M-Shwari platform set to shake up small loans market
Posted Tuesday, November 27 2012 at 20:45
- Subscribers will be able to save between Sh1 and Sh100,000, the maximum deposit on M-Pesa, and earn an interest of between two and five per cent. The interest on M-Shwari deposits is higher than that offered by commercial banks.
- M-Shwari borrowers will initially qualify for loans ranging between Sh100 and Sh20,000 though CBA says it can review the ceiling.
- The loans, payable within 30 days, will attract an interest or facilitation fee of 7.5 per cent.
- If a customer fails to pay the balance within the 30-day extension they will forfeit deposits in M-Shwari that will act as collateral.
- The defaulter also risks being blacklisted by banks and micro-finance firms as his tarnished credit history will be shared with the credit reference bureaus.
Safaricom subscribers can now operate mobile-based savings accounts, earn interest on their deposits and borrow small loans in a move set to raise competition against banks, saccos and shylocks.
The telco Tuesday launched the product dubbed M-Shwari, a virtual banking platform, in partnership with the Commercial Bank of Africa (CBA) accessible by Safaricom’s subscribers under its M-Pesa service menu.
Subscribers will be able to save between Sh1 and Sh100,000, the maximum deposit on M-Pesa, and earn an interest of between two and five per cent.
CBA did not specify what amount qualifies for what interest rate. It also did not identify the period over which the savings will earn interest, with the lender retaining sole discretion in setting the parameters.
The interest on M-Shwari deposits is, however, higher than that offered by commercial banks, meaning that they might have to raise their interest on the savings they have been taking for between zero and 1.6 per cent.
“As CBA we aim to bank a wider customer base and we hope the market will respond to this new innovation with the emergence of new business paradigms and technologies that will contribute to an even more efficient financial market,” said Isaac Awuondo, the CBA chief executive officer.
Data from the Central Bank of Kenya shows that savings accounts have been attracting an average interest of 1.6 per cent while fixed deposit accounts have been earning an average interest of seven per cent since January.
Banks with millions of retail customers have been the biggest beneficiary of the low-cost deposits since most of their individual customers’ cash do not meet the interest-bearing threshold.
Only cash-rich firms and wealthy individuals have been earning double-digit interest on their large deposits that allow them to negotiate for above-market returns, especially when lenders are short of liquidity.
CBA and Safaricom are betting on mobilising some of the Sh300 billion estimated to be circulating outside the formal banking system, targeting the 12 million Kenyans identified by the Central Bank of Kenya and the Kenya Bureau of Statistics as unbanked.
A significant upsurge in deposits on M-Shwari could force CBA to raise its core capital which should be at least eight per cent of total customer base.
M-Shwari borrowers will initially qualify for loans ranging between Sh100 and Sh20,000 though CBA says it can review the ceiling. The loans, payable within 30 days, will attract an interest or facilitation fee of 7.5 per cent.
The bank will perform the due diligence and packaging the loans while Safaricom offers customer information and its M-Pesa platform that now has 15.2 million users. The two did not disclose how they will share the revenues.
Though the 7.5 per cent interest looks competitive compared to interest charged on commercial bank loans, that advantage is severely eroded by the one-month lending tenor that will mostly require borrowers to pay a lump sum amount to settle the debt compared to smaller monthly instalments paid by those who borrow from commercial bank.