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Cashless Nigeria – Leading by example

20.10.2015Camilo Tellez-Merchan, Knowledge and Research Manager, BTCA

As Nigeria rolls out one of the developing world's most ambitious policy platforms to boost digital payments and drive greater financial inclusion, it's important to take stock of the country's progress to date, so that policy-makers around the world can learn from Nigeria's experiences.

To this end, the Better Than Cash Alliance has just released two pivotal studies documenting Nigeria's digital journey, including the prospects for further progress in key areas, and four in-depth case studies which, whilst not a representative sample of all large businesses, nonetheless provide several important lessons.

In aggregate, the studies paint a mixed but broadly encouraging picture of Nigeria's success. The transition from cash to digital payments is progressing at very different speeds in different sectors of the economy and by different payment type.

The most promising findings relate to mass payments from a single payer to many payees ('bulk payments'). On this front the Nigerian Government is leading by example, making all of its pension payments, supplier payments and payments to state and municipal governments electronically, along with 61% of its salary and social subsidy payments. Importantly, the Government's leadership has created momentum that is combining with the Central Bank of Nigeria far-reaching Cash-less Nigeria program and driving significant progress towards digital payments among large businesses.

Cash-less Nigeria entails a wide range of policy initiatives ranging from public information campaigns, point-of-sale guidelines and restrictions on cash-in-transit services, and fees to disincentivize cash withdrawals. It is supported by the National Electronic Identity (e-ID) Card, a national ID that citizens may also choose to activate as a MasterCard-branded payment card. The policy was first implemented in 6 states (Lagos, Rivers, Anambra, Abia, Kano, and Ogun State) and the Federal Capital Territory (FCT), and it was rolled out nationwide in 2014.

As an indication of progress in Nigeria's corporate sector, as of 2013 large businesses now pay 61% of salaries electronically (compared to 31% in medium businesses, and 15% in small businesses). Indeed, one of the key insights to emerge from BTCA's studies is that digital payments now appear to have passed a tipping point in Nigeria's corporate sector, with the result that for large businesses it is not a question of whether to make the transition to digital payments, but rather one of when and how.

However, for other payment types the progress has been more modest. Although they exist, when it comes to payments by many payers to one payee (e.g. consumers paying a utility company or the national tax authority) digital payment options have not been widely utilized. Factors contributing to this low take-up include an absence of aggressive marketing of digital payment options by utility and other consumer-facing companies, the ubiquity of cash payments, and the large portion of the population that does not have a bank account.

Payments by individuals to one commercial payee (ie. a merchant) make up the overwhelming volume of payments in Nigeria, as it does in many markets. In this category, only 1% of payments by volume are currently being made digitally.

Several key barriers to the faster digitization of payments emerged from the Better Than Cash Alliance's studies. Chief among them is the widespread concern among individuals and small businesses about the scrutiny and consequent tax obligations they will face if they adopt digital payment tools. At the same time, there also exists a broad lack of understanding among individuals and small businesses of the benefits of going digital. There is a clear need for more public education campaigns to fill this knowledge gap. That being said, there is also evidence from a 2014 survey of 600 small businesses that some merchants are starting to recognize some of the key benefits, such as better record-keeping tools.

Also central to the findings is recognition of the need for better infrastructure and stronger incentives to drive change forward. While digital payment infrastructure is advancing rapidly in Lagos, and to a lesser extent in other major cities, it is, unsurprisingly, far less developed in rural and remote areas. Action is needed to overcome these digital gaps.

It is also noteworthy, that debit cards have been widely issued to Nigeria's urban and banked population, but consumers overwhelmingly only use them for cash withdrawals (which are generally free), rather than to make payments at the point-of-sale (POS). This low demand among consumers for digital point-of-sale facilities in turn means merchants have little incentive to invest in digital POS facilities, such that "the use of cards at merchants appears to be at a standstill", according to our analysis.

These are the types of challenges that Nigerian policy-makers will need to address with a new round of targeted initiatives if Nigeria is to build on its successes and aggressively drive greater financial inclusion through digital payments. Happily, the ambition and leadership the Government and Central Bank of Nigeria have already demonstrated augurs well for the future. 

________________________________________________________________

Camilo Tellez-Merchan is the Knowledge and Research Manager for the Better than Cash Alliance. Prior to joining BTCA, he worked at CGAP in Washington and the GSM Association in London where he supported providers in the area of digital financial services. He has also worked at the UN Economic Commission for Asia and the Pacific in Bangkok, and at the Microsoft Labs in Bangalore where he conducted ICT4D research in the technology for emerging markets team.

