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Regulation should help digital lending to thrive

By Judith Papai | November 7th 2018

When the history of Kenya’s vibrant mobile money ecosystem is documented, digital lending will definitely clamour for equal attention given its role in expanding Kenya’s financial inclusion.

The revolution of what is today the cradle of mobile money dates back to 2012, with the launch of M-Shwari – which offers a savings account and access to digital credit. Six years later, the micro-lending space has expanded rapidly, attracting admiration and loath in almost equal measure.

Lately, the digital lending space has been accused of over lending and attracting proceeds of crime. This has heightened calls for regulation to shield borrowers from over-indebtness, terrorism financing or a credit bubble.

On the line are commercial banks, venture capitalists, fin-techs and non-banking institutions who have been innovating new products and revamping existing ones to cater to a market once shunned by many. Given, even formal financial institutions that had no interest in the ‘unbankable’ are now strengthening their bench strength to accommodate these customers into the formal banking system.

Indeed, to realise financial inclusion, it is crucial that the sub-sector is regulated and operates within a defined ecosystem. While this holds true, it is even more important that the said regulation does not destabilize what is the preparatory school for access to formal banking.

The birth of digital lenders is one that was quite circumstantial; fuelled by consumers that were considered too risky for formal banking. These were individuals, largely engaged in the informal sector or small enterprises, but pushed away to unstructured money lenders. Then we called them shylocks and they secured risk with an item of equal if not more value to the loan amount.

Access credit

Half a decade later, the needs have almost remained constant but the limits have doubled. You borrow to finance a business, pay school fees, bills and other household needs, but the need to seek a willing shylock, and the pain that comes with earning endorsement by a past borrower to attest to your moral standing, are no longer a pre-requisite to access credit. This is thanks to the mobile phone, whose rise, its pervasive nature and further, its complementary role phone in financial inclusion.When a borrower seeks credit for the first time, their credit risk is weighted against information in the public domain and cross-lender data from Credit Reference Bureaus. This, coupled with additional Know-Your-Customer practices by the lender, including algorithms help build a basic credit profile with a score, that helps with the consideration for credit.

The availability of this data not only provides a good base to build targeted financial products; based on consumer credit profiles, but should be the best bet yet for the formal banking system to target customers. Look at it this way, digital lenders with all the associated risks are not capable of providing credit beyond a certain limit and will more often than not be confined to short term micro-lending, a temporary fix to recurrent needs.

Potential customers

Formal banks on the other hand look at small credits as unprofitable and only consider it a courtesy to existing customers. Then, why not collaborate with digital lenders who bear the risk, to perfect the customer experience and groom potential customers to make them attractive for banks? This means that banks better focus on improving current processes, develop better products and deliver customer value once the customers are accepted into banking.

The place of the mobile phone is that it has given rise to products and solutions that fix every facet of life. In a phone survey report by The Consultative Group to Assist the Poor on Kenya’s digital revolution, 37 per cent of digital borrowers do so for business, another 35 per cent for household needs, 20 per cent seek financing for school fees and a paltry 3 per cent for betting needs.

Considering that 98 per cent of the businesses in our country are SMEs who in turn drive digital borrowing, it is time we appreciate the correlation between building healthy borrowing habits and growth. Indeed, digital lenders have a role in developing the basic financial etiquette that instill borrowing and repayment discipline, which would in turn benefit them beyond these mobile based micro-loans. The ultimate goal should be that of rewarding businesses and individuals alike with more credit at better terms, sustainably.

The future of digital lending is endless and looking at it as easy credit is unfair and one-sided. The truth of the matter is that digital lending is no longer just targeted at the poor but is complementary to formal banking, a key component in the development of a progressive and inclusive financial ecosystem.Even with regulation, let us therefore not undermine the gains made but strengthen the opportunities for collaboration. Any new policies should be aimed at supporting further growth if not increasing access to financial products for all Kenyans.

Ms Papai is the Operations Manager, Stawika

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