Kenyans should be careful not to tamper with innovations like M-Shwari

Every weekday morning, drivers heading to the central business district along the busy Limuru Road will typically encounter dozens of handcarts piled high with fresh food produce heading the opposite way, with many being delivered to the City Market.

Those wares, purchased by micro-traders as early as 3 am, are typically dispatched to the market before sunrise and it is a good bet that many of the market traders will have used a variety of paperless mobile money lending facilities to raise the capital to purchase their goods.

Kenya has rightly been hailed as the world leader in mobile money. Perhaps few aspects of the mobile money revolution in the country stand out as the success of mobile banking in deepening financial inclusion and bringing in millions of Kenyans who were previously unbanked into the formal financial sector.

The figures are striking. The World Bank ranks Kenya top in Africa in terms of ease of access to financial services, ahead of larger economies such as South Africa and Nigeria.

Eight in 10 Kenyan adults operate either a mobile or bank account, a remarkable figure considering that the numbers were paltry in 2007 when M-Pesa came to the scene.

A crucial development that occurred in tandem with the growth of mobile money is innovations such as the M-Shwari account, a service that allows mobile subscribers, including those with no previous banking history, to receive a loan in a matter of seconds from anywhere in the country.

HOW CRUCIAL

Looking at the figures, it is hard to understate how crucial this lending system, which has effectively replaced the predatory loan sharks that previously dominated the sector, has been for the informal economy, the most important segment of the Kenyan economy.

In November, 2012 when M-Shwari was launched, for example, according to the FinAccess household survey report, there were just 700,000 people with a personal bank loan (in a country of 45 million), while 310,000 had a microfinance loan.

Today, 16 million Kenyans operate an M-Shwari account and 4.5 million, or one in five Kenyan adults, are active users (those that have borrowed or saved in the past 30 days).

Since launch, the service had disbursed 60.6 million loans totalling Sh129 billion.

Every day, 70,000 Kenyans from across the country receive a loan from M-Shwari.

It’s little wonder that the World Bank ranks Kenya a world leader in mobile banking.

Beyond the numbers, though, it is important to consider what these loans mean to the economy and in particular to micro-traders.

The average amount lent out is Sh3,300. Vast amounts of the money are disbursed between 3am and 11am, and 6pm and 9pm. This should help situate the type of borrowers that seek these loans.

This is a loan typically taken by the chicken farmer in a rural village in need of extra feed, the boda boda rider seeking to save up and buy a new bicycle, the newspaper vendor with an eye to starting a small courier company, a fisherman seeking to engage in value addition and the salon operator hoping to start a new stall and saving for that goal.

ACT’S EFFECT

There has been a lot of misinformation, particularly on social media, about what the effect of the Banking (Amendment) Act 2016 should be on products like M-Shwari.

The debate fundamentally misrepresents the difference between a facility fee (currently standing at a one-off charge of 7.5 per cent of the disbursed amount on M-Shwari) and the annualised interest rates that banks charge.

The Act, which came into law in the last week of August, prescribes caps on interest rates. Interest rates are usually calculated on a per annum basis and follow the principle of time value for money because they are spread out over many months or years.

A facility fee, on the other hand, reflects a one-off charge to compensate the lender for the activities involved in credit assessment, credit processing and disbursement and the risk of performing the lending activity.

It is clear that the Twitter users calculating interest rates on M-Shwari across 12 months have never used the service because an M-Shwari loan needs to be paid within 30 days of borrowing it. In fact, a huge number of borrowers, particularly small traders, pay the loan within hours of receiving the money, meaning it would be absurd to apply annualised interest rates to them.

In effect, a small trader borrowing Sh3,000 in the morning to purchase bananas for sale at the market will recoup her funds and earn some profit and then repay Sh3,225 within hours, reflecting the 7.5 per cent fee.

CHARGE INTEREST

The crucial difference between the M-Shwari product, which is offered by a strategic partnership between the Commercial Bank of Africa (CBA) and Safaricom, and rival offerings by the Kenya Commercial Bank and Equity Bank is that the latter two explicitly charge interest on their loans rather than a flat transaction fee, which is why they have been seen to fall under the purview of the Banking Act. However, if word in banking circles is to be believed that the two banks have drastically reduced disbursements in this category in keeping with the reduced interest rate that dramatically raises the risks involved in lending, that should demonstrate the dangers of tinkering with the successful – and fair – microlending programme of which Kenya is now a world leader and which has been enthusiastically adopted in neighbouring countries.

If the rates are reduced to a level at which lenders perceive that the risk outweighs the benefit of short-term lending, we will inevitably witness developments similar to what occurred in Zambia, where lending dried up after rate caps were introduced and the law had to be binned two years after its introduction.

It is instructive in the past few days that foreign lending firms, which offer predatory interest rates of up to 30 per cent on short term loans, have gone on the overdrive, positioning themselves to benefit from microlenders, while loan sharks who had been put to pasture by the emergence of services like M-Shwari will surely not be far behind if these offerings disappear.

REVOLUTIONISED INDUSTRY

M-Shwari has revolutionised the banking industry and made a huge difference to the most important sector of the economy. In Kenya, 77 per cent of the workforce draws their direct income from the informal sector, a figure that rises to 80 per cent for women.

The Economic Survey of 2015 indicates that the informal sector employed 11.8 million people in 2014 against 2.4 million in the modern or formal sector.

That vast majority of Kenyans in the informal sector, the backbone of the economy, are the core market for services like M-Shwari. Any drastic changes that lead to the drying up of this pipeline of credit will have a devastating effect.

Perhaps it is fitting to end with an anecdote. During the launch of M-Shwari, one of those who attended was then Immigration minister Otieno Kajwang’. He was there because CBA was the first to use the Integrated Population Registration System, which means that customers can open accounts within 30 seconds simply by having their IDs digitally verified. Today, more than 100 corporates use this system.

The late Kajwang’, with his trademark wit, captured the moment and essence of M-Shwari in his speech by saying: “at last, the people of Mbita can bank as they fish!”

Kenyans and policymakers should be careful not to tamper with these innovations that have had such a transformational effect and which allow millions of borrowers access to a dignified livelihood.

Moses Owuor is a partner at MMA Advocates.