For the vast majority of people living in sub-Saharan Africa, a traditional bank loan is simply not an option.
The region is home to the largest proportion of unbanked people (estimated to be over 60% at last count). But even those who do have access to bank credit face abnormally high loan rates, especially when it comes to the perceived-risky low-income groups.
In recent years there has been a trend of some African countries establishing interest rate ceilings – such as seen recently in Kenya. While the aim is to protect poorer citizens from being charged exorbitant amounts, it has actually further restricted access to credit – as traditional lenders are now imposing even more rigid guidelines for granting loans.
However, this also presents an opportunity for many microfinance institutions, which have popped up over the years to operate in a space deemed too risky for banks. One of these is Musoni Kenya, based in Nairobi. It was launched in 2010 and currently has over 40,000 clients with loans ranging between US$5 and $3,000. The company uses the mobile money platform M-Pesa for loan disbursement and repayments to reduce operational costs, and has a repayment rate of 97%.
At the Mastercard Foundation’s 2017 Symposium on Financial Inclusion, recently held in Accra, How we made it in Africa spoke to the firm’s CEO, Stanley Munyao, about the strategies it employs to reduce the risk of financing bottom-of-the-pyramid consumers.
Partnering to share resources and risk
“One of the biggest challenges for financial institutions, particularly microfinance institutions, is the cost of on-boarding customers and then maintaining those relationships, as well as the lack of proper data to help you make lending decisions,” said Munyao.
However, he noted that partnerships offer a solution to these challenges.
The firm is working with various companies that have products and services aimed at low-income consumers. For example, Musoni Kenya has partnered with d.light, an off-grid solar product distributor, to provide a credit service to d.light clients. It has similar partnerships with agricultural companies (selling everything from fertiliser to bee hives) targeting small-scale farmers.
Musoni Kenya has also connected with FarmDrive, which analyses know-your-customer (KYC) databases (such as those belonging to mobile network operators and government entities) as well as M-Pesa accounts, geographic locations and mobile phone usage to determine the creditworthiness of smallholder farmers.
“We want to work with partnerships because it gives us accelerated growth avenues. Partners do the primary KYC work and to some extent they do tailor-made trainings. So in that way we are able to share costs,” Munyao said.
Providing financial training
According to Munyao, Musoni Kenya targets loans at business-minded individuals – whether this is a small-scale farmer or an informal trader.
One strategy deployed to increase the chances of timely repayments is the provision of financial literacy training seminars, which help clients improve their cash flows.
“We invest a lot in financial literacy training, something that financial institutions run away from because it is expensive and they do not see the gains,” explained Munyao.
“But we see the gains of that in a quality loan book.”
Customer-centricity through technology
Clients, even in remote areas, can easily access Musoni Kenya’s services using mobile phone platforms like SMS and M-Pesa. They don’t have to visit brick-and-mortar centres to get loans, make repayments or acquire information about their balances and credit options – which is often the case with traditional lenders in emerging African markets. It both reduces costs and increases accessibility to the firm’s microloans.
“Customers have a seamless interaction with the institution any time of the day, mainly by SMS – as the majority are holders of feature phones – as well as M-Pesa. It is up 24-hours a day… So customers are able to get credit facilities when they want them,” said Munyao.
“Customer-centricity is a key determinant for success of any financial player in the market,” he added. “How you treat your customers, how you tailor products around their needs, and how you reach them is key to success.”