The Consultative Group to Assist the Poor (CGAP) defines digital credit as loans that are delivered and repaid digitally – over the phone. Being instant, remote and automated are the three characteristics that differentiate digital credit from conventional loans.
Instant: Digital credit uses a customer’s digital data history in airtime top-ups, the number of calls made, and data used on smartphones to make lending decisions. Since the loans are delivered via phone, disbursement is instant.
Automated: Registration for digital credit mostly referred to as e-credit, application, disbursement, and repayment are automated. The lender designs a program with preset parameters that act as the guide to anyone requesting digital credit.
Remote -The process does not involve any human interaction and can be done from anywhere. This eliminates the need to visit the nearest bank branch to get your loan/credit approved. It also eliminates a lot of paperwork present in the brick and motor issue of credit.
Digital lenders in Kenya have risen sharply in the country, having the advantage of consumers embracing M-Pesa, therefore, making it easier for the uptake of other forms of Fintech innovations.
Banks have also joined Fintech in digital credit, Equity has its own platform via Equitel, KCB has partnered with Safaricom for KCB-M-Pesa and Co-operative Bank has Mco-op Cash digital loan.
Some examples of rapidly growing digital credit platforms in the country driven by Fintech include:
- KCB Mpesa
- Mco-op Cash Loans
- Saidia Loans
- Zawadi Loans
- Shika Loan
- Zidisha Loans
- Haraka Loans
- PesaZone Loans
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Currently, Fintech takes the bigger percentage of digital credit, seeing that the Fintech space is yet to have strict regulation. Banks, however, have to follow the CBK rules on prudential lending and have therefore set stricter qualification parameters.
For digital credit, loan eligibility is ultimately enabled by existing digital access. Customers have to access to a mobile phone and mobile money services. Digital credit has provided an avenue for quick access to credit for small households which otherwise would not have had any access to credit.
However, such available and instant credit begs the question of regulation and of lenders giving quality loans. Judging the repayment capability of customers based on social media metrics and other digital patterns as opposed to stable incomes is bound to run into problems in the future.
Lenders are often not concerned with the application of funds, which would mean that credit given may be going to consumer uses and very little to capital investments. When consumers are using such loans to fund their daily expenses without generating more income, repayment then becomes a struggle and levels of default rises. The lenders do not have any collateral to fall back on in case of defaults.
To cater to the level of defaults, digital credit is more expensive than traditional loans. Consumers rarely read the terms and conditions, they just want the money, – ‘no one refuses money’.
Digital credit benefits both borrowers and providers in many ways, it is an alternative to informal lending sources and helps meet emergency liquidity needs for low-income households and can pave the way to formal financial services.
Some lessons that can be learned from the digital credit platforms include:
- Creating a strong remote identification system- ways to verify customer identity especially at a large scale. Digital credit lenders need to have systems that clearly identify customers, and accurate.
- Targeting high-risk customers- with no way to determine their livelihoods some can use the loans to gamble or other ‘illegal’ activities. There is a need to establish the enterprises/jobs that borrowers hold
- Poor products – e.g. having a transfer fee for moving money to/from a mobile money account, making the product unviable and too costly for small households
- An absence of a sound collections strategy – this should be strengthened with clear strategies in place
As the rise of digital credit increases, it will be interesting to watch the regulatory side of it, with Central Bank of Kenya (CBK) and Capital Markets Authority (CMA) coming into the space to provide guidance.
Smart Campaign 7 Client protection Principles aimed at providers that could give direction include:
- Appropriate product design and delivery
- Prevention of over-indebtedness
- Responsible pricing
- Fair and respectful treatment of clients
- Privacy of client data
- Mechanisms for complaint resolution
- Security and fraud prevention