BRIEF The Proliferation of Digital Credit Deployments Digital credit—offering quick small loans remotely over digital channels—is a rising trend in low-income countries, especially in sub-Saharan Africa. The most visible example is the rapid success of the small value credit and savings service M-Shwari in Kenya launched in late 2012 (Cook and McKay 2015), but an increasing number of new deployments is going to market each year. This Brief provides an introduction to the fast-evolving leverage existing digital infrastructure to gain or retain landscape of digital credit and illustrates common market share. In fact, in many countries, digital credit features of this new digital finance offering. The focus is offered alongside a fast-growing and robust digital is on digital credit services that leverage customers’ payments industry. existing access to a mobile phone, though there are also digital credit models building on a person’s connection Most of the early digital credit offerings this Brief to the internet. This Brief uses 10 case examples to evaluates involve partnerships between mobile describe the digital credit trend, recognizing that network operators (MNOs) and banks or other financial there are many more pilots and products under design institutions, but partnership models involving third-party than are covered. Many of the case examples are new FinTech companies are also arising. Leveraging each and have not reached scale yet, while a few already partner’s unique positioning, providers see digital credit have portfolios reaching 800,000 to 1.8 million active as an opportunity to create new revenue streams and borrowers. increase customer retention rates by building on a fast- growing digital finance ecosystem and offering a new CGAP has sought to differentiate digital credit from product category to customers. conventional loans by noting that digital credit is instant, automated, and remote (Chen and Mazer 2016). Accordingly, most of the deployments featured in this What Are Common Features Brief are tailored to meet short-term liquidity needs of of Digital Credit? individual borrowers and can be accessed very quickly: Upon application, a credit decision may be made The 10 case examples noted in Table 1 share four within seconds or at most within 24 hours. The lending distinct features that exhibit how digital credit offerings decision-making process is mostly automated, running function.1 through a series of computerized decision trees and 1. Loan eligibility is enabled by existing digital algorithms. Credit decisions for each loan rely less on access. The digital credit products analyzed in human judgment and manual processes than on the this Brief target existing customers of MNOs. As availability of key digital data, such as mobile phone such, borrower eligibility is tied to the preceding records. In addition, in-person interactions are limited, subscription to and use of voice and SMS services, as transactions such as loan applications, disbursements, digital payments, and—if applicable—bank history. and repayments are carried out remotely, mostly via Digital credit providers target these market the mobile channel. This can have significant financial segments to leverage their digital data records to inclusion implications as many digital credit models do evaluate a potential borrower’s initial loan eligibility. not require customers to have prior financial account For example, M-Shwari and KCB M-Pesa—offered ownership or a credit history. by Safaricom in partnership with Commercial Bank of Africa (CBA) and Kenya Commercial Bank Five out of 10 deployments featured in this Brief are in (KCB), respectively—are two distinct banking Kenya; nine are in sub-Saharan Africa. Though digital products offering digital loans. A prerequisite for credit is offered in many markets, the use in this region applying for either loan product is that borrowers is particularly abundant. One reason is the region’s high are registered Safaricom M-Pesa customers and mobile money penetration, which presents a critical have used M-Pesa for at least six months. Similarly, enabler for large-scale digital credit delivery. As seen Timiza, a digital credit product offered by Airtel and with other products, such as mobile microinsurance Jumo in Tanzania, is available only to existing Airtel (Tellez and Zetterli 2014), new product offerings customers who hold an active Airtel Money account. 1 The deployments analyzed in this Brief are mostly linked to customers’ existing mobile phone and mobile money subscription, though other digital March 2016 credit deployments build on a person’s connection to the internet. 