By Qi Lan, Chinese Academy of Financial Inclusion

December 5, 2018

Source: True Stories of Africa

Prologue

Chinese Academy of Financial Inclusion at Renmin University of China (CAFI) has recently kickstarted the Sino-African Digital Financial Inclusion Exchange and Collaboration Initiative. The Initiative, under the theme of financial inclusion and surrounding China’s Belt and Road Initiative, is committed to fostering the collaborations and investment between China and Africa in financial inclusion-related areas and enabling micro, small, and medium-sized businesses and general public to benefit from financial inclusion. 

Belt and Road Initiative and financial inclusion are both among the nation’s strategic development imperatives and grand agendas by their own rights as well. Nonetheless, CAFI attempts to align these two topics together and experiment with, together with our peers in the industry, maneuvers that are exploratory in nature. The rationale behind is that CAFI, as a research institution dedicated to financial inclusion, knows well what intrinsic value financial inclusion carries. Not only will financial inclusion contribute new contents and meanings to the Belt and Road Initiative, but also will help China’s global endeavors more globally consensual, international cooperation more inclusive, and foundations of such cooperation more solid.       

CAFI takes it as its unrelenting quest to act as a bridge between financial inclusion in China and that in the outside world. In 2017, CAFI introduced to Chinese audience bKash from Southeast Asia, and a collaboration between China’s Ant Financial Services and bKash ensues, striving to create Bangladesh’s answer to Alipay.

As digital technologies are reshaping beyond recognition how we live our lives, people see future trends and hopes. CAFI, on the other hand, sees further beyond the horizon. For example, should we combine “digital agendas” and “Africa” together, probably a new chemistry could result, creating greater meaning. Bearing this thought in mind, as the year 2018 draws to an end and new year dawns, CAFI directs its focus towards Africa and unveils its Sino-African Digital Financial Inclusion Exchange and Collaboration Initiative, striving to bring the best stories of financial inclusion in China to Africa, while simultaneously presenting Africa’s development potentials to Chinese audience. Luckily, this idea of CAFI’s finds an enthusiastic audience in the World Bank and Bill & Melinda Gates Foundation, among other organizations, who never hesitate to lend CAFI a helping hand.

As it is planned, at the end of May 2019, CAFI will mobilize China’s representative institutions to visit Africa, where, through conferences, discussions, and in-depth tours, they will share with Africa China’s practices of and insights into financial inclusion. Surrounding this initiative, CAFI is also actively facilitate cooperation on specific projects, for example, working with other parties involved to explore how, via innovations and collaborations, to serve SMEs in China and Africa with digital means, and promoting cross-border payment and digital lending in Africa, among other agendas.

In late November 2018, CAFI team paid a preparatory visit to Kenya, where they conferred with Chinese-funded businesses, international organizations, banks, Fintech firms, among venture capitalists, among other prospective partners. In ensuing months, we are going to share with our dear readers a series events updates and stories surrounding the Sino-African Digital Financial Inclusion Exchange and Collaboration Initiative.

Following are the debut feature of the series. The author is currently working with Bill & Melinda Gates Foundation. Africa is where the author’s passion lies and for a long period of time, the author has been keeping a keen eye on and chronicling the people’s yearnings and strivings as well as the continent’s development, offering insights that our readers will find helpful in understanding that distant land. More stories about the Initiative are in our pipeline. Stay tuned!       

Now, visualize a life without bankcards, Alipay or WeChat Pay.

For many urbanites, such a life may mean endless nuances: the many inconveniences and risks associated with using (yes, all those bulky to carry and prone to disappearing quarters, dimes, and nickels), carrying, and storing cash; inability to manage our wealth and the resulted feeling of powerlessness while watching our savings losing the race against inflation; absence of credit record, which make it impossible for us to borrow… and list goes on and on.

We are the financial services’ “chosen people” and that is why in the first place we are entitled to bankcards, Alipay, WeChat Pay and other tools and products that make our life run as smoothly as a Swiss watch and assimilate us into an urbanized civilization.

