Africa: The rise of financial loans via mobile phone

The mobile phone is widely used to give Kenyans loans. What is the underlying tech?

A new phenomenon is sweeping across Kenya. Accessing loans through mobile phone is now spreading like wildfire.

Many banks have adopted this approach including Kenya Commercial Bank (KCB) in conjunction with M-Pesa. This follows in the footsteps of trailblazers, Commercial Bank of Africa (CBA), also in partnership with M-Pesa, to launch MShwari.

The concept is easy. You save money with one bank through mobile money and the more you save, the better chances you have in accessing higher loan facilities, delivered direct into your mobile wallet.

The success is there to be seen. MShwari currently has US$300 million worth of loans and is processing 50,000 loans every single day for its 10 million subscribers. The KCB M-Pesa product also has two million subscribers with over US$10 million in loans.

The loans for such services vary from Kshs50 (US$0.5) to Kshs one million (US$10,000) – the majority of which are small loans. Interest rates also are friendly from two percent.

This success has also attracted individual players in the market, aiming to work in spaces normally only reserved for banks. Companies like Branch and Mkopo Rahisi owned by Inventure have captured the market with their small loan programme which has thousands of users.

With these small players, you don’t have to save money with them as they are not banks, but using special algorithms, they can determine who to lend to.

Their applications that are live on various app stores have thousands of downloads and high engagement as more people leverage on these services for their personal or business lives.

But what impact do FinTech innovations have on the finance landscape in Kenya?

“FinTech is changing an important sector which has been stagnant in some respects for many years,” Dr. Abdigani Diriye founder of data analytic company, SuperFluid Labs tells IDG Connect.

“Couple this with evolving consumer behaviour, adoption of technology such as smartphones and tablets, eroding consumer trust in financial institutions, and substantial resources and funding from VCs has made innovations by alternative financial services provides like peer-to-peer lending, payments, remittance, and credit possible,” Diriye says.

SuperFluid Labs is currently supporting financial institutions with data algorithms to help analyse their customers. The company has hired mathematicians and researchers to provide relevant data to their clients.

Diriye believes that FinTech is an attractive space because of its potential to impact and improve people’s lives, and the right market conditions currently exist.

“In the competitive landscape, you have traditional technology allies on one hand and modern FinTech threats on another. What formal institutions need is a modern technology ally to stay ahead,” Diriye explains.


Making sense of banking data

New FinTech companies are trying to see who is credit-worthy and who is not. And different organisations approach this differently.

FinTech company Branch, which gives loans to people in Kenya through their mobile phones, incorporates social media into its algorithm. Last year while launching in Kenya, Andrew Huelsenbeck, Kenya Country Lead, explained how its uses this data:

“Branch is using Facebook as a kind of digital fingerprint for our customers. We use it as a fast and easy way to confirm identity, and use other information available from Facebook for credit scoring,” reported online tech site ITWeb Africa.

Huelsenbeck added that many Kenyans have Facebook accounts and many of them do not have other forms of identification, to enable them to access loans.

SuperFluid Labs also treats data with utter respect. “Data is at the heart of all financial decisions whether it’s to open account because there is a sufficient amount of data to do an adequate ‘know your customer’ to financial data giving an indicator to an individual’s credit worthiness, or spending behaviour to identify the right products to recommend,” Diriye says.

He adds that in many countries there are no real credit bureaus and those which do, have not provided accurate credit reporting. This gives financial institutions a tough job digging through piles of documents.

Real-time and usable data can really help banks and institutions screen applicants credit worthiness.

“We are seeing some interesting innovation in this space where mobile money wallets, telephony behaviour, and someone’s online digital footprint is being used as proxies for this,” Diriye says.

“In the Kenyan market we are seeing several new players offering digital banking services. The dangers tend to revolve around lack of regulation, recourse, and security. For as much criticism as banks get, they have the operational, infrastructural and regulatory compliance to deliver financial services to the masses,” he adds.

Banks also need to recognise the changing shift in digital banking products and evolve with them. Many banks currently allow their customers to deposit and withdraw funds using various mobile money products. When customers do this, they are charged a fee that makes Telcos and financial institutions profitable.

“But as it stands only a subset of most banks’ processes are digitised. We are seeing several banks making steps forward, but the pace of innovation and change is still very slow.” Diriye concludes.

“Banks need to start to act more like a start-up to embrace new technologies and modes of service delivery. This means changing aspects of how they operate to ensure they are able to move faster, innovate and experiment.”