Helping or Hurting? 10 Facts About Digital Credit in Tanzania

Michelle Kaffenberger
28 Feb 2018

Digital credit is a growing phenomenon, surrounded by much excitement and expectation that quick access to credit could help poor households, especially when faced with emergencies or other financial needs. A new nationally representative phone survey conducted by CGAP in Tanzania examines whether it is living up to this hype. We interviewed more than 4,500 Tanzanians, including 1,132 digital credit users, to understand who is using digital credit, how it fits into borrowers’ portfolios, and what risks are emerging. Our findings suggest that while borrowers are using digital credit to meet everyday needs, few turn to it for emergencies. We also find that nearly a third of digital borrowers have defaulted on a digital loan, and more than half have repaid a loan late.

Digital credit has been available in Tanzania since 2014, with the launch of M-Pawa which now boasts nearly 5 million subscribers. As our findings show, while digital credit has the potential to bring benefits to low-income individuals with limited access to formal credit, it also carries potential risks that need to be balanced and understood. Better understanding digital borrowers and their experiences with loans is critical for determining steps regulators and providers should take to maximize benefits and mitigate risks.

Who is using digital credit?

  • A fifth of Tanzanian phone owners have taken out a digital loan. The digital credit market is dominated by three lenders: M-Pawa (which 48 percent of digital borrowers have used), Airtel Timiza (39 percent), and Tigo Nivushe (29 percent); numbers add to more than 100 percent as many borrowers have used more than one digital lender.
  • Digital borrowers tend to be men between the ages of 26 and 45. They tend to be better educated than people who have not used digital credit, but still the majority have only primary education. They are more likely than the average person to live in urban areas.
  • Digital borrowers are much more likely to have used banks and other financial services. They are three times more likely to have a bank account than the typical Tanzanian adult (44 percent vs. 13 percent, respectively), and 11 times more likely to have taken a bank loan (11 percent vs. 1 percent).

Nationally representative sample of N=4,574 phone owners in Tanzania, of whom 1,132 have used digital credit. “All Tanzanian adults” was calculated based on the nationally representative FinScope survey dataset with sample N=9,459. Multiple responses allowed.

  • While most digital borrowers are self-employed, other income sources are mixed. Seventy-two percent are self-employed, compared with just 15 percent of Tanzanian adults overall. A large portion of digital borrowers rely to some degree on income from family, friends or government aid transfers (“dependents” in the graph). Yet digital borrowers are also more likely than average to be wage earners, which is correlated with higher-than-average education levels. This suggests that digital credit is reaching a few distinct segments: a segment of educated wage earners, a potentially less-well-off segment that depends on others for income, and segments that fall somewhere in between.

Nationally representative sample of N=4,574 phone owners in Tanzania, of whom 1,132 have used digital credit. “All Tanzanian adults” was calculated based on the nationally representative FinScope survey dataset with sample N=9,459. Multiple responses allowed.

How is digital credit being used?

  • Although most digital borrowers are self-employed, only a third report using a digital loan for business purposes. Even within the self-employed segment, fewer than 40 percent of borrowers report using a digital loan for business. Digital loans are most commonly used to meet ordinary household needs and to purchase airtime. Only 9 percent of borrowers report having used the loans for medical expenses, including emergencies, and fewer than 1 percent have used them for any other type of emergency. The only use case for which digital credit is more commonly used than other sources of credit (informal or formal) is for purchasing airtime.

Numbers based on nationally representative sample of N=4,574 phone owners in Tanzania, of whom 1,132 have used digital credit.

  • Digital credit primarily complements existing loan sources. Two-thirds of digital borrowers have not reduced their use of other loan sources since gaining access to digital credit, while one-third has.
  • Digital credit is a frequently used part of borrowers’ portfolios. Sixty percent of digital borrowers had at least one outstanding digital loan at the time of the survey, and 67 percent had taken a loan out in the last 90 days. This active rate is much higher than the 31 percent typical of mobile money accounts.

