African Digital Credit Goes West

The age of digital credit has arrived in West Africa. Customers from Abuja to Accra are increasingly turning to their mobile phones for quick access to funds, and digital lenders are pointing to growing portfolios and relatively low default rates. CGAP reached out to West Africa’s leading providers to understand the factors behind the region’s apparent early success with digital credit and what this means for the future of digital credit on the continent.

Last year, CGAP research raised consumer protection concerns surrounding digital borrowing in East Africa, home to the continent’s first digital credit offerings. Surveys of digital borrowers in Kenya and Tanzania and analysis of data from over 20 million digital loans in Tanzania revealed high delinquency and default rates, especially among poor borrowers. The research also showed that most borrowers used digital credit for discretionary consumption, rather than for productive investments or household emergencies.

Nevertheless, the commercial success of digital credit in East Africa has paved the way for the rise of similar lending products across the continent. This is especially true in West Africa, where the growth of mobile money and an enabling regulatory environment have created the right conditions for digital credit. Ghana, Côte d’Ivoire, Nigeria and Senegal have thriving digital credit products today. In Ghana, for instance, MTN’s Qwikloans platform alone disbursed 5 million loans worth about $120 million before its first anniversary. Nigeria, the largest market in the region, has also seen a proliferation of digital credit offerings from providers such as Carbon, Aeella, Branch, Fairmoney, Alat and Palm Credit.

“With high mobile money penetration in territories such as Ghana, Côte d’Ivoire, Cameroon and Benin, as well as a clear need for lending services (due to low pre-existing access to affordable financing), West Africa is very much the next key region for digital credit providers operating on the continent,” explains Daisy Mwanzia, MTN Group banking specialist.

Interestingly, early results from West African providers indicate that digital credit may be on a different trajectory than that charted by their peers in the East. CGAP’s research in Kenya and Tanzania revealed delinquency rates of 50 and 56 percent and default rates of 12 to 31 percent, respectively. These numbers stand in stark contrast to those of West African countries like Ghana, where providers told CGAP that nonperforming loan rates are in the single digits. These rates also compare favorably to Ghana’s traditional banking sector, for which the central bank reports a nonperforming loan rate of 18 percent.

While CGAP could not confirm the profiles of borrowers in Ghana, experience in East Africa suggests that many are borrowing from formal lenders for the first time. JUMO, one of Ghana’s most successful digital lenders, also operates in Tanzania, where it found that 81 percent of its borrowers had never before borrowed from a formal financial institution. The ability to reach excluded customers and help them to build formal credit histories has always been touted as the promise of digital credit. And while more data are necessary before forming any conclusions about the potential impact of digital loans in West Africa, the results from Ghana are cause for optimism.

What is West Africa doing differently? One factor may be that lenders are learning from customers and building better products.

In response to queries from CGAP, MTN cited several steps it has taken along with JUMO in Ghana to protect against risky borrowing and repayment issues. JUMO is using data on repayment behavior to discourage “spinning,” in which borrowers apply for and quickly repay a small loan in order to increase their credit limit and take out a larger loan. They are experimenting with ways to discourage unhealthy credit decisions — for example, by mandating a cool-down period for frequent borrowers with rapidly increasing credit limits. And they are putting a premium on awareness and education, implementing initiatives designed to improve customers’ understanding of loan products.

“MTN and JUMO are consistently dedicated to improving ecosystem health in Ghana and constantly researching guardrails to ensure healthy interaction between consumers and the platform,” Mwanzia emphasizes.

Regulations may also play a role. Both Ghana and Nigeria require lenders to have a license from the central bank, while Kenya and Tanzania allow unlicensed digital lending (however, the largest deployments in each country involve regulated banks). Regulatory oversight, in which each product must be approved by the central bank before launch and is subject to ongoing supervision, could mitigate risky lending associated with unlicensed entities.

MTN cites one additional factor working to its benefit in countries like Ghana, where its dominance of the mobile money market has placed it in a unique position. Because of its overwhelming market share and robust know-your-customer data, delinquent borrowers cannot simply ditch their SIM and open another account.

“These factors combined produce a high perceived value of mobile money account holding to the customer,” explains Mwanzia. “This becomes a proxy for loan collateral and drives high collection rates.” Of course, none of this suggests that the same problems witnessed in East Africa could not befall West Africa’s digital credit providers and borrowers.

Digital credit is a relatively new phenomenon in West Africa, and the results seen thus far are not necessarily predictive of where things will head as the market matures and more (and potentially riskier) borrowers take out loans. Therefore, it is paramount that regulators, providers and other stakeholders continue to monitor these deployments and emphasize core principles of consumer protection, including those identified in CGAP research on digital credit.

Protecting customers will be an increasingly important concern as recent regulatory reforms promise to drive further innovation and growth in the region’s digital credit offerings. For example, Ghana's new Payment Systems and Services Act formally recognizes fintechs as institutions within the payment sector and empowers the central bank to regulate their activities. Nigeria has also announced several regulatory updates that allow nonbanks such as mobile network operators to play an active role in the payments sector. Both developments promise to offer new channels for lenders to reach customers digitally.

"[Regulatory changes] in Nigeria will lead to large, million-person ecosystems in need of quick access to credit,” Mwanzia predicts.

With new opportunities and increased competition on the horizon, MTN is already looking toward the launch of a new generation of digital credit. Following on JUMO’s successful introduction of risk-based pricing in Zambia (where repeat borrowers see a reduction in interest rates), MTN is considering bringing the feature to Ghana. It also plans to introduce flexible repayments and installment products. The goal, says Mwanzia, is to grow MTN’s customer base by offering products that “are more able to fit a customer’s specific and customizable needs — significantly more so than the current single-term, fixed price access product.”