But, what does absence of financial services mean to those down and out?

Their savings are more prone to missing and losing in value? They have nowhere to borrow money when in destitution? Their cash turnover is too low to accumulate capital needed for production or education? Poverty heads nowhere but only to direr poverty.   

In today’s world, three out of every ten adults live such lives.

(Note: Starting from 2011, Bill & Melinda Gates Foundation support the World Bank to compile detailed statistics on financial inclusion. For more information, please visit https://globalfindex.worldbank.org)

Such vacuum also means business opportunities. In the past decade, the developing world has witnessed a “big bang” of innovations in financial services and Africa is no exception. It is a lucky coincidence for me that in 2015 and 2016 I was involved in commercial bank digitalization projects in Nigeria and Thailand and in the week past conducted a field study in Kenya on digital financial inclusion. The following is a record of what I have seen and heard. Contained in the piece are just my personal opinions, nothing more and nothing less, and absolutely no trade secret involved. I wish that readers may find it helpful.

Kenya is the, absolutely not one of the, most accomplished among all African countries in financial innovations. The birth and proliferation of M-Pesa is the driving force that propels the country to this altitude. I won't go to details here (lots can be found by simply Googling it). To make the story short, in 2007, Safaricom, a subsidiary of U.K.'s Vodafone and Kenya's near-monopoly mobile network operator (MNO), launched M-Pesa, a feature phone-based mobile wallet app, to facilitate P2P transfer. Kenya's central bank issued a non-objection letter, and in effect gave its blessing, to this endeavor. Capitalizing on Safaricom's market dominance and customer base, M-Pesa has enjoyed a meteoric rise. It now covers 70% of the country's adult population, contributes USD600 million per annum to Safaricom's coffer, and has an agent network consisting over 110000 offline agents. Those agents could be small merchants, post offices, or gas stations, spreading everywhere in town and country, from whom users can top up airtime, transfer money, make payment, and even withdraw cash, just like the case of ATM. (And by the way, since 2011, M-Pesa's software infrastructure has been build and serviced by Huawei.)

It is safe to claim that M-Pesa's importance to Kenyans' livelihood is much greater than that of Alipay or WeChat Pay to Chinese. Although not that fluid or sophisticated, its functions are adequate to today's market. Moreover, Safaricom has created a myriad of digital financial products based on M-Pesa.

The first step is expanding into digital banking services including lending and saving. In 2012, Safaricom teamed up with Commercial Bank of Africa (CBA) and launched M-Shwari. In 2015, in a joint effort with Kenyan Commercial Bank (KCB), the country's largest bank in terms of total assets, introduced KCB M-Pesa, which offers a wider array of functions (M-Shwari is more like an extended version of mobile wallet, whereas KCBM-Pesa is one-step closer to digital bank).

According to the 2017 statistics compiled by FSD, Africa's most credible financial inclusion think tank (also a Bill & Melinda Gates Foundation grantee), in Kenya, 30% of adult population has used M-Shwari. Particularly in lending, M-Shwari and KCB M-Pesa are the two players with the highest market shares. Approximately 40% of Kenya's mobile phone users ever borrowed from M-Shwari. It is easy, fast, fractional in amount, and accrued monthly. Research on M-Shwari also finds that its greatest value lies in helping families tackle emergencies, such as impoverished households' paying tuitions for their children and coping with unexpected shocks. Its effects in productive investing, creating jobs, and improving household incomes, however, are rather limited.

Let's talk more about lending. Although rather exorbitant (APR could be as high as 90%), M-Shwari nonetheless has certain threshold for who can borrow from it. What could those who fail to meet its lending criteria? Now enters Fintech players, such as Branch (in which Creditease New Finance Industry Fund owns stakes) and Tala, which use big data in assessing poor people's creditworthiness and meet their borrowing demand accordingly.