Gravatar: Carol Caruso, Senior Vice President, Channels & Technology, Accion

New Case Study Provides Evidence on the Impact of Digital Field Applications

21.09.2015Carol Caruso, Senior Vice President, Channels & Technology, Accion

This post was originally published on the Center for Financial Inclusion Blog website.

Providing micro financial services is often a costly endeavor. As practiced in most places today, it involves many manual processes which limit the potential for scaling up and expose vulnerability to poor service, errors, and fraud. Furthermore, as telco operators and fintech companies bring services to customers through new distribution mechanisms, microfinance banks (MFBs) need to explore innovative ways to competitively deliver their services. Hence, it is promising to see a rise in the use of tablets, smartphones, and other devices housing applications that digitize field operations. Digital field applications (DFAs) offer MFBs a way to take advantage of technology to solve some of these challenges. Globally MFBs have deployed DFAs in a wide variety of ways. For example, loan officers equipped with DFAs can process loan applications and answer client inquiries in the field, eliminating paper forms, digitizing data, and saving time and money for organizations and their clients. Bringing financial services out to clients can achieve a much-needed personal touch and can even increase the richness of the client interaction. For example, client education and consumer protection awareness can be more effective when digital messages are delivered by a field staff member. DFAs can also improve credit operations. When assessing loan applications and risks, field officers can operate more efficiently if digitally equipped.

In order for MFBs to successfully leverage these tools, both for their and their clients' benefit, they must understand their business case, and incorporate best practices for implementation that have been derived from lessons learned by others. There is no shortage of pilots that have been halted due to challenges arising from lack of experience and understanding - despite hardware availability or subsidies.

With this in mind, Accion's Channels & Technology group have published a case study aiming to provide some clarity on the impact of DFA use by examining the business case, implementation process, and effects for three MFBs: Ujjivan Financial Services in India, Musoni Kenya, and Opportunity Bank Serbia (OBS). Our case study presents a consolidated review of the findings from the three MFBs, with an accompanying Excel-based business case toolkit, available for MFBs to examine the potential impact a DFA might have on their business. Individual cases presenting the findings from each institution are also available - here, here, and here.

DFAs Are a Sound Investment

When we analyzed the business case - reviewing capital and operational expenditures, cost savings, and revenues earned - we concluded that an MFB could reasonably expect to achieve breakeven between 12 to 24 months after implementing a DFA. Furthermore, although the primary motivation for implementing DFAs was in most cases to improve loan processing efficiency, all three institutions experienced a variety of benefits that went well beyond their core objective.

Key results included:

  • Average loan officer case load increased by 134 percent at Ujjivan
  • Loan application turnaround time (TAT) decreased from 72 to 6 hours at Musoni
  • A new digital credit scorecard delivered a credit-decision in the field for 80 percent of targeted loans at OBS

Additionally, the institutions realized a range of adjacent benefits, including enhanced credit scoring and Social Performance Monitoring (SPM) capabilities, improved enforcement of controls and policies, and a reputation as market innovators.

During the study we also explored client impact and found that clients benefited from increased convenience due to a faster loan application process with fewer KYC documents required, or were notified more quickly if they were not qualified.

Lessons Learned

In studying which elements were essential for successful implementation, strong change management capability was crucial. Several key activities emerged as best practices:

  • A clear understanding of the institution's requirements coupled with strategic business process reengineering ensured the solution was designed optimally to meet their needs.
  • Close cooperation between MFB staff and the solution provider during planning and piloting also proved critical for successful integration and take-up, as testing with end-users revealed pain points that could be redesigned to enhance usability. Furthermore, this collaborative approach helped cultivate project champions among internal staff, an important part of organizational change management.
  • All three MFBs approved contextually appropriate modifications to their DFA solutions, rather than opting for out-of-the-box functionality. For example, the decision to operate in offline mode required robust back-end integration, data storage, and CBS security, but allowed loan officers to perform certain functions in areas of low connectivity.

Overall, results from the case study were very promising, and we hope that more studies will compliment these findings. Equally important is to hear from a wider set of MFBs about their use of DFAs, and the related impact, challenges, and lessons learned.

 

 

Carol Caruso is Accion's Head of Channels & Technology (C&T); responsible for bringing innovative delivery channels and technology solutions to Accion partners and increasing sector development through advisory services and initiatives. Carol has 20 years of experience in business and IT consulting services in developed and developing countries. 

South Africa’s Proposed Credit Regulations Irk Credit Providers, Please Consumers

27.07.2015Magauta Mphahlele, CEO, National Debt Mediation Association (NDMA)

This post was originally published on the Center for Financial Inclusion website.

