Why do you need an alternative?
- Current model is unable to serve a large base of potential consumers
- Existing model is costly and unaffordable
In case of lending (specifically small value lending) the manner in which it is done, has not seen change for a very long period of time possibly since inception. Till a few years back and in 99 % of current method of lending
- Requires lengthy documentation and objective (Type of House, Source of income, farm land etc.)/subjective (based on interaction with neighbours, village head men etc ) assessments
- Takes anywhere between 7-10 days to get loan sanctioned. (As most processing and approval systems are centralised)
- Depends on banking transaction history for loan eligibility.
- Collection and disbursement involve huge value of cash transaction. (Almost all MFI depend on huge on ground work force to collect or disburse loan )
- Involves lot of travel to the nearby banking touch point
- Last mile Reconciliation of Data involves lot of manual intervention
It has led to a situation wherein
- Various estimates have suggested more than 2 billion individuals are deprived of Micro-credit (The percentage changes from country to country like Netherlands has 100 % access to bank loans while in India more than 75 % have no access to
formal financial channel )
- as they are not considered credit worthy
- cost of serving them is way too high
- Regulatory non readiness has led to almost 0 innovation
However things are changing and In last 5-6 years like everything else lending is also undergoing changes driven by “Mobile in every household” and possibly in next 5 years with “Smart Phone and Data in every household”.
The current wave of changes in lending landscape is driven by
- Telco led Bulk Lending Model’s like M-Shwari
- P2P lending Marketplace like Prosper & Lending club.
- Rotating Savings and Credit Association (ROSCA) or Chit Fund market place
M-Shwari (Bulk Micro Lending): Offered in collaboration with Commercial Bank of Africa by Safaricom, it represents the next level of growth in mobile money space.
M-Shwari? Is a loan cum Savings product wherein Safaricom provides access to
- Know Your Customer (KYC) data
- customer M-PESA or Telco usage history
- M-Shwari menu as part of m-pesa SIM toolkit menu
- Wide distribution to access funds
This enables the bank to (All regulatory compliance and NPA/Risk are on bank book)
- open account (the process is seamless as KYC is already available with Safaricom)
- Perform credit scoring (This was first of its kind credit scoring mechanism based on usage of telecom product, the initial model was based on consumer usage behaviour on Safaricom’s Okoa Jahazi airtime credit product).
The credit-scoring algorithm incorporates
- Telco Variable airtime, airtime credit
- M-PESA usage pattern, savings behaviour on m-shwari.
- Timely payment of key utility bills
- Length of association
- Funds in M-Shwari account.
Not sure if it also incorporates (and has access to talent to decode rich insights from) regularity in
- Payment for grocery
- Access/Payment towards Insurance, pension or Investment products
- Payment towards mass transport
- Regular inwards from govt. subsidy/Welfare/corporate salary programs
Its few clicks away for consumer:
- Consumer activates m-shwari from m-pesa menu and accepts the loan terms and conditions online by entering the m-pin.
- Consumer can check eligibility on a regular basis from the m-shwari menu.
It’s almost “No Touch” and Low cost model that adds value and therefore accepted
- Allows the consumer to take care of any short term liquidity challenge that they may face and savings instrument gives ability to invest in long term future.
- Acts as an active credit line which they need to nurture and maintain relationship with. The constant need to see that the money they have earned and are saving in m-shwari account is “adding value” (improving credit worthiness in case of future needs)
leads to greater acceptance.
- Instant (6 seconds TAT) availability of loan (As low as $ 10) adds to the “money is adding value or my money is working for me” part. It is this instant availability which scores over 7.5 %/m fee for a loan, which if the loan rolls over 12 months is an
effective APR of 138 percent;
How easy or difficult it is to expand M-Shwari beyond Kenya?
Challenges In most other markets
- Telecom and Banking regulator don’t accept each other’s KYC.
- Banking regulator don’t allow the telecom/airtime usage pattern to be taken as proxy for credit worthiness assessment.
- One operator doesn’t control market share the way Safaricom does in Kenya (Resulting in rich data for credit scoring)
- Lack of Single National ID as a KYC
- The Banking regulator will be not so relaxed in allowing terms and conditions to be just okayed on a feature phone via pin (which in actual terms require consumer to be directed to web and read them).
- 5 % pm is a high fee environment and may not find acceptance in other markets
- Concerns with respect data privacy and safety blocking the lender’s access to the specific type of data required.
A few Statistics
- M-Shwari has 8 million active customers and over 11 million accounts;
- Ksh 5.8 Bn of savings and 2.1 Bn of loans extended.
- Non-Performing Loan @ 2%
- The current loan range is roughly $ 1- 1000;
Finally what M-Shwari brings
- Innovative Credit assessment mechanism
- Instant access to loans upon exhibiting behaviour in line with credit scoring algorithm
- Reduced dependence on social channels during the periods of urgent need.
- Greater privacy of the transaction
- Anytime, anywhere access to savings and loan.
- Credit history creation for those who had none
- New channel of lending to Banking
- New Revenue stream for Telecom companies
- Loan + Savings = Reduced Churn for Telco
A more robust system can be created that combines the insights from
Telecom usage + Mobile Money + Utility Payments + Retail Household Transactions + Mass Transport Usage
And off-course it has to be the one that keeps consumer data privacy paramount to everything else.