M-Shwari platform set to shake up small loans market


Isaac Awuondo (left), the CBA chief executive officer, Finance minister Njeru Githae and Safaricom CEO Bob Collymore (right) celebrate during the launch of the M-Shwari mobile banking service. The service, a partnership between CBA and Safaricom, was launched at the Windsor Golf and Country Club in Nairobi November 27, 2012. Photo/SALATON NJAU

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.

READ: Safaricom takes on banks with micro-loans product

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.

The product is, however, seen as competitive among individuals and small business owners who have difficulty accessing credit from banks due to lack of collateral and documents like cash flow statements and payslips.

Borrowers seeking short term funds, in particular will also find the 7.5 per cent interest competitive since banks normally charge a 10 per cent interest on overdrafts while shylocks charge more exorbitant rates.

CBA will rely on the spending patterns of Safaricom customers across various products offered by the telco to build a credit assessment and risk profile that will ultimately inform the loan size a customer can secure.

The bank will use the amount of airtime used by post-pay subscribers, their M-Pesa transactions and the deposits on M-Shwari. A borrower who does not settle the principal and interest within the 30 days shall be deemed to be in default.

This would attract a further interest of 7.5 per cent on the defaulted amount and the total outstanding balance shall be rolled over to the next 30 days.

“In addition to paying the outstanding amount in respect of the loan any outstanding facility fee, pay to the bank a roll-over fee being 7.5 per cent of the outstanding amount in respect of the loan (the Roll-Over Fee),” reads part of the terms and conditions of the service.

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.

For subscribers to qualify for M-Shwari services, they will have to be 18 years of age and be registered users of M-Pesa, giving CBA access to information necessary for Know Your Customer prudential requirements.

CBA is hoping to hook a large segment of Safaricom’s 19 million subscriber base to M-Shwari as well as the telecom firm’s network of 47,000 distribution agents to deliver the service.

For Safaricom, the service is set to further boost its earnings from M-Pesa, which was introduced as a money transfer tool but has evolved into a utility bills payment and credit service. Daily M-Pesa transactions stand at two million and are valued at Sh2 billion.

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