Take Tala for example. Tala is a digital lending company. It was established eight years ago but spent most of its early years testing and did not launch its service in Kenya until 2014. The reason why choosing Kenya for its debut is the omnipresence of M-Pesa mobile wallet in the country. Tala teams up with Safaricom, having its services directly linked to M-Pesa wallet. It only takes a borrower three minutes to go through the loan application process and the money is disbursed to the borrower's M-Pesa wallet. Behind the scene is Tala's running all kinds of data analyses to comply with the KYC (know your customer) requirements. The same process takes a bit longer in Tanzania than in Kenya as the ID system is not as well developed in the former as that in the latter and to comply with KYC regulations, Tala has to run a cross-authentication process using both voter registration and ID. 

Tala is an app-based service and therefore, only available to those armed with smartphones (of course, the cheapest smartphone in Arica can be acquired for less than USD50). Its value proposition is straightforward: serving individual's fractional borrowing needs, and not engaging in head-to-head competition against banks, hence the lending cap of USD300. The interest is accrued monthly at 11%, and for the repeat customers with good credit history, can be lowered down to 5% (still rather expensive).  

In the past four years, Tala has lent a cumulative total of USD500 million to 2 million borrowers (80% of whom are in Kenya) in several emerging markets across Africa and South Asia. More impressive, 90% of the borrowers have paid back the loans and 95% has used Tala's lending service repeatedly. A particularly remarkable success of Tala's is its service is 100% digital. It has no offline branches nor call centers but resorts to mobile app, SNS, and chatbot to communicate with and service the customers, 24 hours a day, in order to nurture customers' digital adaptation. Not only does this approach help build brand awareness among users but also is enthusiastically received by the investors. In its recently completed USD65 million-worth series funding, PayPal is among the investors.   

I asked Tala,

“It sounds to me that your core competence lies in two aspects: One is that you can complete the lending process in mere minutes but nonetheless achieves a reasonably decent repayment rate, and other is that customer interface is 100% online, which I believe is a hard-sell to low-income segments in Africa. How did you achieve that?” 

“The first aspect you just mentioned, namely our strong data capture and analysis capability, is our core asset. People always say that there is no data in Africa. But actually, there are data, for example, behavioral data, which lay people may not find of much meaning but are exactly what we value. Moreover, we frequently reflect, and never view those data statically but dynamically. The second is rather challenging. Our most important approach is to relentlessly honing our products to make them as simple as possible so that users can easily understand and use”, answered Tala's person in charge in Kenya.  

From a business perspective, Tala still has to tackle a series of daunting obstacles, for example, how to further refine its risk-based pricing model to lower the interest rates, and how to reach more customers (that 95% are repeat customers indicates too few new customers), etc. And there are myriad of other challenges, such as many negative remarks circulating on the market on individual loans, blaming apps like Tala's for beguiling poor people into overconsumption (although Tala begs to differ, based on its own customer surveys); fake apps mushrooming to defraud customers, tarnishing Tala's brand image, etc. On the other hand, Tala wishes to better align with bank's lending system (for example in terms of customer credit history data) but has yet to make much progress due to institutional deficiencies.

Let's get back to Safaricom. In addition to the extension of financial products, Safaricom also manages to create many user scenes. For example, it has primarily completed building its digital agricultural platform Digi-farm (also known as M-Agri). The platform, staffed with its own integral internal team, focuses on agricultural value chain. It provides knowledge and market information to farmers via SMS and connects with a variety of partners to grant farmers lending and payment tools for purchasing seeds, fertilizers, and machineries. It has enrolled hundreds of thousands of farmers and is making inroads into education and health care spheres. Of course, Safaricom also has its fair share of failures, for example, its e-commerce and cab hailing apps lag far behind its competitions, and whether its freshly launched Bonga, an SNS with embedded financial services function, will prove a success has yet to be seen.  

