At the beginning of the last quarter of 2015, I wrote an article examining the question if Mobile Money could be the answer to financial inclusion in the developing world. I argued that Mobile Money could possibly become the tool that will deliver financial inclusion to Sub-Saharan Africa’s two and a half billion lower and middle-income households who remain unbanked.
MTN – Africa and the Middle East’s leading emerging mobile markets operator who then emphasized that “the continued roll-out of MTN Mobile Money and broader financial services [would] remain[s] a priority” is now expected to launch a savings and loans feature to its Mobile Money fabric.
Just like Safaricom in Kenya, MTN has partnered with Commercial Bank of Africa (CBA) to usher in the new service that will offer MTN Mobile Money users the option to save and access loans using mobile handsets.
The new Mobile Money service – currently being tested with a selected base of customers – will allow subscribers to activate a savings and loans account free of charge. An active Savings account is a pre-requisite for one to qualify for a loan, with loans of up to 1 million Ugandan Shillings initially available. The credit score – called Loan Limit – is computed based on assessments of the user’s repayment behavior, savings amount, their use of Mobile Money as well as other MTN services. Interest rates vary between 2% and 5% depending on the amount saved and “interest on savings is accrued and paid quarterly after an account is activated”, as information available on MTN’s website indicates.
Safaricom offers the best case study at the significance of such a product. “Every second of the day, a Safaricom [through CBA] processes a loan,” said Safaricom’s CEO Bobby Collymore, speaking at an event in Kampala recently.
“Every second of the day, MPesa processes a new loan.” – Safaricom CEO @bobcollymore
— Albert Mucunguzi (@albertmuc) August 5, 2016
According to Uganda Bankers Association, there are only 5 million Ugandans with formal bank accounts – while almost four times as many and over half of Uganda’s population (19.5 million, approximately about 53 percent) are mobile phone users as statistics by the Uganda Communications Commission showed. 18.5 million out of those 19.5 million mobile phone users are registered for mobile money services across the various operators.
What this shows is that currently mobile money is strongly favoured over formal and traditional banking ecosystems. Compared to formal financial institutions where one must make the journey to a bank, queue up and possibly wait several days until a query is processed, with the help of USSD technology that provides a text-based menu that is accessible on even the most basic mobile phone without needing to connect to the internet, Mobile Money facilitates effortless, instant, convenient and efficient access to financial services and transactions.
In her Global Microcredit Summit workshop paper “Village Savings and Loans: A Pathway to Financial Inclusion for Africa’s Poorest Households”, Lauren Hendricks who is the Executive Director of CARE International (a global confederation working to fight poverty) and Access Africa (a strategic investment with focus on expanding CARE across Sub-Saharan Africa) investigates data collected in Malawi, Tanzania and Kenya where the Village Savings and Loans model was implemented to support poor and marginalized households in building their financial assets through saving rather than borrowing, and thus diversifying their income generating activities and sustaining their household consumption needs.
The study also revealed that the most common place to save in Uganda is in the house where 63.1 percent keep their savings which, needless to say, is unsafe and unproductive on the long run as it keeps money out of circulation and opportunities to grow one’s assets are limited. For the remaining percentage with access to formal financial services, the interest rates for loans in Uganda averages at 24% with the Central Bank Rate having been increased to 17 percent by the Bank of Uganda in October 2015.
Moreover, results of a geo-spatial mapping exercise of financial outlets carried out in 2013 indicated that while urban areas were well covered, the rural areas still had a long way to go even after taking into consideration the SACCOs and mobile money outlets. As a FinScope survey revealed, the vast majority (75%) of Ugandans aged 16 and above live in rural areas, with 42% relying on informal banking services and 30% entirely excluded financially, i.e. being served by neither formal nor informal institution.
The study concluded saying that Financial Inclusion in Uganda “is highly influenced by the informal sector”, hence rendering evident that informal institutions still play a substantial role, especially for rural populations who continue to resort to above mentioned VSLs or community-led groups to save and borrow or lend money amongst themselves.
Therefore, access to affordable and convenient savings and loans schemes, now possible via MTN’s Mobile Money Savings and Loans would offer these and other households favourable circumstances to improve and grow their financial assets in a significant manner. Although users will need to keep in mind that the amount one may be allowed to borrow is crucially dependent on their saving behavior (hence the “savings and loans” reference, according to an MTN source), the possibility of being able to instantly acquire a loan without the requirement to present security and sign paperwork is almost unimaginable.
Notable success has been recorded with already established similar services with Safaricom’s M-Shwari and M-Pawa. Operating in Kenya and Tanzania respectively, the savings and loans service M-Shwari has been described as “representing the next frontier of digital financial services as it demonstrates that mobile money infrastructure can be leveraged to offer higher value financial products at scale”. An analyst for the financial paper The Economist writes that a study found that in rural Kenyan households that adopted M-PESA, increased their incomes by a margin of 5% up to 30%. In addition, the availability of a reliable mobile-payments platform has spawned a host of start-ups in Nairobi, whose business models build on M-PESA’s foundations.
With these Safaricom’s products as successful models to further closing the financial opportunities gap between banked and non-banked populations, MTN Mobile Money’s Savings & Loans component may promise comparable achievements in Uganda.
On the grand scale, Uganda and its President Yoweri Museveni recently set an ambitious 5-year vision to reach middle-income status by 2021. “Middle income” by definition would require an inclusive strategy to influence the income of all households.
The Population and Housing Census of 2014 suggested that households reliance on subsistence farming rose to 69 percent, which means that 7 in 10 Ugandans depend on agriculture for most of their livelihoods. Naturally, the significance of this sector was echoed in the President’s recent Cabinet address outlining “Strategic Guidelines and Directives 2016 – 2021”. Museveni gave agriculture a paramount role, pinpointing declining productivity in this sector due to limited access to appropriate technologies as a major challenge among others. The weight agriculture carries is reflected in the allocated share of the national budget – a 65% increase from Shs. 343.46 billion in the fiscal year 2015/16 to Shs. 823.42 billion.
Keeping all the above in mind, one could infer that a mobile savings and loans system that requires no internet connection and is accessible for rural households – of whom a very significant proportion rely mainly on agriculture for livelihoods – might prove opportune for the President’s. Furthermore, integrating the VSL model into the Mobile Money fabric could aid farmers (collectives) or any other unbanked individuals enhance their financial literacy, thus empowering them to manage their finances better and make informed choices that will benefit their consumption needs and wealth accumulation.
Beyond the agriculture sector, financial inclusion appears to play a more all-encompassing and central role to Uganda’s development, so much so that the country’s national financial institution Bank of Uganda incorporated it into its strategic roadmap four years ago, under the Bank of Uganda Financial Inclusion Project Plan 2012-2015. With focus on these four pillars: Financial Literacy, Financial Customer Protection, Financial Innovations (including mobile money and agent banking) and Financial Services Data and Measurement, the main aim of the Financial Inclusion Plan is to respond to the fast-emerging technological advancements by acting as an enabler to “exploring different ways of promoting increased financial services delivery channels and linkages between the formal and informal financial sector.”
To further strengthen the initiative, the Bank of Uganda revised the project in 2013 and formed a Strategic Paper extending the project’s initial duration by two more years until 2017.
If, as expected, the official launch of MTN’s savings and loans happens in the next few days, it will be interesting to observe how the subscribers embrace it and how the financial service landscape will be impacted. PC Tech will keep an eye on the service’s progress and offer ongoing coverage of the product’s perfomance.