What risks are emerging from digital credit use?

  • Late repayment and default are widespread. Nearly a third of digital borrowers have defaulted on a digital loan, and more than half have repaid late. Late repayments and defaults are surprisingly consistent across segments. While casual workers and those reliant on income from others are the most likely to have defaulted, even among employed borrowers and those with tertiary education a quarter have defaulted. And this is just the percentage that admitted to defaulting, so the true figure could be even higher.

Numbers based on nationally representative sample of N=4,574 phone owners in Tanzania, of whom 1,132 have used digital credit.

  • Poor transparency means borrowers may not understand fees or repayment requirements. Just over a quarter of digital borrowers report that they were charged fees they didn’t expect, that they did not fully understand the costs associated with a loan, or that a lender unexpectedly withdrew money from their account. Poor transparency has follow-on repercussions, as those who reported poor transparency were more likely to have repaid a loan late or defaulted.
  • Nearly 10 percent of digital borrowers report that they have reduced food purchases to repay a loan. This group is more likely to have defaulted on a loan (37 percent) and more likely to have repaid late (82 percent). They are also more likely to have been balancing multiple loans at the same time, suggesting that they may be carrying too heavy of a debt load (though further research would be needed to rigorously assess the impact of digital credit on borrower financial portfolios).

While digital credit may be providing benefits for many borrowers, perhaps smoothing consumption when it is used for household needs, it doesn’t seem to be living up to the hype of helping households cope with medical expenses, emergencies or paying school fees when income is tight. And there seems to be at least one segment for whom it may be having detrimental effects, as families struggle to purchase food while repaying. Smart regulations, such as requiring better transparency as well as suitability and needs assessment rules, and proactive steps by providers, such as better identifying borrower repayment abilities to limit over-indebtedness, could go a long way towards maximizing benefits and minimizing risks as the digital credit market evolves.

Note: This post was originally published on CGAP website.

To learn more about the Tanzania phone survey, see Digital Credit in Tanzania: Customer Experiences and Emerging Risks. CGAP conducted the same survey in Kenya in partnership with FSD Kenya. Future analysis will compare market development and customer experiences in the two countries.

Photo: Hendri Lombard / World Bank

Closing the Gap: Identifying Key Challenges for the Missing Middle SMEs in Francophone West Africa

Ekta Jhaveri
28 Feb 2018

Many small and medium-sized enterprises (SMEs) in developing countries face a classic conundrum when it comes to securing finance. Most constitute the “missing middle,” as they are considered too big for microfinance institutions (MFIs) and too small or risky for traditional finance providers such as commercial banks.

This dilemma is well known, but to truly solve it, we need to know more. To get a deeper understanding of the missing middle SME sector, (which for the purposes of this article we refer to as MM-SME), and how to support it, the Dutch Good Growth Fund (DGGF) commissioned several studies on the entrepreneurial ecosystems of six francophone West African countries – Benin, Ivory Coast, Guinea, Mali, Senegal and Togo. The reports were published as part of DGGF’s #ClosingTheGap series, with research for the country studies conducted by Enclude.

I recently interviewed Julia Kho, knowledge manager at TripleJump, an investment management and advisory services firm that, along with PricewaterhouseCoopers, manages DGGF’s Investment Funds Local SMEs effort.

Ekta Jhaveri: Why was the francophone West African region chosen by DGGF for #ClosingTheGap studies?

Julia Kho

Julia Kho: The DGGF supports financial intermediaries across the developing world, the mandate covers 68 countries in total. Local financial stakeholders reach out to DGGF for funding support. We received very few proposals from this region. That is why DGGF commissioned these studies to get a better understanding of the SME landscape and the ecosystem around them. The intent was to identify, elaborate on and strengthen existing and potential solutions – including fostering the appetite of investors in investing in local SMEs in the region – to address key challenges and obstacles faced by the missing middle entrepreneurs.  Now we see more fund managers addressing this market and expect more activity in the coming years.