One the basis of user scenes, Safaricom also nurtures M-Kopa Solar, a company of considerable international renown. In Africa, over 600 million people still have to resort to firewood, coal, or kerosene for daily lighting needs. M-Kopa, however, strives to bring solar power systems into rural household via a pay-as-you-go mechanism. Users pay USD40 upfront and then pay usage fees on a daily basis via M-Pesa. After one year of consecutive payments, they can own the systems without having to pay anymore. Thanks to M-Kopa, at present, over 600000 households are able to enjoy clean energy every day.

After a consecutive year of stable payment streams, based on their good credit records, the users can also opt to upgrade to other merchandises, such as solar-powered televisions, energy-efficient stoves, smart phones, and solar-powered water pumps, etc. At the same time, users can capitalize on their good payment records with M-Kopa to apply for loans for tuition payments or purchasing fertilizers. It is because of this aspect that M-Kopa never defines itself as a solar company but positions itself as a financial services provider, which uses its assets, such as user payment and usage histories of solar systems, as a credit endorsement and, building upon M-Pesa platform in combination with innovative payment schedules, continuously introduces equipment and services to expand people's livelihood one step a time.

The past seven years has proved a perilous journey for M-Kopa. Even though with the backing of Safaricom and other investors, Bill & Melinda Gates Foundation included, and tapping into its brand awareness in Kenya, it nonetheless has to overcome daunting challenges in educating customers, nurturing customer habits, and building a sales network, etc. M-Kopa has over 200 full-time employees to answer customer queries and deal with complaints and claims 24 hours a day. It also has over 60 brick-and-mortar stores and more than 500 sales representatives spread across Kenya.

At M-Kopa's Nairobi campus, there is a humble hut used as a demonstration of a typical M-Kopa household. We got into the hut, closed the door and there was nothing but pitch darkness in side. The very moment when M-Kopa equipment was turned on and there was suddenly light, I could hardly restrain my tears – only having experienced darkness can we come into realization how precious electricity is and how we shall never take it for granted.

A typical M-Kopa family has a daily household income of USD10, slightly above the poverty line. There are approximately 7 million such households in Kenya and Uganda, offering M-Kopa considerable growth potential.

In addition to Safaricom, there are other enterprising players in market, the most notable of which are banks. Kenya's most famous bank is actually not KCB, the one with the largest total assets, but Equity Bank, which traces its origin to microlending and renowned for its agency banking. It is Kenya's best in providing financial services to SMEs.

Agency banking model refers to third-party entities, such as merchants, regulated by the central bank and authorized by banks, provides financial service to general public, becoming part of commercial banks' retail banking distribution networks. These agents, like antennae reaching into remotest areas, provide basic financial services to rural population at places where banks do not have branch network. In Kenya, Equity Bank has approximately 200 branch offices and over 30000 agents.

SME lending has long been a thorn in the flesh in many emerging economies. Kenya has approximately 1.4 billion micro and small business (annual revenue less than USD50000, employees fewer than 10), most of which do not have access to financial services. In order to effectively serve SMEs, Equity Bank keeps on flexing its innovative muscles, for example, introducing a credit scoring system through enhancing its data mining capacity. Now some business can get loans from the bank within 2 days on fastest cases, a significant leap forwards compare to the 2 to 3 weeks in the past.

Equity Bank also establishes FinServe, an independent subsidiary, in order to boost digitalization throughout the bank. FinServe now has 70 employees, 75% of whom are engineers, and launched its first product Equitel in 2014, which is supported by Bill & Melinda Gates Foundation thanks to its inclusive nature. Equitel proves able to rival M-Shwari and KCB M-Pesa, and has grabbed a 20% market share in three years since its debut. Most of its users are individuals, including farmers (about 40000) and merchants. Unlike M-Shwari and other competitions, Equitel adopts a completely different technical approach. SIM card-based, it has a ThinSim embedded inside the cell phone, which can link directly to the user's account at Equity Bank. In comparison with mobile wallet, it charges much cheaper fees: 0.1% per transaction, or only 1/5 of what M-Pesa charges. Of course, because ThinSim is too close to bank accounts, some people are highly skeptical about its account security.

