M-Shwari: A window into the future of micro credit

Micro credit is one of those financial offerings which resides at the rare confluence of societal benefit and profit motive. The impact of microcredit availability on self employment, children’s education, sanitation, poverty reduction and women empowerment have been the subject of countless studies. Over last 5 years the necessity of extending microcredit in developing and developed economies, where credit requirement of middle and upper middle class with access to formal financial institution has largely reached saturation, for driving growth is abundantly clear. The same is reflected by the mushrooming of NBFCs and fintech cos.

The question that arises is why something that is so well suited to incentivize forces of both demand and supply is still not an all pervasive phenomenon in the developing world, even more than 2 decades post a Noble prize and multiple scattered roll outs. More importantly what would enable micro credit to bridge the 2 trillion Dollar global credit gap. The answer to what is required for making micro credit scale the heights it would one day surely achieve to a large extent can be deciphered from the phenomenal success of M-Shwari.  M-Shwari is a mobile banking plus lending app from Kenya, a country of 48 million with a commercial bank penetration of 5 per 10,000 adults (compared to a global average of 12 per 10,000 adults). Founded in 2012, M-Shwari today has 40 million users in 5 African countries and has disbursed USD 40 Billion in credits. Following are the 5 takeaways:

Think Digital: Back when M-Pesa (another initiative from Safaricom) started only 14% of Kenya’s population had a bank account, but 39% had mobile services. Although the commercial bank branches per 10,000 customer have remained largely the same, mobile penetration has increased to almost 100% and 93% of Keneya’s adult population have a M-Pesa account today. 54% of M-Shwari customers don’t have bank account. Digital is the only possible channel to disburse micro credit at scale not only because of the reach but also because of operational cost. The interest income (The average loan size of an M-Shwari customer is USD 15) from micro credits would never justify the operational cost of processing loans and collecting repayments offline.

Right partnerships: M-Shwari was created through a strategic partnership between Commercial bank of Africa (CBA) and Safaricom and leveraged the reach of M-Pesa (Mobile wallet). This trinity of telecom operator, bank and mobile wallet is at the heart of what made M-Shwari possible. While bank (CBA) enabled low cost of capital, telecom operator (Safaricom) enabled distribution and data for accurate credit scoring and mobile wallet (M-Pesa) made KYC, disbursement and collection possible.

Customized product and processes: Understanding and customizing for the unique requirements of the base at the bottom of the pyramid has been another important key to the success of M-Shwari. When it comes to micro credit the requirement, challenges and abilities of the target audience are very different from that of a normal credit. An important aspect fueling M-Shwari’s appeal is it’s easy access 30 days loan. More than 55% of respondents in a American journal of finance’s survey(the survey was conducted amongst 30% of all residents in Meru county who have availed micro credit) had primary/mid level education or no formal education. Moreover, 85% respondents doesn’t have formal employment. Hence any product of that needs paperwork or extensive documentation or formal proofs would have led to failure.

Paperless, real time KYC: M-Shwari uses a combination of telecom data, M-Pesa KYC data and national ID database for KYC and verification. This made the loan processing simple, real time and cost effective. While national ID provides a good verification of name and age, telecom data gives very accurate proxy for address verification and income proof which are two crucial components for default reduction. This not only empowered largely low skilled (55% had primary or no formal education) credit seekers to access credit easily but also enabled profitability by slashing of operational cost of infra and manpower required for loan processing. The later is pivotal for sustenance of any micro credit business where income per loan is wafer thin.

Alternate data credit score: At the heart of M-Shwari’s success lies the alternate data credit score. Back in 2012 when M-Shwari was born less than 5% of Kenya’s adult population had credit score. This is where all conventional lending would hit a hard wall. But M-Shwari leveraged on the rich repository of Safaricom data that enabled them to score majority of Kenyan adults. There would hardly be any other single source that can remotely compete with telecom providers in the richness, accuracy and coverage of consumer data. M-Shwari has a default rate of 2% which is rather impressive compared to the national average of 6%. This becomes unimaginable when one adds to it the fact that these are unsecured loans extended to people with no formal income over remote mobile channel.

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