 

 

EJ: Can you briefly describe the process of entrepreneurial ecosystem assessments?

JK: The entrepreneurial ecosystem assessments were conducted using the ecosystem toolkit created by the Aspen Network of Development Entrepreneurs (ANDE). It involves analyzing the ecosystem along six dimensions or domains – culture, policy, markets, finance, support and human capital. A literature review was followed by field visits to conduct interviews with the stakeholders from the various domains. The fieldwork was followed by a workshop of key stakeholders to discuss findings and possible solutions to close the identified gaps along the six domains.

EJ: How do you characterize or define the missing middle SMEs in francophone West Africa? Were these SMEs homogenous across the six countries?

JK: The starting point of our definition of the MM-SMEs was the one mentioned above. We found that it was important to sub-segment the MM-SME sector in order to get a deeper understanding of the characteristics of local enterprises and their needs and regroup them under clusters that share these common characteristics and needs. The sub-categories we came up with are fairly general and they can be applied across countries; where they differ is around the relative representation of the sub-category by country. So, even though the markets in each of the six francophone West African countries differ, at a high level this sub-segmentation of the SME sector applies. The sub-segments we defined and found were a very large cluster of small necessity entrepreneurs (established for the sake of providing livelihood) followed by moderate growth entrepreneurs (mainly family-owned businesses), and smaller clusters of high-growth startups (young entrepreneurs mainly in the technology sector), opportunity-driven SMEs (entrepreneurs copying successful business models and involved in several businesses) and gazelles (successful startups with high growth rates).

While this sub-segmentation of the SME sector is an important exercise, we are now embarking on a deeper study with the Omidyar Network and DGGF. Its goal is to create a robust segmentation framework of SMEs, which will help investors and intermediaries match appropriate financial products with different enterprise segments, as well as help entrepreneurs understand the most appropriate investors to target.

EJ: Were the challenges more systemic or operational? Can you elaborate on the top three challenges across the six countries?

JK: Both – systemic and operational. While there is some variation across these countries, the few general challenges we saw were:

  • Weak entrepreneurial culture: Entrepreneurship is generally not promoted or celebrated as it is not perceived to be the venue one takes to be successful. Culturally, one is considered successful if they work in the government or as an employee of a big company. In francophone West Africa, the government is very involved in supporting the development of the private sector. There are many public entities that look after issues of SME development. Despite good intentions, civil servants haven’t been able to achieve the anticipated impact, as they often are unable to relate to the realities of running a business.
  • Policy Framework: The informal sector in these countries is very large. Between 70-90 percent of the SMEs are considered informal businesses and going formal is perceived by local entrepreneurs as too costly (time and money) and complex (the process). Many don’t see the value in going formal. This is a real issue as informal businesses can’t access formal financial services.
  • Finance: The challenge is on two levels. Firstly, SMEs don’t have an accurate understanding of whether they need external financing and what their specific financing needs are. Secondly, the financial landscape is largely comprised of banks and MFIs that provide collateralized debt. SMEs without a track record, collateral or positive cash flow are hence limited in accessing the available financing options. The six countries demonstrate different levels of maturity. We’ve seen that in Senegal and Ivory Coast, for instance, a few players are recently emerging to provide mezzanine finance and equity.

EJ: Were there any surprising findings from the entrepreneurial assessments you conducted with SME owners? Can you elaborate on a couple of these findings?

JK: I don’t know if these are specific to the region but we found a couple of things that were very interesting if not surprising. First, there is no shortage of dynamic entrepreneurs. The challenge lies in how they look at their business and in understanding their own needs. Entrepreneurs tend to talk about the need for external finance to grow their business. But often when discussing their business further, it appears that the first need is to secure recurring customers to sustain regular revenues and then think about finance, i.e. what type of financial support they need for which purposes. In the region, given the current financial service offerings, we identified that stakeholders are aware of debt products but their exposure to other financial instruments and products is extremely limited and hence their understanding of those, too.