2 Table 1. Sample of Digital Credit Deploymentsa Partner Providers Nonbank Typical Year of Deployment financial 3rd Party Typical Loan Size Launch Nameb Country MNO Bank institution FinTech Loan Term (US$)c 2012 M-Shwari Kenya Safaricom Commercial 4 weeks 30 Bank of Africa (CBA) EcoCashLoan Zimbabwe Econet Steward 4 weeks 125 Bank 2014 Mkopo Rahisi Kenya InVenture 3 weeks 20 M-Pawa Tanzania Vodacom Commercial 4 weeks 7 Bank of Africa (CBA) Timiza Tanzania Airtel Jumo 1, 2, 3, or 10 4 weeks Mjara Ghana MTN Adehyeman Mobile 2 or 4 26 Savings and Financial weeks Loans Services (MFS) Africa 2015 Eazzy Loan Kenya Airtel Equity Bank 4 weeks 50 KCB M-Pesa Kenya Safaricom Kenya 4, 12, or 30 Commercial 24 weeks Bank (KCB) Branch Kenya Branch 3 weeks 10 2016 Instaloan Philippines Globe Fuse Lenddo 16 weeks 50 Dataspark a. The list is not exhaustive in capturing all existing digital credit deployments. For the purpose of this Brief, we deliberately focus on deployments that strictly meet our definition of digital credit, and that have emerged in low-income and lower-middle-income economies. In addition, the focus is on individual loans, and does not include merchant cash advances, MSME and e-commerce loans, or person-to-person lending platforms. b. Some deployments—i.e., M-Shwari, EcoCash, M-Pawa, and KCB M-Pesa—offer both credit and savings products. The table only depicts the specifics of the credit component of the account. c. Numbers are based on foreign exchange rates to U.S. dollar as of December 2015. EcoCashLoan is a short-term microloan offered by likelihood of default, how to manage their customer Econet and Steward Bank in Zimbabwe and is journey, and how to follow up for loan collections. To likewise targeting existing customers of the MNO.2 apply for an EcoCashLoan, for instance, an eligible In addition to requiring prior use of Econet’s airtime borrower requests a loan by entering a USSD code and mobile money service, EcoCash, loan applicants on his or her mobile phone. The request then triggers must sign up for an EcoCashSave savings account a set of automated decision trees that estimate the offered by Steward Bank and maintain a minimum applicant’s credit risk. Variables taken into account savings balance of US$5 over a period of at least may include use of mobile airtime, data top-ups, three months. mobile money transactions, mobile wallet balance, age of the applicant, and previous loan status. The 2. Loan decisions are automated and leverage use of alternative digital data is particularly important nontraditional digital data. The digital credit in evaluating first-time borrowers, while repayment- application process happens over a mobile device and based credit history becomes more important for with limited in-person interactions. This is especially subsequent loan applications. true in Africa, where mobile phones are the main links to digital communications (whereas, in other markets, Some credit scoring models may also include social online banking over a personal computer may be media and utility payment histories, among other more widespread). Existing digital data are leveraged data, to inform credit decisions. First Access and to gain predictive insights into a potential borrower’s Lenddo are two of the various emerging third-party 2 This Brief does not include an analysis of the different marketing strategies used to reach the respective target customers. 3 companies providing customer credit scoring services bureau, and the negative information remains on by using such nonconventional data points. Branch record for five years. To qualify for subsequent credit is an example of a nonbank financial institution that through Instaloan, a customer must close out his or uses data stored on the applicant’s smartphone, her first loan and not exceed a certain number of including SMS, call logs, and contact lists to assess a late payments. Timiza rewards “good” borrowers by borrower’s credit risk. extending subsequent loan terms and offering higher loan amounts. 