The last two years have seen losses for Kuda MFB, a neobank with a Nigerian microfinance bank license.
According to the company’s financial report, reviewed by Business Verge, it lost $6,092,554,866 ($14,214,681) by the conclusion of the 2021 fiscal year, an increase of 602% over the $2,025,295 loss it suffered in 2020.
The company’s sales climbed by 4,315% from 72,649,000 in 2020 to 3,207,177,570 in 2021, according to the financial report. However, after deducting every cost, the business reported a net loss for the year, with significant credit loss/impairment charges and operating costs being the main causes.
The nonperforming loan (NPL) recorded by the firm is “too high for the comfort computed at 69%,” according to the report, and as expected, this resulted in a high impairment rate for the neobank, which was valued at 2,258,698,669. To put things in perspective, loans are deemed impaired when it is likely, in light of the information and circumstances at hand, that the creditor won’t be able to recoup all of the interest and principal payments due in accordance with the terms of the loan arrangement.
Particularly, the impairment is claimed to have reduced 96% of the interest income from the loan offer in the report’s analysis section. This basically means that Kuda’s overdraft product allowed it to extend a lot of poor credit, which ate away at its balance sheet.
Before announcing its $25 million Series A round in March 2021, Kuda began testing its overdraft solution with more than 2,500 consumers who “had been utilizing their Kuda accounts actively.” It stated that the product had 50,000 users each week by June. The business once declared in a statement that at the end of the second quarter of 2021, they had provided $20 million in credit with a 30-day repayment period to over 200,000 qualifying users.
In reality, the co-founder and CEO of the business, Babs Ogundeyi, once asserted that the neobank’s strategy has resulted in “little” default. We allocate the overdraft proportion depending on a customer’s activities, aiming towards it, using all the data we have available for that customer.
It’s important to note that lending accounts for a sizable portion of traditional banks’ revenue. In actuality, the average NPL ratio in the traditional banking sector decreased to 4.8% during the same time period, whereas Kuda’s NPL ratio concluded the year at 69%. While Kuda solely operates with user activity on its app, traditional banks often only give credit to a small number of low-risk enterprises with significant collateral that already mitigates defaults. Nevertheless, the disparity between the two ratios is alarming.
The firm’s risk appetite, criteria, and strategy linked to retail and business loans “demand for quick restructuring,” according to the financial report analysis that was referenced earlier.
Due to the company’s increased use of expensive senior management individuals, compensation reviews, and promotions of current employees, Kuda’s personnel costs also grew by about 500% from 215,437,000 in 2020 to 1,285,381,188. The corporation offered Ryan Laubscher, who had only been an advisor through 2020, a full-time position as its group COO, among other important additions. The company’s expansion effort is presently being led by Laubscher, who serves as chief expansion officer.
This increase in workforce caused the depreciation and amortization of its equipment, such as laptops and furniture, to significantly increase by 246%, from 18 590 000 to 64 326 473. Operating expenses (OPEX) for Kuda as a whole increased by 652% to $7,033,275,412 in 2021 from $935,560,000 in 2020.
Additionally, the bank poured a lot of cash into branding and marketing. The company has spent over $1 million on marketing by the first quarter of 2021. Without specifying the overall amount spent on marketing and branding for the entire financial year under review, the marketing spend was cited in the summary of the financial report as one of the main causes of its high OPEX.
In keeping with the bank’s slogan, “The Bank of the Free,” Kuda offered free bank transfers on its app when it first opened (the first 100 transactions or 25 free transfers per month). The free-transfers strategy was criticized by several industry analysts, despite the fact that this is helpful for customer acquisition. According to the report, the neobank’s value-added services, such as airtime purchases, produced more revenue than its basic banking services. Kuda claimed that it was merely adhering to a Central Bank mandate, but it has already begun charging fees for deposits and transfers.
Kuda raised $55 million in Series B funding in August 2021, and as of now, it is worth $500 million, surpassing several Nigerian banks in value. What can the bank do to break even if it is now clear that it isn’t producing money the way traditional banks do and that its valuation is predicated on predictions of what might happen in the future?
In its Series B release, Neobank stated that it now has 1.5 million users. However, given the nature of the financial sector, client lifetime value is frequently of greater importance. The long-term revenue gained from these clients is more valuable than the short-term costs or losses suffered, therefore Kuda and its investors are probably playing the long game when it comes to building their user base.
Prior to figuring out how to monetize or enhance its current offers, the company may not achieve break-even for a longer period of time than anticipated.
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