Combining inclusion and protection?

… so this is a guest post by guest blogger Claudia Huber:

MshwariI remember Compartamos’ initial public offering (IPO) in early 2007. Microfinance still being considered the panacea to all development problems, Compartamos shares were 13 times oversubscribed and sold at 12 times the book value producing proceeds of 450 million USD. Did the initial owners become rich on poor people’s backs? Many papers analysed this question and an outcry went around the (microfinance) world when it became publicly known that Compartamos charged their borrowers an effective interest rate of around 100% p.a.

With the excitement around “traditional” microfinance having slowed down, digital financial services are picking up as the new silver bullet to increase access to financial services for the poor. According to the GSMA, mobile money services are now available in 89 out of 145 developing countries and in 16 countries more mobile money accounts are registered than bank accounts. One of the most cheered additions to mobile financial services is MShwari, a credit-extension of the well-known MPesa payment service offered by Safaricom and Commercial Bank of Africa (CBA) in Kenya.

MShwari offers small loans ranging from 100 to 20,000 KSh (approx. 1 to 200 USD) for a duration of 30 days. The loan is accessed by sms and disbursed directly into the client’s mobile wallet. According to recent CGAP research, 2.8 million unique borrowers have accessed MShwari loans since its launch in late 2012 borrowing a total of 277 million USD. This is an unprecedented success in terms of outreach when compared to about one million people having a regular bank or MFI account in Kenya (see FinAccess 2013). MShwari opens opportunities to millions of people who did not have access to financial services before!

However, it is surprising that discussions have been rather unanimously focusing on the advantages of increased access to financial services for the unbanked. I have noted very few discussions on consumer protection issues related to the new product. What about hard-to-understand, legal language and small-print terms and conditions and high fees?

MShwari charges a flat fee of 7.5% on the loan amount–emphasis is put on the word “fee” as opposed to interest rate, a claim strongly made in the FAQ section on Safaricom’s webpage. Converting this fee into an internationally accepted measure for comparing loan prices, the effective annual percentage rate (APR), results in a price tag for the loan of around 138% p.a., exceeding Compartamos’ much criticized 100%. Furthermore, it is unclear whether at all and if so, how much savings are blocked on a borrower’s mobile account to collateralize the loan? Whereas according to MShwari’s Terms and Conditions, CBA reserves the right to block any amount of cash on the borrower’s MShwari deposit account “as collateral and security for any amounts outstanding and due”, CGAP’s summary does not confirm this.

When discussing high interests, microfinance institutions generally argue that the high operational costs of appraisal-based loans drive costs up, especially visiting clients at their business and home to establish their repayment capacity (research accounts for an operational expense to average loan portfolio ratio of 82% after 24 months of operations in Sub-Saharan African greenfield MFIs).

How is clients’ repayment capacity assessed by MShwari? MShwari uses data generated by clients mobile phone’s voice and data services usage and by transacting on their MPesa account during a six-months waiting period (before being able to sign up for MShwari) to predict clients’ repayment capacity and determine their credit limit. Once they have qualified for one loan, their repayment behaviour is added to the equation. Clearly, developing a functioning algorithm to determine (or score) people’s credit worthiness involves substantial development costs. However, once developed operational expenses to implement and scale the product are negligible. Therefore, justifying high effective interest rates with high operational costs and the need for financial sustainability is not appropriate in this case. The beauty of new technology and mobile-based services is – amongst others – that operational costs can be cut to a fraction of those of traditional microfinance businesses.

MShwari is an expensive product! And still, 50,000 Kenyans use it every day, taking into account only those that get loans approved—many more might apply for one. Portfolio at risk for MShwari seems to be at an acceptable 2.0% (and how is this Portfolio at risk figure actually calculated??). However, are these numbers good enough to determine if a product is useful for clients and impacts their lives positively? Is it enough to think that if there is demand for a product, it is useful to people (we would never conclude this for some consumer products… think about cigarettes or alcohol!) and if it wasn’t, they would not buy it? How can we assure that people do not use other (informal?) sources of credit to pay off an MShwari loan? How can we make sure that outreach and increased inclusion do not happen at the detriment of clients’ welfare?

The latest addition to the 37 live mobile credit services worldwide is a loan product offered by Safaricom in partnership with KCB (another bank). Fees have come down substantially to an APR of less than half of MShwari’s and the product offers different savings and borrowing options. The maximum loan amount is with 1 million KSh fifty times higher than MShwari’s. Even if the average amount disbursed might be much lower in the end (as is MShwari’s), approving a 10,000 USD loan based on mobile phone transactions raises certain questions.

Experience will show how the product is taken up and how it performs. Hopefully, we will have access to insights and analysis. Lower prices are certainly a step into the right direction. However, I hope that the proliferation of new services and products will also spur critical and constructive discussions about the balance to strike between inclusion and protection.


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