3. Loans are smaller, shorter-term, and often costlier than traditional consumer loan products. Though The remote nature of credit management greatly products are still new and will evolve over time, the reduces the need for in-person interactions and initial loan size is typically small, and loan terms are physical visits of borrowers to brick-and-mortar bank generally short. The typical loan size of a Branch branches to pay back their obligations. Digital credit loan is US$10, US$30 with M-Shwari and KCB hence closes geographical distances that formerly M-Pesa, and US$50 with Instaloan and Eazzy Loan. acted as a barrier to providing credit. However, Eazzy Loan, EcoCashLoan, M-Pawa, and M-Shwari the effectiveness of remote credit management each have a loan term of four weeks. Annualized to encourage timely loan repayment varies across interest rates are very high compared to interest deployments. Some have suffered from high default rates charged on most conventional consumer or rates that forced providers to adjust their credit microfinance credit products in these markets, management process, while others have maintained with most deployments featured charging monthly nonperforming loan ratios at around 2 percent even interest rates between 2 percent and 10 percent. as they reached scale. There are several factors contributing to higher interest rates, but a big driver is that the ratio of costs to each loan may be higher for smaller loan Conclusion sizes. As such, the financial dynamics of digital credit driven by short terms and small loan sizes are very The proliferation of digital credit marks an important different than those in conventional consumer and development in financial inclusion, building on and most microfinance credits. extending financial services beyond digital payments, and promising to reach the poor at large scale. Yet 4. Customer relations, repayments, and collections digital credit is a new and emerging product, and many are managed remotely. Loans are repaid via digital questions remain to be addressed over time, including payment channels either in installments or at the the following: end of the loan term. SMS and phone call reminders prompt borrowers to repay their loan, while call • What are preconditions for digital credit delivery? center staff engage in scripted interactions with What are core elements of an enabling digital credit delinquent borrowers. Most providers impose a infrastructure? penalty fee in case of delinquency. • What are different partnership and service design models, and what is their potential to reach unserved Some countries in our analysis negatively report and underserved customers? delinquent borrowers to credit bureaus.3 Reporting • What are the risks of this new digital finance offering, conditions, i.e., number of delinquent days and what are the emerging consumer protection triggering negative reporting and time remaining implications? on credit bureau files, vary. As with traditional loan products, customers’ repayment behavior informs Several early deployments have gone to market and the eligibility for subsequent loans and their terms. struggled to take off, while others have scaled quickly. In the case of M-Shwari, for example, overdue loans New sets of deployments are already waiting in the are automatically extended for another 30-day cycle pipelines, each one experimenting with new features under the same terms, and borrowers are alerted to drive uptake and use. Some may succeed; others with text messages and calls from a customer center. may fail. In this fast-evolving environment, a better Borrowers are also notified about the possibility of understanding of digital credit and how individual being negatively reported to a credit bureau in case customers and eventually micro and small businesses of further delinquency. At the 120-day overdue mark, interact with this product will be critical. With many the individual is negatively reported to the credit questions and few answers, we still have a lot to learn. 3 Credit bureau reporting requirements vary across countries of analysis: Some bureaus capture both positive and negative customer credit data, while others include negative information only. In some countries, no credit bureau reporting occurs at all. March 2016 All CGAP publications are available on the References CGAP Web site at www.cgap.org. Chen, Greg, and Rafe Mazer. 2016. “Instant, Automated, Remote: The Key Attributes of Digital Credit.” CGAP CGAP Blog. Washington, D.C.: CGAP, 8 February. http:// 1818 H Street, NW www.cgap.org/blog/instant-automated-remote-key- MSN IS7-700 attributes-digital-credit Washington, DC 20433 USA Cook, Tamara, and Claudia McKay. 2015. “How M-Shwari Works: The Story So Far.” Forum 10. Washington, D.C.: Tel: 202-473-9594 CGAP and FSD Kenya, April. http://www.cgap.org/sites/ Fax: 202-522-3744 default/files/Forum-How-M-Shwari-Works-Apr-2015.pdf Email: Tellez, Camilo, and Peter Zetterli. 2014. “The Emerging cgap@worldbank.org Global Landscape of Mobile Microinsurance.” Brief. Washington, D.C.: CGAP, January. http://www.cgap. © CGAP, 2016 org/sites/default/files/Brief-The-Emerging-Global- Landscape-of-Mobile-Microinsurance-Jan-2014.pdf AUTHORS: Byoung-Hwa Hwang and Camilo Tellez