.

The View From UK SME Leaders

I have had many conversations with business owners in the UK, and the trend is clear:

• The larger you are and the more money you want to borrow the easier it is to find credit.
• Loan terms are often far too arduous for SMEs; you have to bet the farm to take a small business development loan.
• Loans are easier to get for asset purchases, but harder for strategic investments in things like sales and marketing, or research and development.
• The other main funding option for small businesses is equity, but the option is not suitable for most SMEs as they don’t have an exit planned, and most profit they generate is reinvested in growth,  limiting dividend returns.

Large banking organisations simply avoid lending to SMEs. It is too hard; they are not close to them, they can’t get guaranteed collateral, and the large legal costs for structures like Special Purpose Vehicles (SPVs) limit the minimum amounts that can be raised.

Covid-19 & Lending Simulus

But then in 2019 the world changed. With Covid stifling economic growth, like many other countries, the UK government stepped in with ‘bounce-back’ loans to help SMEs survive. The pandemic had brought renewed attention to both the struggles and importance of SMEs, and intensified the demand for a sustainable solution. The immediate and significant results of this SME lending was clear for everyone to see through visible SME investments, particularly in the hospitality sector.

Community & Local Banks: The Lost Solution

So if Covid has shown that we need a sustainable way to close the SME financing gap, what’s the solution? Interestingly, we once had this solution, but have allowed it to slowly slip away. Years ago lending in the UK was accessed through your local regional bank. The bank manager knew about your business and they lent based on trust and relationships. Borrowers were incentivised to repay loans to protect their local reputation and prevent being cut-off from a readily accessible funding source.

However, over the last three decades the UK banking market, mirroring developments across the globe, has consolidated and become monopolised by its largest members. These big banks no longer have contact with their community and prefer to lend to the large institutions or against assets. They have forgotten what good lending is all about - community. We’ve lost the fact that lending happened within a community and that the community trusted it to be repaid. In return, the community got a profit on their investment to pay for retirement, value creation in the form of assets, and job and wealth creation for its members. It was a system that worked for the majority, not just the few.

Anecdotal Evidence vs. Research

My experiences and anecdotal evidence are all very well, but were not quite enough for me to commit the next few decades to solving this problem. I wanted to find out what the academic and banking experts such as the World Bank and International Finance Corporation (IFC) knew and thought about the problem. Spoiler alert - they think it’s a BIG problem !

SMEs represent over 90% of businesses worldwide and are estimated to be responsible for 50-70% of employment globally. According to the World Bank formal SMEs are estimated to contribute up to 40% of GDP in emerging economies and 7 out of 10 jobs in those economies are created by SMEs. The IFC estimates that 65 million firms, or 40%-50% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year.

The average US savings account APR is 0.07% whilst there is $5.4 trillion of unmet developing nation debt –– surely there must be a solution to bridge this gap to benefit everyone?

My research showed that the vast majority of international economic, governmental and trade organisations saw the problem and the opportunity. Small and medium-size enterprises are the world’s growth engine –– helping SMEs to grow means providing opportunity to a significant proportion of the world’s population.

The Reform Infrastructure Is Here: Ethereum

Ten years after my trip to Uganda I got involved in investing and learning about crypto, inspired by Satoshi’s genius and the clarion call from the Bitcoin community –– Don’t Trust, Verify.

A plausible foundation from which to solve the SME lending gap started to emerge. Smartphone global coverage is large and still growing, banking has gone digital and crypto is here with its open and frictionless financial system. In Africa, using a mobile phone to jump onto Binance to buy crypto currency from a Mpesa wallet is becoming incredibly easy, giving a simple on and off-ramp from fiat to crypto currencies.

Then the key breakthrough - I realised that in Ethereum lies the building blocks to construct an open, scalable lending platform, to connect funds to those that can use them most effectively, and to optimise financial returns and social impact for the borrowers.

So by the start of 2022, after a long journey of discovery, I knew I had everything I needed to found Sapling, modernising the traditional way of lending, based on relationships and community to build trust –– Trust, Once Verified Through Community.

We’re not naive. We realise that not everything can be encoded, we have to create ways to build trust with each other. However, we believe that by building Sapling we can create the solution that allows borrowers time to build a public track record which can be verified by anyone who wants to lend to them.

The unsecured lending that SMEs need is already working within the Ethereum ecosystem. Sapling will build on that success with new protocol mechanics to bring the lenders closer to borrowers on-chain and through our community.

Sapling Protocol is the open source community-owned permissionless lending platform.

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Coming up next: What is Sapling? Introducing the Protocol