Why mobile phone is the next frontier for lending

After the release of financial results by all commercial banks, one thing is brutally clear: The going is tough for lenders.

Figures from all lenders painted a grim picture of a financial sector struggling with its core business of lending. Income on interest and loan advances shrunk as banks' hitherto gush of profits slowed down into a trickle in the first quarter of 2017.

For the top 10 largest banks, income on interest and loan advances declined from Sh62 billion in the first quarter of 2016 to Sh54 billion in the same quarter in 2017.

Except for Diamond Trust Bank and Commercial Bank of Africa, all banks have seen their profit margins squeezed. But, amid this storm, there has been a sweet lull: small loans seemed to have surged between January and March, 2017 compared to the same period last year.

According to the Central Bank of Kenya, loan applications grew but they were mostly small-loans. "The number of loan applications increased by 23.4 per cent between August 2016 and April 2017, but the value of loan applications decreased by 18.3 per cent, suggesting smaller size of loan applications," read the statement by the Central Bank's Monetary Policy Committee (MPC) and which was signed by its Chairman the Governor of CBK Dr Patrick Njoroge.

There is little doubt that a good chunk of these 'smaller size' loans were offered through the mobile phones, an indication that, with the right environment, mobile phones might be the next frontier for lending in the country.

And if the future of lending in Kenya is through the mobile phone rather than the bureaucratic process of making several trips to the nearest branch to fill up a sheaf of loan application papers, then the banks that have mobile loan services such as Commercial Bank of Africa (CBA), Equity Bank, Co-operative Bank of Kenya, Kenya Commercial Bank (KCB) - have a head start of sorts.

Although most banks have moved most of their services to mobile phones, contributing to the growth of mobile banking, it is only these lenders that have gone ahead to include lending and saving into the mobile banking services.

So far, and catalysed by the enactment of the Banking Amendment Act 2016 which has put a ceiling on interest rate charged by commercial banks, a wave of digitisation has been sweeping through the banking sector.

George Bodo, head of financial desk at Eco Bank Capital, says in the context of this legislation, lenders have been forced to seek more efficient ways both in lending perspective and services. To this end, mobile loans have become a primary channel for this adjustment to the law with most banks being pushed into digital channels.

The mobile phone is at the heart of the digitisation process that has seen branches closed and employees including cashiers and loan officers sent home.

Branches have been left to house administrators and managers, as all the business moves to mobile phones or agencies. Loans through Equity Bank's mobile virtual network operator (MVNO), Equitel, rose by 75 per cent even as the bank's profitability declined. Equity Banks' net profit dropped to Sh4.8 billion in the first quarter of 2017 from Sh5.1 billion in the same period last year.

CBA does not give a breakdown of transactions done through M-Shwari- a mobile phone-based savings and lending service offered by CBA in conjunction with telecommunications provider Safaricom. However, analysts agree that being a pioneer its performance is in tandem with, if not better than, others.

M-Shwari is reported to handle 420,000 loan applications everyday with 70,000 loans processed daily to be repaid within 30 days.

The growth in mobile banking buoyed by the high rate of mobile subscription in the country, currently at around 38 million subscribers, that has been phenomenal in the rise of mobile lending.

For Equity, transactions by agents grew by 25 per cent between May 2015 and May 2016, compared to a staggering growth of 545 per cent in transactions by Equitel. There was also an increase of 39 per cent in transactions by merchants.

However, for the country's largest bank by customer numbers, transactions through the traditional channels such branches and ATMs, declined. Transactions at branches declined by 12 per cent in the period under review same as in ATMs where transactions declined by 17 per cent.

The script is the same with KCB, the biggest bank in the country by asset-size and which claims to have attracted about 10 million customers in its KCB-M-Pesa mobile service.

While transactions through KCB-M-Pesa rose from 35 per cent between January and March 2016 to 41 per cent in the same quarter in 2017, transactions at branches shrunk to 20 per cent from 31 per cent.

Agency banking improved by three percentage points from 12 per cent in the first quarter of 2016 to 17 per cent in the same 2017.

For KCB, it was also the period that saw volumes transacted through the mobile phones rise to Sh55 billion up from Sh34.3 billion in the same period last.

In a month, an active subscriber of KCB MPesa made, on average, about six transactions in a month, up from an average of four in the same period last year. The activities might include moving saving, borrowing, withdrawing, repaying a loan and so forth.

