By Nathan Were
In 2012, the Indian state of Andhra Pradesh saw multiple suicide cases arising from failure of Indian poor families to pay multiple micro-loans they had taken from microfinance institutions.
These events shook the world and raised many questions about microfinance – a sector that had been hailed for lifting millions out of poverty for years.
As the dust in India was settling, across the border in Kenya Safaricom, Kenya’s biggest Telecom Company was launching Mshwari – the world’s first mobile savings and credit product that uses data – spends on airtime, data; payments, deposits, frequency of mobile money use to determine a loan amount without any human interaction.
Today, Kenya has several mobile digital credit companies offering micro-loans from as low as $5.
The proliferation of unregulated digital credit initiatives is now exposing millions of poor Kenyans to greater risk.
In 2017 a study from MicroSave – a financial services consulting firm showed that 2.7 million people had already been blacklisted on the credit reference bureau in Kenya for failure to pay loans from as low as $5 – as digital credit continues to grow unchecked and remains easy to access.
This has already raised concerns about the current standards of regulation, customer protection and the design of these products.
In Uganda, similar digital credit initiatives are starting to emerge.
The challenge though is that while some are being deployed through formal financial institutions [Banks, MFIs] and therefore easy to track borrowers through the credit reference bureau [CRB], several companies lending digitally are non-bank financial institutions and thus not mandated to report borrower data to the CRB.
If these continue to grow unchecked – they’re going to drive over-indebtedness and with limited customer safeguards, many might end up in trouble as they take on multiple loans which they can’t pay.
The Consultative Group to Assist the Poor [CGAP] has conducted two separate studies in Kenya and Tanzania between 2016 and 2017; these studies have flagged some interesting findings.
In Tanzania, a quarter of the digital borrowers have reported that they were charged fees they didn’t expect, that they did not fully understand the costs associated with a loan or that a lender unexpectedly withdrew money from their account.
Poor transparency on product terms, conditions and pricing among the unregulated lenders remains a major threat to unsuspecting poor borrowers.
These findings should be an eye opener for our regulators.
In Kenya, a similar CGAP study shows that nearly 10% of digital borrowers report that they have reduced food purchases as they juggle balancing repaying multiple loans at the same time.
Digital loans are easy to obtain, short-term, carry a high interest rate and are available from numerous bank and nonbank institutions.
This easy accessibility is pushing many people to take-up loans than what their capacity can service.
The central bank needs to closely monitor the activities of these digital lenders especially those outside of its regulatory environment for their unsupervised practices will have far reaching effects on the financial system given the scale at which these schemes grow and the numbers of people they service.
Consumer safeguards are going to be important – safeguards that compel digital lenders to fully disclose their pricing, and exposure limits for each borrower to guard against people taking several loans they can’t service a situation that might drive us into the Indian microfinance bubble.
Digital credit holds a greater promise to driving financial inclusion because of scale, but without a proper regulator environment it is going to leave more people wounded.
It will shutter livelihoods and might have far reaching consequences on the living standards of poor families.
Mr. Were works to advance the financial inclusion agenda in Africa