Another finding is related to the varied level of professionalism and sophistication of local businesses. Keeping records of levels of production and supply needs, for instance, and analyzing those to identify what is needed not just to operate tomorrow, next week or next month but rather the next year, is not necessarily a common practice.

EJ: What are the different types of stakeholders (financial and non-financial) that provide support to SMEs? What is the level of collaboration among them?

JK: In addition to what was said earlier on the current financial offers, we identified a gap in financing at the very early stages of development of local enterprises. There are barely any players that can offer external funding (that is not collateralized debt) in the range of 10,000-1 million euros.

On the non-financial side of things, again, in addition to what was said earlier, we see a positive trend of one-stop shops being set up to provide information for local businesses such as how to register, etc. However, besides the few traditional business support development service providers that can be expensive, full-fledged service providers that help entrepreneurs – from the conceptual to commercialization stage – at affordable prices are extremely limited.

As a direct response to this identified gap, DGGF is supporting Suguba, a network of impact hubs that originated in Mali and which are looking to expand to Senegal and Ivory Coast. We are also supporting EtriLabs, a tech innovation hub in Benin and Innov’Up, a women-focused incubator in Togo.

As in many ecosystems, we observe that local stakeholders tend to be disconnected. If the SME sector is not sub-segmented based on characteristics and needs of local enterprises, then the service offering is not targeted and specialized, which makes collaboration challenging. Our work with Omidyar Network (mentioned above) is important as it will provide an understanding of the appropriate financial products based on different enterprise segments.

EJ: A pilot study for the #ClosingTheGap series was done for Kenya in 2015. Are there any learnings from the Kenyan entrepreneurial ecosystem assessment that can be applied to these six countries?

JK: There is no one-size-fits-all approach. There are many variations across the countries and Kenya has an ecosystem that tends to be more dynamic than the six countries we’re discussing. What we learnt was that the sub-segmentation methodology piloted in Kenya was applicable to any other market and that the sub-segments defined through the Kenyan study were also relevant to the francophone West African markets, although the relative proportions of SME sub-segments representation are different. The entrepreneurial culture is promoted in Kenya. There is diversity in terms of ecosystem players: MFIs, banks, mezzanine/venture capital/private equity funds, hubs, incubators and accelerators – and they intervene at different stages of maturity of the enterprises. We saw some linkages with universities (e.g. a hub or incubator hosted by a university). In fact entrepreneurship education is part of some high school/university curricula, which we don’t see in francophone West Africa. 

EJ: What other types of innovative financial instruments have the potential to increase access to finance for such SMEs – and which types of financial institutions are best positioned to fill this need?

JK: There are steady moderate growth companies, often family-owned, whose service or product offerings address a market demand but they may still lack the track record, collateral, cash flow or profit levels that can qualify them for a bank loan. These companies require more risky (less collateralized), flexible and long-term capital to grow. This is what we refer to as “mezzanine finance,” which blends elements from traditional private equity and debt financing into a unique product. DGGF commissioned a study in 2016 that dives into this interesting additional offering for missing middle entrepreneurs and seems relevant to local enterprises in the region.

EJ: There is a lot of talk in the development community about the use of blended finance for the missing middle SMEs. What are your thoughts on this?

JK: The concept of blended finance is an interesting one. We see it as particularly relevant to foster innovations, i.e. to test and launch new and different financial products and models. In my mind, local intermediaries – both financial and non-financial ones – would benefit from this type of financial support to try out and identify what works/does not.

 

Note: This post was originally published on the NextBillion website.

All the reports under the #ClosingTheGap series can be accessed on the DGGF website.

Top image: Employees from different ethnic groups are seen at work at a carpentry in Gao, Mali. Flickr credit.

Ekta Jhaveri is senior research associate for the Healthcare and Financial Sector Development Initiatives at the William Davidson Institute, NextBillion’s parent organization.