FinServe has also been committed to the Bank's own digital transformation since its establishment. Today at Equity Bank over 90% of lending activities and 45% of total lending amount are conducted online. For the next step, FinServe is weighing how to serve more SMEs via digital means, expand to online insurance and wealth management, among other products, and extend to other usage scenes including education and health care. Its ultimate goal is to evolve into an independent financial innovation hub with capacities to render services to other commercial banks.

Beyond single countries, another huge gap existing in Africa is cross-border fund transfer and payment. In the past 5 years, a new breed of Fintech firms emerged capitalizing on blockchain technologies. A notable example is BitPesa.

The world's first player that connect Bitcoin with mobile wallet, BitPesa is set to lower the costs and improve the efficiency of cross-border transaction. It started operations five years ago in Kenya and now boasts local presence in Uganda, Tanzania, Nigeria, Ghana, Senegal, South Africa, and Morocco, among other countries, where they work closely with local mobile wallet service providers (MNOs and commercial banks) to build API connections. Its business model is fairly straightforward. For example, to switch from Paga, a Nigerian mobile wallet, to Kenya's M-Pesa, a user only has to pass KYC process online and accepts the exchange rate that BitPesa offers, the transaction can be closed in a matter of a few minutes. BitPesa charges fees through exchange rates (a margin of single-digit percentage points), much lower than what legacy financial institutions charge. At present, over a million transactions have been completed on BitPesa platform, with transaction amount exceeding USD35 million, and 90% of its users are merchants (traders, for example).

Although bearing the term Bit in its name, BitPesa only has 10% of its transactions related to cryptocurrencies. Its cross-border payment business is mainly underpinned by three pillars: the first, blockchain technology; the second, a strong exchange rate team to monitor and manage liquidity; and the third, a sales force with strong power of execution to balance cash receivables and payables in accordance to the benchmarks set by the exchange rate team.

However, BitPesa has to tackle regulatory challenges. In recent years, many countries have turned hostile towards Bitcoin. Take Kenya for example. Its central bank issued a decree outlawing cryptocurrencies, causing BitPesa to be unable to open shilling account in any Kenyan bank. By contrast, Nigerian central bank adopts a fairly enlightened approach in this respect.

All financial innovations mentioned above have to be erected upon two bedrocks: policy and infrastructure. As for infrastructure, including telecommunication network, internet penetration rate, mobile phone (especially smart phone) penetration rate, interconnectedness of mobile wallet, etc., myriad can be found in publicly available data and reports and it is no need to go details here. Policy aspects are mentioned sporadically in preceding parts of the article and here I would like to raise two issue.   

First, regulations of digital finance are far from coherent.

In Kenya, Fintech sector is not regulated by the central bank, whereas banks are subject to draconian regulations from the central bank. For example, in no occasion are banks allowed to charge any individual or entity interest rate over 14%, whereas digital lending such as Tala and M-Shwari can charge whatever interest rate out of their discretion. Banks also have to comply with stringent KYC and anti-money laundering (AML) requirements and as a result, it usually takes more than a day for banks to process an individual's loan application, whereas the same process only takes a few minutes for digital lenders. All in all, it is more difficult for banks to innovate, whereas Fintech sector is crowded with all kinds of players, not all of whom are necessarily bona fide. Fortunately, this situation may be changes soon. Public authorities, industry, and think tanks are joining force to force an industry association for digital credit, which may be included into the central bank's jurisdiction in order to regulate the industry and protect customers.

Same as in anywhere else, in Africa, the state and the market move in tandem towards improvement amid constant games. In some occasions, policy is in place but it still takes time for regulation and implementation to catch up. For example, in 2018, Kenya's central bank commanded that all banks deliver financial educations to customers but failed to define what financial education was and how to implement (for example, full disclosure of products and fee schedules, customer protection, etc.). Another example, the central bank has made it mandatory that mobile wallets from various MNOs be interconnected but this also has yet to be accomplished.

