Fintech, digital credit, pay-as-you-go… These new services are essential and promising today. L’incredibly fast evolution of digital finance offers is based on a promise of flexibility and ease of granting and above all on a very high penetration rate of mobile phones : 134 million active “mobile banking” accounts were listed in 2017 worldwide, including more than 84 million in sub-Saharan Africa. However, these new financial services must be developed by guaranteeing a fair balance between the financial objectives of the financial service provider and the interests of the clients. Microfinance experience shows that it is only on this condition that services can be truly useful to clients while preventing the risk of over-indebtedness or exclusion.
Financial innovation and opportunities
On the ground, digital finance is already transforming the field of microfinance. At the very least, when granting a loan, loan officers from microfinance institutions (MFIs) enter the file directly on their touch pad during their visit to clients. Some innovations even lead to the complete dematerialization of relations between loan officers and customers with credit granting from the customer’s phone. By adopting these new financial technologies, MFIs intend to gain in efficiency, better respond to needs, reduce the cost of access to financial services and reach more clients.
Digitization also allows customers to interact with a broader financial ecosystem. It is developing uses that are more varied and more suited to the capacities, needs, location and preferences of populations, including for customers at the bottom of the pyramid. It can also facilitate access to energy, water and even education through innovative systems linked to leasing (also called pay-as-you-go, or PAYG). Another promise of digital finance is to reduce the costs of financial services since the supposed improvement in efficiency should make it possible to offer significantly lower rates and lower costs.
Microfinance: for more pragmatic and risk-based supervision
Technical innovations that carry risks
Fintechs bring new possibilities and promise new accessibility to financial services, but they also potentially generate new discrimination in their selection and granting methods. Questions arise and Fintech players will have to take them up: women in Africa still have more limited access to mobile phones than men. How then to ensure that they are not again excluded from these innovations of the financial system? Or how to limit the excesses of a system based on data and which can use private data to decide on the granting of a loan? How do you ensure that banking information and loan terms are understood by customers who are illiterate or unfamiliar with SMS?
Digital finance can renew microfinance if it does not completely disrupt it. The geographical, cultural and social proximity that exists between the loan officer and the borrower was theorized by Servet, Gentil or Labie in the 2000s and is at the heart of the approach of MFIs: “By regularly visiting the workplace and home of the micro-entrepreneur, the loan officer becomes aware of the realities on the ground and can thus gradually understand them better. This is very important both for the diagnosis made before the loan is granted and for the follow-up that will be done. “. What if direct links to loan officers are replaced by messages?
As for the debt risks normally assessed by loan officers during their meeting with the borrower, their limits can be pushed to the extreme. How to prevent systems based on algorithms from automatically granting credits – dedicated mainly if not exclusively to consumption – based on a profile analysis rather than on the real economic capacity of repayment? In this case, many customers will find themselves in a spiral of multiple and renewable debts. In Kenya, the risk has become reality: users are encouraged to use consumer credit for ever larger amounts. Thanks to their personal data, their profiles are established and integrated into the iterations of the granting algorithms. The ” credit scoring » or the equivalent of the risk rating is refined as grants are awarded. Observation confirms this hypothesis: the percentage of the portfolio at risk is particularly high, reaching levels that are not possible for institutions subject to regulation. Those who do not repay are forced out of the system and lose all access to credit. Bad payers are thus blacklisted by risk centers responsible for analyzing and cross-checking profiles. According to a study by Microsave, there are 8 million Kenyan users and 3.5 million of them are negatively listed by the Kenyan credit bureau. Finally, despite the potential and the promise of a more efficient approach, the rates remain particularly high, sometimes reaching 2% per month.
CGAP (Consultative Group to Assist the Poor), a consortium of donors and foundations on inclusive finance, advocates for a growth slowdown digital credit in East Africathe time that financial and development actors can grasp and respond to these different challenges.
Microfinance: its growth is promising for the achievement of the SDGs
Drawing inspiration from microfinance experiences
It is interesting to revisit the history of microfinance as we witness the growth of digital finance. First extolled when the Nobel Peace Prize was awarded in 2006 to Mohamed Yunus, one of its founders, microfinance quickly showed : peaks of over-indebtedness in India, crises of uncontrolled growth in Nicaragua, Morocco, Bosnia-Herzegovina and Pakistan or even soaring interest rates in Mexico. Some unscrupulous MFIs had actually favored growth and profits to the detriment of their social mission, the real needs and the well-being of their clients.
However, some players in the sector such as CERISE, the Imp-Act consortium or microfinance rating agencies were already working on the development of a responsible, transparent, fair, secure financial services offer likely to have a positive impact on poor customers. In 2005, the Social Performance Task Force (SPTF) was created around several of these initiatives to identify the needs for customer-centric management, also called social performance management. The 3,000 members of the SPTF today (MFIs, networks, investors, donors, consultants) have established a common definition of social performance and are building the related standards. Since 2012, the universal standards for social performance management constitute a set of management practices to help financial service providers (MFIs, banks) assess and achieve their social objectives. They place the customer at the heart of strategic and operational decisions by making financial performance a means and not an end in itself. These normative developments have made the microfinance sector more responsible. MFIs now use social performance indicators to report on their social results, discuss them and make decisions with their stakeholders.
Social impact contract: new development financing tool?
Promoting responsible digital finance
We are seeing the multiplication of digital credit offers but also already striking examples of over-indebtedness, very high interest rates, files of bad payers in credit bureaus or even an essentially urban focus for the PAYG models of access to energy in East Africa despite an open rural mission. Digital finance must adjust its practices to bring real value to its customers. A responsible approach will also enable it to secure its economic model and its reputation. Thus, since 2015, the Smart Campaign for the protection of clients has been working on principles adapted to Fintech, and in 2018, the Financial Investment Company offered investors Principles for responsible investment in digital finance.
Unlike MFIs, Fintechs do not specifically claim a social mission. However, an organization wishing to promote financial inclusion and reach a growing number of customers has every interest in avoiding the excesses experienced by microfinance.. A crisis caused by Fintech will inevitably have significant reputational and credibility impacts for the entire inclusive finance sector. The SPTF thus shares the customer-centric approach and social performance that it has developed with investors and new Fintech players during webinars. To ensure a local service despite the reduced level of interactions, digital credit offers can draw inspiration from existing customer satisfaction monitoring and survey approaches to develop services that meet customer needs. Within these practical approaches, social performance management involves improving internal systems and processes to enhance external impact. Digital finance must rely on these practices to take responsibility and participate in greater financial inclusion. Moreover, a customer protection code is being created in the energy access sector.
Close cooperation between traditional microfinance players and new players in digital finance should make it possible to capitalize on 30 years of responsible finance and avoid delaying the real creation of value for customers.
The opinions expressed on this site are those of the authors and do not necessarily reflect the official position of their institution or that of AFD.