A few weeks ago, South Africa's Department of Trade and Industry published new proposed regulations pertaining to the National Credit Act limiting fees and interest rates on short-term and unsecured loans along with credit cards. The public may lodge comments to the draft regulations up until 30 days after its publishing date of June 25th. The intelligence used to inform the proposals have not been released so it is not clear what policy, cost, or operational factors were taken into consideration to arrive at the outlined changes. Meanwhile, the microfinance industry in the country, which has been lobbying for the flexibility to charge significantly higher interest rates and fees, seeks to understand the regulators' rationale.

The draft regulations were published after a protracted court battle where one of the industry associations representing micro-lenders requested the court to force the regulator and policymakers to review the fees requirements of the National Credit Act. The fees and interest rates hadn't been reviewed since the Act became effective in 2007 - a concern when taking into account factors like inflation.

Credit providers have responded with dismay and concern about the proposed changes, especially the interest rate caps on unsecured loans. They have expressed the fear that the proposed interest and fee changes will affect the cost of administering credit, reduce profits, and constrict access to credit for borrowers. Other commentators have viewed the reductions favorably considering consumers are already over-indebted to a large extent and the interest rate cycle is predicted to start trending upwards. On this blog a few months ago, I shared that in 2014, the National Credit Regulator (NCR) Credit Bureau Monitor revealed that out of South Africa's roughly 23 million credit active individuals, about 11 million have impaired records.

Now, for some specifics. Bear in mind that the rates listed below are subject to change according to fluctuations in the market's interest rate cycle - namely, fluctuations in the market's "repo rate," which is the rate at which the central bank lends to commercial ones. However, the proposed amendments do dampen the effect of repo rate changes on interest rates so that increases in the cost of capital for banks don't get passed on to borrowers. 

  • Credit Cards & Overdrafts: Current per annum interest rate: 22.65%; proposed interest rate: 19.775%
  • Unsecured Credit Transactions: Current per annum interest rate: 32.65%; proposed interest rate: 24.75%
  • Short-Term Loans (Up to R8,000 (US$648) Repayable Over Six Months): Current per month interest rate: 5%; proposed interest rate: 5% on first loan, and 3% on any additional loans within the same year
  • Maximum Monthly Service Fee: Currently R50 per month; proposed R60 per month
  • Mortgage Agreement: Current (per annum) interest rate of 17.65% would not change with new rules

The draft provision has raised major concerns and uncertainties regarding specifics surrounding the rules and regulations. For example, for monthly service fees, the draft states: "This service fee covers the cost of administering a credit agreement which is the operational cost of the credit provider such as rent, labor, communication, banking, processing of repayments and related costs." It remains unclear what credit providers are allowed to charge for outside the proposed R60 per month and how this will affect sustainability and profitability.

The proposed regulations are part of a broader legal reform strategy in South Africa to address overindebtedness and reckless lending, which the government views as getting out of control. The strategy encompassed recent amendments to the National Credit Act to introduce more stringent loan affordability tests, and moves to stop credit providers from employing unnecessary and hidden fees. The amendments on affordability were promulgated this past March. The amended legislation introduced the new affordability guidelines because any such regulatory mechanisms were lacking. In some cases of reckless lending we are investigating, evidence indicates that consumers consistently under-declare their monthly expenses by as much as 60 percent, that way it appears they have more money for loan repayment.

The affordability amendment requires credit providers verify income as well as conduct the following assessment: calculate the consumer's discretionary income; take into account all monthly debt repayment obligations; and take into account maintenance obligations and other necessary expenses. Additionally, a credit provider must take into account the consumer's debt repayment history under credit agreements.

The new affordability measures incorporate minimal expense norms, which are individuals' necessary expenses that a provider must accept they have and keep free from use for loan repayment. Given the structure of these new expense norms, their introduction will restrict credit to lower income consumers, especially those who currently depend on state grants, unless they have proven additional income. Many view this as a good thing but others fear that they will gravitate towards underground lenders who charge illegal and usurious interest rates and use hard core and illegal collection tactics like retaining bank cards.

Though these affordability amendments to the National Credit Act are already enacted, we'll be eager to witness what transpires during the 30-day comment period for the proposed interest rates and fees amendments. Of course client well-being and protecting against overindebtedness is the central priority of microfinance, but these proposed changes don't seem to match the financial realities required to serve lower income clients.

Is Digital Finance Hitting its Stride in WAEMU?

15.06.2015Estelle Lahaye, Financial Sector Specialist, CGAP

This post was originally published on the CGAP website.

Thanks to the support of The MasterCard Foundation, since 2012 CGAP has been involved in the development of an ecosystem for digital financial services in the WAEMU region - a customs and monetary union between the countries of Benin, Burkina Faso, Côte d'Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo. When we started our work, we thought the conditions were right for digital finance to significantly advance financial inclusion in the region. Two years later, it is a good opportunity to reflect on the state of play.