Successful banking agents: what do they look like and how identifying them promotes responsible finance. Case study from FINCA DRC

27 Feb 2018

By Anca Bogdana Rusu

For the past decade agent banking has been touted as one of the solutions to financial inclusion. The concept is the embodiment of responsible finance: with a network of agents a limited but essential range of financial services can be offered to previously unbanked populations in an economically viable way. However, questions remain about what makes a successful agent and how to expand a network in sustainable manner.

Answering these questions are fundamental for expanding digital delivery channels to benefit both the institution and the consumer; to realize the promise of responsible finance. For the institution, the agent network supports profitability and is also an essential tool for customer acquisition and relationship management. The agents become proxies of the institution: successful agents engender positive customer relationships; while poor performing agents and agent churn has a negative impact on the trust customers have, both for the institution and for the broader financial system more generally.

Through a long-term research engagement with FINCA DRC, IFC’s Applied Research and Learning team analyzed agent information, including agent characteristics and agent transactional data and built a model to identify the characteristics of successful agents.

Background

In DRC, FINCA launched its agent network in 2011 by employing small business owners to offer FINCA DRC banking services. The agent network grew rapidly and by 2014 over 60% of FINCA’s transactions were done via the agent network.  Much of the agent selection up to that point was done in a rather opportunistic manner, by reaching out to existing retail outlet – clients and signing them up as agents, which was an efficient strategy at inception stage. However, this meant that despite having rolled out over 300 agents at the time, there was little understanding of what determined agent efficiency – as defined by high number of transactions and volumes transacted.  Today, 80% of FINCA transactions are through their agent channel.

  1. Analysis

To better understand what makes a successful agent we compiled existing data on FINCA’s active agent network.  Data for the model included location/market characteristics, business and socio-demographic data on the agent, transactional data as well as monitoring data on the agent’s cash and e-float, the shop condition, quality of the agent’s customer interaction as well as FINCA DRC product branding displayed among others. Data availability and data quality were the main challenges in developing the agent performance model. Digitized data were required for sources usually only collected on paper, like agent application and monitoring forms.

  1. Results: Financial inclusion and business development goals align

Successful banking agents in DRC were identified by the following statistically significant criteria:

  • geographic location
  • sector of an agent’s main business
  • gender of the agent
  • whether profits are re-invested in the agent’s business

Women-owned agents are found, for example, to make 16 percent more profit with their agent businesses than their male counterparts; the value of their business inventory is 42 percent higher.

Importantly for financial inclusion and responsible finance, we find that transactions are higher in low income, densely populated areas with high levels of commercial development.  This suggests that the agent network can be best used for supporting financial transactions among the urban poor. In addition, visible FINCA branding and effective liquidity management are strongly linked to agent activity. The results suggest that agents can be effective providers of basic financial services among the urban poor who lack suitable alternatives.

These results were implemented to improve and streamline the agent selection process, which ultimately helped to expand the network into rural areas by incorporating factors into agent surveys and roll-out strategy and driving FINCA’s ability to achieve 80% of total transactions through the agent network today.

Conclusion

The value of this analysis comes from the fact that it starts answering the question of what makes a successful agent and helps mitigate some of the risk for all the parties involved. Rolling out an agent is a costly endeavor for any institution and being able to able to identify which potential agents are worth the investment is highly valuable. The value comes both from a more strategic investment and a more effective customer acquisition and relationship management via the agent network.

For the prospective agent who is a small business owner, building a trust relationship with the financial provider and the additional income from the agent activity are welcome. However, becoming an agent involves an investment of time and money and is only worthwhile if the relationship is lasting.

From the consumer’s perspective, an efficiently selected and managed agent network means stability, lower churn of agents and thus a better trust relationship with formal financial alternatives.

Equally important, this endeavor highlights the significant benefits that any financial institution – but especially digital financial services providers – stands to gain from employing data analytics to make better informed business decisions.

Adapted from a case study presented in the Data Analytics and Digital Financial Services Handbook (June, 2017), this post was authored by  Anca Bogdana Rusu, IFC-Mastercard Foundation Partnership for Financial Inclusion, for the Responsible Finance Forum Blog.