Digital Credit is not always good for financial inclusion

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Digital Credit is not always good for financial inclusion

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The latest product from a combination of a bank and a mobile network operator (MNO) is MoKash.  It could be “the next big thing”.  But before anyone gets too excited about the benefits, we should take a hard look at lessons from Kenya.  Kenya is where M-Shwari (a predecessor to MoKash) started and has really taken off.

Just like M-Shwari (from Safaricom), MoKash (a collaboration between Commercial Bank of Africa and MTN Uganda), allows people to save and to borrow via their mobile phones. For most potential consumers this has a major benefit in that they do not have to go to a bank and open an account.  The processes are a lot easier and essentially work for people who have a mobile phone, use mobile money, but do not yet have a bank account (or those who do but want easier transactions).  So the potential for these products to reach many more people, especially in rural areas – where the nearest bank branch may be many kilometres and several hours’ travel time away – is considerable.

But are these products going to make major contributions to increasing financial inclusion?  Financial inclusion is not only about access to formal (e.g. bank) financial services. While there is no universal common definition of “financial inclusion”, there is wide agreement that the term should capture three key components: access, usage and quality: i.e. how people and businesses use financial services to add value to their lives and enterprises.

So how do these new digital financial service products stack up against these three components of financial inclusion? Yes, they provide access to savings and credit for a lot more people. Yes, in Kenya and Tanzania M-Shwari is widely used by increasing numbers of people; but it is too early to tell how wide spread the use of MoKash will become in Uganda.

Table1 suggests that MoKash is indeed already very popular. What is most unclear is how these products add value to people’s lives.

Provider Number of sign ups Number of loans issued Value of loans made (USD) Gross value of savings deposited (USD) Sources
M-Shwari (Kenya) 16 million 60 million 1.2 billion 4-5 billion MicroSave estimates
M-Pawa (Tanzania) 4.8 million 3.5 million 11 million 5-6 million MicroSave estimates and
Equitel Eazzy Loan


2.2 million 3.5 million 0.2 billion 6-8 million and


KCB M-Pesa (Kenya) 10 million 4 million 170 million 9-12 million MicroSave estimates
MoKash (Uganda) 1 million 0.25 million 1 million ~2 million

Conversion rates used:
Kenya 1USD=100 Ksh
Tanzania 1USD= Tsh 2140
Uganda 1USD=Ush 3340
Disclaimer: Some of the figures are from a press releases making the authencity questionable

Uncertainty about the quality of use test comes from the evidence coming out of Kenya.  It should give us pause for thought.

In Kenya there are now more than 20 providers of digital credit.  Sounds good “But interest rates for these providers range from the annual equivalents of 49% to 620%.”The bottom end sounds very reasonable. The top end sounds like usury.

However, in Kenya, there are around 400,000 people who have already defaulted on digital loans of amounts less than KSh 200, the equivalent of $2 (see link below to Business Daily Africa story).  Banks and mobile network operators are obliged by law to report such defaults to the credit reference bureau. This means that now those 400,000 people are probably excluded from any type of formal credit, the opposite of the intended outcome.

If people default on loans, should they not suffer the consequences? Generally, yes.  But the answer also depends on whether they understood these consequences at the outset, and whether lenders understood what the consumers were going to use the credit for.  In short, did they focus on consumer protection?

Right now, probably not enough.  People almost always want credit and want it quickly – but whether they should get it depends on how they intend to use it and how they expect to pay it back. This needs in-depth qualitative research into the motives and behaviours of consumers.  In Uganda, we know far too little about this.  So before we embrace digital credit as a universal good, let us do some more homework so that we understand consumers a lot better.

Finally, a further couple of suggestions:

  1. Financial service providers should be required to report both on positive (those who had repaid on time) and negative (those who were delinquent) borrowers. This would encourage and enhance competition and thus possibly create downward pressure on pricing.
  2. Credit reference bureaus should be required by regulation, for negative listings, to tell inquirers both the amount of the loan that was in default and whether it had been paid off by the time the inquiry was made. This would help minimise the risk of financial exclusion

By Ian Robinson (FSD Uganda) & Graham Wright (Microsave)

Here are links to some relevant articles and reports:

Pain of Kenyans blacklisted for amounts as small as Sh100

Top 10 things to know about m-shwari

M-Shwari Briefing final digital

M-shwari vs KCB M-pesa convergence or divergence

Digital credit Kenya time celebration or concern