PERC, a “think and do tank” advancing financial inclusion through information services, has been effective in addressing credit invisibility by advocating the use of alternative data in credit reporting, including in Australia, Brazil, China, Kenya, and the U.S. We invited Michael Turner, PERC’s CEO, to submit an opinion piece, and are publishing the results in a three-part series. The following is part one.

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Recently, a number of players have flaunted an impressive array of promising digital technologies to expand credit access, advertising nothing less than a full on revolution in financial inclusion. While the promise of many of these solutions is inarguable, in most cases they are limited to lower-value, higher-interest consumption loans at best, or, at worst, are at risk of being useless as they suffer from the classic error of putting the cart before the horse. The principle limitation on these solutions is a lack of access to sufficient quantities of regularly reported, high-quality, predictive data upon which to base credit decisions and develop credit products.

Consider the case of Safaricom, which revolutionized the payment systems market in Kenya with its M-Pesa offering. The rapid uptake of M-Pesa by lower-income Kenyans was proof positive of the value of digital financial services and spawned a wave of investment into hundreds of copycat service providers around the world.

As if this weren’t accomplishment enough, several years later Safaricom, with the Commercial Bank of Africa (CBA), again shocked the development world with the roll-out of M-Shwari. M-Shwari is a means for Safaricom subscribers who use the M-Pesa payment system to have paperless access to an interest-bearing savings account and low-interest credit. Once again, many prominent development experts touted this as a game-changer. “In line with the vision 2030 agenda on financial inclusion, CBA and Safaricom are launching a product that will revolutionize this agenda.”

It is not my objective to diminish the contribution of Safaricom and CBA, nor to quibble with the value of extending consumption loans to previously financially excluded populations. M-Shwari has been a game-changer. But let’s be clear about what’s really happened in Kenya now that the dust has settled and it’s been declared “Mission Accomplished.” Consider the following:

  • M-Shwari has 4.5 million active customers and over 10 million accounts;
  • Fewer than 4 in 10 users report obtaining a loan (aggregate value of all loans to date is $277 million, an average loan value of roughly $13);
  • The current loan range is roughly $1 to $1,000;
  • There is a 7.5 percent fee for a loan, which if the loan rolls over 12 months is an effective APR of 138 percent;
  • Commercial Bank of Africa (CBA)—Safaricom’s partner in M-Shwari—requires a deposit in a saving account equal to the amount of the loan, and freezes this amount if the loan goes into arrears; and,
  • About a year ago CBA blacklisted 140,000 borrowers for defaulting on loans.

Despite its potential, M-Shwari in its current iteration is a borderline high-cost lender and has not yet fully evolved into an instrument for financial inclusion. Consider the basic structure. You deposit with CBA an amount equal in value to the loan you wish to secure. You then pay CBA a fee of 7.5 percent of the loan value to borrow back your money for a month. If you’re late, they add another 7.5 percent fee, making your effective APR nearly 140 percent. If you default until day 120, you’re reported to credit bureaus and you forfeit your “deposit” in your CBA account. In short, M-Shwari borrowers risk ending up more financially excluded than ever.

I understand the business rationale for this model. Working in an environment with little to no data on past payment behavior (CBA uses a narrow data set and relies largely upon M-Pesa and Safaricom top-off data), a tiered approach to risk makes sense (require a business relationship, start with small value loans, and build up incrementally based upon repayment performance). And while the effective APR sounds high, it is better than terms offered by other creditors to whom the unbanked may have access.

My real concern here is with the nature of the loans, which are almost exclusively consumption loans. Without being overly dismissive—I do recognize there is some value in extending this type of credit—the type of financial inclusion likely to have the biggest impact on one’s life chances remains productive loans. The same holds for development impacts, which are far more likely to be positively affected through extending productive capital to high growth small businesses (think job creation) than by enabling the purchase of a television.

If the lower value short-term loans are a starting point, and if CBA extends greater amounts of credit on better terms to borrowers who demonstrate reliability over time, then M-Shwari offers potential as a tool to drive meaningful financial inclusion. In this respect, the jury is still out on M-Shwari, though Safaricom has been moving to collect data from agricultural supply chains and create a basis for agricultural loans. Meanwhile, it is highly profitable for CBA and Safaricom. This, in turn, begs the question about the ethics of earning high margins on the backs of hardworking, low-income, unbanked persons, but that is a topic for another discussion.

Ultimately, however, any lender seeking to extend productive credit to the large credit invisible populations in emerging markets must have access to proven predictive data. Traditional credit bureaus largely lack this data, as their focus is on the already-banked. Consequently, the revolution in digital financial services must be preceded by a focused and sustained effort to enable the unbanked to access their own payment and transaction data to share with lenders to qualify for affordable credit—both consumptive and productive. Empowered with such data, lenders can move beyond circle lending and extend credit directly to individuals, and can do so without a drawn out loan sequencing process, without requiring massive “deposits,” and without a steep risk premium. This would be a truly revolutionary outcome—but getting there requires financial inclusion stakeholder collaboration and a willingness to take risks and fail.

Have you read?

Reality Check: Three Ways We Hype Up Financial Inclusion Breakthroughs

Jipange KuSave, M-Shwari, and the Influence of Startups

Buena Paga, Mala Paga: An Incomplete and Personal History of Credit Reporting