How better use of data can boost credit access

As our legislators passed the law on interest rate capping, the consumers stood divided along two distinct lines in what has been largely criticised as a move that affected the profitability of lenders, locking out a bulk of individual borrowers and the SME sector from access to credit.

A scenario that I dare say bears some truth but its application largely misguided.

To the chagrin of many commercial banks, the law in itself did push their investments into risk-free government lending, to compensate for the now waning profitability arising from lending.

We also witnessed the same institutions put in place aggressive cost-cutting measures while the environment helped tame the high costs of credit. Not without risk though, the now affordable credit was only accessible to a certain segment of the market that was deemed less risky. While the agitation for the cap removal with its cited bagful of benefits maybe what we are all angling for, is this all there is to ease access to credit and larger financial inclusion?

Not too long ago, the Central Bank of Kenya (CBK) at the Fintech in the Savannah Festival saw deliberations on the bank of the future — one born out of legacy banks as we know them today, with a little help from technology and customer data.

The truth is, this cannot be done by the CBK alone but will take the effort of banks, financial intermediaries such as digital lenders, saccos, chammas and even mobile service providers — who all have different sets of customer habits and behaviour to guide loan pricing and access.

I take interest in small-scale traders such as the mama mboga in my neighbourhood. On a given day, her stock does not exceed Sh5,000. When you look at her mobile money transactions — weekly savings of Sh500 for chamma, another 200 to her boda boda guy for the collection of goods and another Sh1,500 to her managu supplier every alternate day for the stock. In total, her transactions worth Sh2,200 do not tell us or build her credit profile.

The same lady does not hold a bank account but at the start of each term, manages Sh 15,000 for school fees and consumables for her children in addition to another Sh4,500 for rent monthly. But how does she raise this? Her chamma extends her a loan, repayable in three months but also offers her the flexibility for daily, weekly or monthly repayments.

On the surface, she is only bankable within her social circles.

For financial inclusion, the borrowing, repayment and cash cycles provide insightful data that is unfortunately restricted to her social circles. A closed group that thrives on social capital and tailored around lifestyles. If we were to generate a credit score for her, she doesn’t even meet the minimum threshold — no borrower history, limited mobile money transaction and no documented record of default and, therefore, not creditworthy.

Now let us reimagine the scenario with access to her lending circle, payment patterns to her supplier, for example, irregular purchases mean irregular payment and this might be an early indicator that her business is not doing too well. It would also point us to shifting customer habits which have seen her stock a different commodity. If we were to dig into her chamma history altogether, look at her weekly repayment habits and the number of times that the chairlady had to seek intervention from her neighbours for repayment, we would better understand her micro-enterprise cash cycle.

Guiding lenders on the time, amount and repayment period of any credit extended to her.

All around, commercial banks, saccos and other financial intermediaries have heightened interest in the SME segment offering loans in no time, with or without security.

Which goes to show that you can never truly be overbanked, the catch is getting the right credit provider within acceptable terms of the borrower.

Just how do we achieve this? Basic financial literacy on cash flow management and the digitisation of SMEs will enable the market to move from contextual services. We need to move from the point where all we can provide is money, and the qualifying parameters revolve around holding a physical bank account, having a duly registered business with a certain turnover onto what other consumer data can be generated from these businesses, personal spending habits and social capital to better understand what financial inclusion policies Kenya requires.

The truth is, small businesses and even a segment of Kenyans remain locked out of the formal and digital credit ecosystem, denying them better saving options and financial access necessary to uplift their livelihoods.

In what has taken the financial markets by storm, MyBank, an online bank by business magnate Jack Ma is said to have lent out loans amounting to $398 billion to at least 16 million small companies, based on real payments data and a risk management system that looks at more than 3,000 variables such as social media, payment systems and the government-administered social credit system.

Bringing in new borrowers, rewarding good ones and punishing misbehaving ones, in what has previously viewed as risky customers.

Back home, the relationship between lenders and data custodians is such that we have such a veiled stance towards privacy, locking out troves of useful data which if analysed, would boost the existing credit scoring mechanism that relies on existing financial history.

By expanding the credit information bracket to include social data and other quantifiable ways will not only boost credit risk assessment but bring us closer to servicing both individuals and businesses.

To unlock the socio-economic impact and gains of financial inclusion, we need a collaboration of players, policymakers and custodians of data. This means bridging the gap between access to other forms of data and utilising that which is already in our custody, better.

As financial markets continue to evolve, so is innovation, let us harmonise data for informed financial decision making and the changing face of the borrower of the future.

The writer is CEO, Stawika Capital.