Capital Markets

Safaricom takes on banks with micro-loans product


“It is simple. There are no ledger fees, no limits on the frequency of withdrawals, no minimum operating balance and no charges on deposits for M-Pesa to M-Shwari account,” said Bob Collymore (pictured), the Safaricom chief executive officer. PHOTO/ FILE

Safaricom’s foray into the financial services market is expected to deepen on Tuesday morning with the launch of a mobile banking service that allows users of its revolutionary M-Pesa platform to save and borrow money using their phones.

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The service, which mainly targets micro-savers and borrowers, requires users to open a mobile bank account, M-Shwari , into which they can deposit as low as Sh1 in savings and borrow up to Sh100,000 payable with a one-off interest rate of 7.5 per cent.

All loans are payable within a month of disbursement.

People familiar with the product told the Business Daily that deposits in M-Shwari accounts will earn a graduated interest up to a maximum of five per cent per annum.

Safaricom is offering the service in collaboration with Commercial Bank of Africa (CBA), which has been the primary banker for M-Pesa, Safaricom’s mobile money platform.

Users of the mobile banking service will remotely open the M-Shwari account by simply clicking on their phones. This will spare them the pain of filling application forms as happens with traditional banking.

“It is simple. There are no ledger fees, no limits on the frequency of withdrawals, no minimum operating balance and no charges on deposits for M-Pesa to M-Shwari account,” said Bob Collymore, the Safaricom chief executive officer.

Safaricom is positioning M-Shwari as a groundbreaking financial service that promotes a culture of saving among ordinary Kenyans and allows those with no collateral to access loans through their mobile phones.

Mobile money enthusiasts declared the service another revolutionary product with the potential of taking the ongoing convergence between telecoms and banking sectors higher but critics warned of the dangers that lie in the high interest rates and the one-month loan term.

The M-Shwari service is designed to act as a rudimentary credit facility for those who have been locked out of the loans market for lack of collateral and credit history.

“M-Shwari will attract a one-time facilitation fee (read interest rate) of 7.5 per cent of the borrowed amount,” Safaricom said in a statement.

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 period 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.

For instance, a loan of Sh100,000 from the mobile bank account would attract a Sh7,500 interest charge, which means that the borrower pays back Sh107,500 within 30 days, including the principal.

A similar bank loan attracting interest at the current average rate of 20 per cent, would be repaid at the rate of between Sh9,150 and Sh9,200 per month for a year on reducing balance.
This would translate to an interest burden of Sh11,161 spread over 12 months – compared to Safaricom’s Sh7,500 interest payable in a month.

Safaricom is relying on the spending patterns of its customers, traceable from their airtime top-ups and M-Pesa transactions to determine the creditworthiness of subscribers.

Credit evaluation experts see this as giving the telecoms firm an edge over banks, especially with regard to target market that is mainly made up of informal sector operators who have been unable to secure loans for lack of cashflow statements, payslips and collateral.

To qualify for an M-Shwari loan, one needs to be an M-Pesa subscriber for at least six months, deposit some savings in their M-Shwari account and be a regular user of other Safaricom services such as voice, data and M-Pesa.

And to open an M-Shwari account, consumers will go to the Safaricom menu in their phones, select “M-Pesa”, go to “My Account”, “Update Menu”, enter “M-Pesa PIN” and wait to receive the updated M-Pesa menu.

Commercial Bank of Africa 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.

It is estimated that more than Sh300 billion of money in circulation in Kenya is outside the formal banking system and M-Shwari is designed to bring some of that money into the formal banking channels by targeting the 12 million Kenyans identified by the Central Bank of Kenya and the Kenya Bureau of Statistics as unbanked.

Safaricom launched a similar service with Equity Bank in May 2010 but the initiative collapsed a few months later amid reports of disagreements over fees and revenue sharing.
It also comes just six months after Airtel launched its credit-over-the-mobile service offer, targeting commercial banks’ core lending business at the lower end of the market. Airtel’s loans are capped at Sh10,000 and are issued in partnership with Faulu Kenya, a micro-financier.

The partnership between Safaricom and CBA comes after last week’s release of Central Bank of Kenya data showing that Kenyans transferred Sh1.117 trillion through their mobile phones, helped by the interface between banks and cash transfer services of telephone firms.

The value of all economic activities in Kenya — or the Gross Domestic Product — was Sh3.7 trillion last year.

CBK said the increase in mobile money transfers was being fuelled by the high number of consumers moving money into and from their bank accounts using mobile phones.
Kenya’s six biggest banks have established mobile banking platforms that allow consumers to access their accounts through their phones.

Kenya’s mobile phone operators first rattled the banks with money transfer services five years ago, forcing the lenders to form partnerships with the telecom operators for a share of the fees charged on the multi-billion-shilling domestic transfers.

The direct entry of Safaricom into the lending market is expected to lift 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. M-Pesa users now stand at 15.2 million, having grown from 52,452 at its launch in April 2007.

Revenues from the service rose 32 per cent to Sh10.4 billion in the first half of the year ended September 30, making it a critical growth area compared to the voice business, which has been hit by a vicious price war.

M-Pesa’s contribution to Safaricom’s total revenue rose to 18.6 per cent from 17.1 per cent, with Safaricom’s parent company, Vodafone, set to take the service global by signing more partnerships in multiple markets.

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