Series: An Alternative Lending Revolution: What’s in It For Africa?

Financial Inclusion: Mobile Money in Africa

NB: This is the first of a three parts series titled, “An Alternative Lending Revolution: What’s in it for Africa?”

MPESA in in Kenya has changed the way businesses operate; Photo Courtesy: WeeTracker

Source: 2019 FinAccess Household Survey

According to the 2019 FinAccess Household Survey, formal financial inclusion increased between 2006 and 2019. This was attributed to the introduction of mobile financial services in 2007, followed by increased partnerships and innovations such as mobile banking, agency banking, digital finance and mobile apps. Yet, how do we put this into context?

Mobile money is a technology that enables the receipt, storage and spending of money via a mobile phone. Occasionally, it may be referred to as a ‘mobile wallet’, or frequently by the name of the specific service (e.g. M-Pesa). Across the globe, over 270 different mobile money services are in operation, although more popularly in Africa, Asia and Latin America. The biggest advantage of this technology is that anyone with a mobile phone can have a mobile money account, allowing them to experience the speed, convenience, affordability and multiple uses of the service. However, beyond the definition mobile money, there are some important facts about it that one needs to keep abreast of.

Mobile money has been implemented beyond the Kenyan boarders. Even though 93% of the country’s adult population is registered and 60% actively use the service (mostly Safaricom’s M-Pesa), developments in other markets such as Tanzania, Uganda and Zimbabwe have proven that mobile money can work, successfully, beyond the Kenyan borders. A significant portion of providers still battle with well-known operational issues namely agent liquidity challenges and high numbers of inactive customers.

Airtime purchases, person-to-person payments and bill payments continue to dominate, though the range is widening to mobile credit and freemium mobile microinsurance. The take-off in Ghana by Tigo to offer free life insurance cover tied to cell phone usage, has since been adopted in other markets. The product’s simplicity has had a positive impact in the broader understanding of insurance, where according to MicroEnsure ( a specialist insurance provider to the mass market in Africa), 94% of customers can explain the product.  Mobile money still remains largely cash-based, with customers cashing out at the receiving end of remittances (for services like M-Pesa, MTN Mobile Money, Tigo Cash and Airtel Money). The few who choose to hold their money in the e-wallets do so for emergencies or unplanned purchases, though they, too, end up transacting in cash anyway. After all, if not for the deadly pandemic (covid-19), the number of businesses that allow mobile payments on normal occasions (in Kenya, for instance) are countable. This is troubling for both the long-term viability of these services, and for financial inclusion. Even M-Pesa has not matched its full potential due to its high direct agent costs.

New products are emerging in the mobile money space that could revolutionize the future, which is basically how the digital credit subset has been birthed. Lenders are now using online activity to create consumer credit scores, thus providing convenience as no contact is required for a borrower to be verified. The Cambridge Dictionary defines a revolution (in Business English) as a big change or improvement in the way that something works or looks, or in the way that people do a particular activity. This probably explains why digital lending is said to be a revolution knocking on the African door. It is such a huge part of the technological advancements happening in Africa, particularly because it is a facet of mobile banking which has been phenomenal in transforming the handling of finances down to the very grassroots of the continent.

Lending through a digital platform, right from the receipt of a loan application to the disbursement of the loan, is referred to as digital lending (Ravikumar, 2019). The last decade has seen the emergence of Financial Technology (FinTech) as the game changer of the 21st century. Some Fintech firms focus on digital lending (also known as alternative lending), while others stick to payment services, remittances and insurance. Alternative lending refers to digital platforms that offer low-cost loans, which are simple to obtain for the large unaddressed market segment (Ravikumar, 2019). It is a growing industry aimed at different borrowing needs including consumer loans. Small and Medium Enterprises (SME) loans, working capital loans and payday loans, just to name a few. The industry typically consists of digital lending platforms and enablers to facilitate the platforms (e.g. alternate credit scorers). These platforms usually connect lenders, whilst seeking higher returns than banks currently offer, and with customers seeking fast, short-term loans.

N’Gunu Tiny, head of Dubai-based Emerald Group, alludes to the fact that technology allows for reduced cost of doing business which, subsequently, should be passed down to the consumer. One of the problems inherent in traditional banking is the route to the customer. Retail branches do not work. Even when a customer has been acquired, traditional forms of transacting also do not work. Additionally, the uncapped interest rates for commercial banks do put the common mwananchi in jeopardy as pertains to obtaining loans. This, aside from the fact that many small business owners (or budding entrepreneurs) have no significant assets, if any, to give as collateral. These, among other challenges with the traditional banking system are the drivers of growth in mobile money.

In the Part two of these series, Ida shall further explore the digital credit wave in East Africa.

Written By Ida Mwangi
@Noemie(Twitter) 
@Ida Mwangi (Linkedln)