Can mobile loans help break the cycle of poverty in east Africa?

Owning a smartphone has changed Phylista Wambua’s life. The 50-year-old mother-of-two sells fresh fruits and vegetables in downtown Nairobi. With her phone she can access mobile loans via smartphone apps, which have significantly increased her income.

“In January last year, I used to make just 800 [Kenyan] shillings a day (US$8),” Phylista tells Equal Times. “It was hardly enough to buy additional stock, never mind feed and educate my two children.”

Phylista doesn’t have a stable income so she couldn’t apply for a traditional loan from a bank, and she didn’t want to be trapped paying the extortionate interest rates charged by neighbourhood loan sharks. So when a friend told her about the micro credit offered by mobile banking apps, she knew she had nothing to lose.

“The first time I did it I took out a loan of 1,000 shillings (US$10),” she says. These days, she uses several loan apps, which charge an average interest rate of 15 per cent.

“This year alone, I have received about 50,000 shillings (US$500) from mobile loan providers,” she says, which has enabled her to buy more stock and a greater variety of produce. “I make good money, especially on kale. On a good day I now make about 4,000 shillings (US$40) if I can sell all my stock."

Creating over a million new jobs

Unsecured mobile loans are helping to boost millions of micro, small and medium enterprises (MSMEs) across east Africa. Until recently, almost 80 per cent of people in sub-Saharan Africa were excluded from formal finance, with the African Development Bank estimating a credit gap of between US$70 and US$90 billion for the continent’s MSMEs. As a result, the potential for the digital loan market is huge.

The renowned Kenyan economist Dr Harris Mutio Mule, who will soon be presenting a paper on mobile finance to the African Development Bank, tells Equal Times that mobile loans have had a transformative effect on the East African Community (EAC) region, creating over a million new jobs.

“Digital mobile technologies help in creating employment. Some 700,000 people in the region have moved away from the poverty trap. They are now middle class citizens. An additional 800,000 indirect jobs have also been created.”

Amongst the major players in this corner of the east African fintech market is Tala, a subsidiary of the California-based Inventure Corporation, which has offices in Kenya, Tanzania and the Philippines.

“We can approve loans within just 60 seconds after someone submits an application,” says Mary Kioni, the chief loan officer at Tala. “The money is sent straight to their mobile cash account.”

As most microfinance lendees are low-income earners in the informal economy, and are unable to access credit through more traditional means, mobile loan companies such as Tala assess their users’ mobile data to compile a credit score.

“We go through your SMS records. Your email and social media usage records [Facebook, LinkedIn, Twitter, for example] are also vital. This way, we determine your loan limit. We begin with US$10 and your loan limit increases as you continue to borrow and repay on time with us," she explains.

A “healthy” market but more regulation needed

In 2011, Kenya became one of the first countries in Africa to introduce mobile loans. M-Shwari – a subsidiary of the market-leading Kenyan telecoms company Safaricom in partnership with the Commercial Bank of Africa (CBA) – dominates the market with one in five Kenyan adults holding an account, according to the financial inclusion global partnership CGAP. But there are more than 100 mobile-based lenders currently operating in east Africa.

The governor of Kenya’s Central Bank, Dr. Patrick Ngugi Njoroge, tells Equal Times that the digital lending market is “healthy” but that more regulation is needed.

"Despite the fact that mobile loans have helped many people out of poverty, some of them also abuse consumers,” he says. "Many consumers are forced to pay exorbitantly high interest rates on these loans. A repayment rate of 15 to 18 per cent is above the legal requirement of 10 to 14 percent.

’’We will soon deregister seven lenders once we complete our investigations,” he says, adding that matters are made even worse for vulnerable consumers with unnecessary late repayment charges and loan processing fees.

"Some mobile lenders unfairly charge 210 shillings (US$2.10) if people are late on repaying at the agreed time. Others charge 100 shillings (US$1) or more for processing fees. This should not be the case," he says.

Dr Njoroge also expressed concerns about data privacy. “Lenders can misuse the data to their advantage. Only government security agencies have the right to an individual’s mobile phone data", he explains.

But given the total lack of credit history for most digital loan customers, lenders say this is the most efficient and effective solution. M-Shwari says its default rate is less than 2 per cent, proving that the system works.

Meanwhile, Farida Kariuki, the press and communications chief at Saida, a Kenyan-based fintech company that disbursed over US$13.1 million worth of loans last year, tells Equal Times: “We always get the permission of the applicant to access their data. It is the best solution for us to make a decision."

Greater regulation, however, is on the way. The Central Bank of Kenya will soon launch new guidelines on how best to govern the sector, a move which follows on the from the East African Legislative Assembly special task force on mobile loans, formed to offer proposals on how member parliaments can effectively protect consumers.

VAT down, mobile sales up

But the general consensus is that digital loans are a force for good. The key now is to expand access. With increased competition in the financial sector, mainstream financial institutions such as Barclays, Standard Chartered, Kenya Commercial Bank and Equity Bank have also recently joined the bandwagon of digital lending.

However, smartphones are still prohibitively expensive for most people in sub-Saharan Africa. Last June, the governments of Kenya, Uganda, Tanzania and Rwanda made a significant step towards making them more affordable by reducing the amount of value added tax (VAT) payable on smartphones from 47 per cent to 32 per cent.

Professor Germano Mwabu, a World Bank consultant economist for Africa, says that over US$60 million worth of smartphones have been purchased in the region since then.

"It is a huge market. Safaricom has disbursed mobile loans in the east African region totalling about US$16 billion last year alone,” he says.

In turn, millions of previously financially excluded people now have access to credit – and it is not just business people who benefit from digital loans. "These small loans have saved lives by helping people pay hospital bills and education costs," says Kariuki.

Kendon Kamau, a 36-year-old farmer, is one such example. “Last August, my then two-month-old son almost died of pneumonia. The hospital could not treat him without the required cash amount of 4,000 shillings (US$40). So I borrowed 7,000 shillings (US$70) from Tala which took 60 seconds to approve.

’This money also paid for my bus fare to and from the hospital, but most importantly it saved my son’s life,” he says.