Transactions per active customer per month at agency also rose from 2.8 times to 3.8 times, a slight increase when compared to transactions through the mobile phone. "We are processing an average of two loans every second on KCB-MPESA and that is a key indicator about how integral mobile loans have become not just for us as an institution, but more so for the millions of our customers," said the Edward Ndichu, KCB Head of Digital Financial Services.

"Currently, non-branch channel systems—Mbenki, KCB M-PESA, Mobi and payments— account for 77 per cent of total transactions."

Mobile loans, it is still debatable whether or not the mobile loans have been capped by the new legislation, although Equity and KCB announced that they would ensure their mobile loans are compliant.

KCB announced that it would peg its loans at 1.2 per cent per month while savings would be capped at 7.35 per cent. It was not immediately clear what Equity Bank's rate would be, only saying that they would not charge above the 14.5 per cent rate.

M-Shwari insisted that they did not charge interest rate but a one-off facilitation fee of 7.5 per cent for their monthly credits.

Co-operative Bank says its Mco-op Cash Mobile Wallet continues to play a pivotal role in the growth of non-funded income with over 3.21 million customers.

"Through our multi-channel strategy the Bank has successfully moved 88 per cent of customer transactions to alternative delivery channels particularly mobile banking, ATMs, internet and Co-op Kwa Jirani bank agency outlets," said Coop Bank CEO Gideon Muriuki said.

A financial revolution that began with the conception of M-Pesa, in the process lengthening the country's financial access strand from a low of 26.7 per cent in 2006 to 75.3 per cent in 2016, reached yet another milestone when the Government early this year launched the M-Akiba bond enabling Kenyans to lend to the Government through their handsets.

Even as commercial banks drag their feet adopting the mobile phone as a platform to extend loan and savings services, other non-bank players have fearlessly jumped into the fray. "Credit invisibles" such as Branch, Tala, Saida, Zidisha and Micromobile mobile apps offer unsecured micro-credit through mobile phones using what is known as reputational collateral.

Their loans are approved based on the applicant's reputation- how many times do they make calls? How often do they use their M-Pesa? They even look at the kind of posts they put on Facebook which can rely the kind of person you are. The credit referencing bureaus (CRBs) have made their business even easier.

Bodo, who thinks there is also a need to look critically at the numbers being bandied around, says mobile loans will be more critical for banks that target the mass market. They are not as critical for banks like Standard Chartered that target the corporates, notes Bodo.

Though, he agrees that after the capping of interest rates, the use of mobile phone for efficiency is going to be critical. True, the small mobile loans remain a product for the poor. But if history has taught such banks as Barclays and Standard Chartered any lesson, it should be that banking on the ordinary Kenyans is not necessarily a loss-making venture.

Jared Osoro, a researcher at Kenya Bankers Association, agrees that lending through the mobile phone is still geared towards consumption. However, with a little innovation it might be extended even to businesses in the future.

Osoro, is careful not to say mobile phones will be the next "frontier" of lending. But he agrees that a number of things need to be done for mobile lending to catch on.

Currently, says Osoro, most of the loans offered through mobile loans are, short-term small loans meant mainly for consumption. "Their short-term tenure is an inbuilt limitation," says Osoro who explains that business expansion need medium term and long-term loans.

The result has meant that as much as there are many loans being given through mobile phones, a bulk of them are still going through conventional channels, where risk profiling involves getting a pay-slip for the salaried borrowers or such security as land title deed or log book.

To get a loan from M-Shwari and KCB-M-Pesa, one needs to have some savings, not have a negative score at any of the CRBs and being a frequent user of M-Pesa.

By and large, the basis of appraisal for these loans is consumption rather than looking at business records and all that, says Osoro.

However, this does not mean these limitations in mobile lending cannot be remedied to integrate bigger loans. "There is a need to shift mobile loans from being individual-based to being business-based. This is the next level of innovation," says Osoro.

"Mobile phones are for individuals, now you can have a mobile account for a business," he adds.

KCB is a live to the in-built limitation that Mr Osoro is talking about. "For the time being, we are able to offer loans that require simple matrix on the mobile phone but over time, technology allowing, bigger and bigger loans can be processed on mobile gadgets as we capture more data and create more complex credit-determination matrix," explains Ndichu.