(More interesting regulation cases can be found in other African countries. For example, in Nigeria, the central bank has a rather labyrinthine licensing regime for all types of charted financial institutions).

The second, a macro trend towards digitalization is beyond doubt.

Although different government agencies may adopt different approaches, for example, the central bank's and Ministry of Information's attitude towards digitalization could vary, e-governance is where the reform is heading.

At present, Kenya and several African countries are drafting their ten-year national payment strategies in order to improve the coverage, usage frequency, and price-performance ratio of financial services, guide super platforms and micro innovations to together fill up the ecosystem, and to take a forward-looking perspective to understand how to meet the needs of the countries' dominant younger population. 

International organizations are naturally involved in this macro trend. For example, the World Bank's Digital Economy for Africa initiative, created with the backing of Bill & Melinda Gates Foundation, is making steady progress. With Kenya and Rwanda as the first priority countries, this initiative conducts comprehensive market diagnostics and based on it, proposes policy recommendations to governments on how to create better digital economic markets.

Now, time for the Author's two cents:

First off, all financial innovations mentioned in this piece have to overcome challenges in profitability and scaling-up of the operations.

Tala and M-Kopa have yet to turn a profit (M-Kopa should have been in the black should only Kenyan market be considered), even though Tala only provides services to those who own smart phones and M-Kopa's users are those who can spend more than USD2 per day, whereas in Kenya, approximately half of the population live for less than USD2 per day. These innovative ventures are relentless pushing financial services to those on the bottom of economic hierarchy, but could not really penetrate to the very bottom lest their commercial sustainability be compromised, unless the society's economic situation as a whole is improved and a strong real economy materialized.

The same can be said about the scale. In terms of overall economic development, level of digitalization, and quality of governance, Kenya among all African countries is fairly friendly for financial innovations. When expanding to Tanzania, Uganda, and other countries, however, these companies usually find themselves in uncharted waters, where they have to overcome differences in and challenges derived from public policies, regulations, customer habits, and purchasing power.

Secondly, compared to Chinese or Asian market, the figures listed in this article are far from impressive, because the markets are not big enough or growing fast enough.

Contrary to cases in China, where a startup can expect to go public in three to five years, these African players usually do not have rich and powerful investors at their back and probably because of this, move more patiently and are more willing to struggle against an imperfect market one small step a time, rather than making big bubbles with money.  

This approach towards growth reminds me that the essence of commercial enterprise is to create value, following which market determines prices that users pay. For people who are not adequately affluent and markets that do not have adequate capacity, should the businesses recklessly erect Potyomkin villages and over-supply, more sever risks would ensue, bringing deeper harms to general public. 

The last but not the least, what can China contribute to Africa's financial innovations? The most straightforward is technology, or, in other words, through technologies, to help make local markets a bit more optimal and local industry grow a bit faster.

In the past decade or more, hardware and software from Chinese companies such as Huawei and Transsion have been instrumental in fostering Africa's digitalization. For the next step, more technologies in the realms of data mining and analytics, Blockchain, and AI can be involved to lend supports to Africa's industries. China's rich diversity of business models and cornucopia of scene-based products certainly can provoke inspirations in African markets but have to be substantially localized first.

As this article is nearing its completion, the author has a sudden nervous attack, worrying that the cases mentioned here might be subject to distortions or misrepresentations by some bearing less than bona fide intentions. As Mr. Dong Ma, the TV sensation, puts it, those who express are predestined to be misunderstood. Nevertheless, it is the author's humble wish that not to intentionally misunderstand is a reader's basic stance and good will.

Disclaimer: The stance and opinions contained in this article are of the author’s and the author’s only and do not represent the opinions of the Chinese Academy of Financial Inclusion nor of this public account.

THE END