Very early on, the regional central bank (BCEAO) understood the potential for alternative electronic delivery channels to advance financial inclusion. In 2006, the BCEAO issued a regulation on electronic money, creating opportunities for nonbanks to offer e-money solutions. Since then, the ecosystem expanded quite rapidly with currently 25 mobile money deployments registered. The BCEAO is also reviewing 30 or so requests for new e-money issuers or partnerships for the use of e-money solutions. As in other African countries, the ecosystem is dominated by mobile network operators (in partnership with banks).

However, in contrast to developments in other markets in WAEMU technology providers have emerged as an important player issuing e-money as means to offer digital payments solutions. Money transfer providers, banks and microfinance institutions (MFIs) are also getting interested. This diversity offers promising innovations and creates a dynamic market with diverse options available to customers. However, there are still important obstacles to be addressed if digital finance is to reach its full potential in WAEMU. Distribution networks are poorly developed in rural areas. Services continue to be focused on traditional offerings such as money transfers, bill payments and airtime top-ups, and are not customized enough to the needs of the low income population. Customers are not sufficiently empowered to become active players in the ecosystem. With growth and competition, new issues are also emerging such as interoperability and access to USSD channels.

While all WAEMU countries share the same regulation for e-money, the ecosystem is developing unevenly across the eight markets. Each market displays different dynamics, financial access structure, challenges, and customer needs, which open the door to different opportunities and country-specific responses. Achievements on digital finance in Cote d'Ivoire are quite impressive and it is an interesting success story in WAEMU. Take also the case of Senegal. It has the most crowded and diverse provider ecosystem for digital finance. Yet, providers have not managed to reach large scale and demand-side data confirms that mobile money usage among the low-income population is low. It will be interesting to watch how providers progress by offering a broader range of financial services and leveraging the existing distribution infrastructure offered by money transfer companies, postal networks and MFIs. But what about digital finance in a country like Niger with very low levels of financial inclusion and mobile money penetration (approximately 1% of adult population with a mobile money account)? The current challenges are probably bigger, but so is the potential upside. The question is, where do you start?

There is no doubt that some interesting strides have been made developing digital finance in WAEMU but the journey towards financial inclusion continues. By highlighting some of the recent developments, sharing lessons, and documenting aspirations for the future, we hope this blog series will contribute to further develop the digital finance ecosystem.

________

Estelle Lahaye leads experimentation and research activities to help create an effective and innovative ecosystem for digital financial services in the WAEMU. Before joining CGAP, she worked as an account manager in Luxembourg at Banco Itaú Europa, the international private banking division of Banco Itaú, Brazil. Lahaye holds a master's degree in business administration from San Francisco State University and a bachelor's degree in banking, finance, and insurance from the University of Nancy 2 in France. She speaks fluent English, French, Portuguese. 

Gravatar: Excerpt from the Doing Business in the East African Community 2012

What has Worked in Credit Information Sharing?

04.05.2015Excerpt from the Doing Business in the East African Community 2012

Specific practices help increase credit coverage and encourage the use of credit information systems. Among the most common measures are 1) expanding the range of information shared, 2) collecting and distributing data from sources other than banks and 3) lowering or eliminating minimum-loan thresholds (figure 7.8).

Reporting positive as well as negative information

Credit information can be broadly divided into 2 categories: negative and positive. Negative information covers defaults and late payments. Positive information includes, for example, on-time loan repayments and the original and outstanding amounts of loans.

A credit information system that reports only negative information penalizes borrowers who default on payments-but it fails to reward diligent borrowers who pay on time. Sharing information on reliable repayment allows customers to establish a positive credit history and improves the ability of lenders to distinguish good borrowers from bad ones. Sharing more than just negative information also ensures that a credit information system will include high-risk borrowers that have accumulated significant debt exposure without yet defaulting on any loans.

Sharing full information makes a difference for lenders. A study in the United States simulated individual credit scores using only negative information and then using both negative and positive information. The negative-only model produced a 3.35% default rate among approved applicants while the use of both positive and negative information led to a 1.9% default rate[16].

A study of Latin American economies suggests that where private credit bureaus distribute both positive and negative information and have 100% participation from banks, lending to the private sector is greater-at least 47.5% greater[17].

Collecting and distributing data from retailers and utility companies

One effective way to expand the range of information distributed by credit registries is to include credit information from retailers and utility companies-such as electricity providers and mobile phone companies. Providing information on the payment of electricity and phone bills can help establish a good credit history for those without previous bank loans or credit cards. This represents an important opportunity for including people without traditional banking relationships. A recent study across 8 global mobile money operators found that 37% of their customers lacked a bank account[18].

But including this information can be challenging. Utilities and retailers are regulated by different institutions than financial companies are. They also might have to be convinced that the benefits of reporting bill payment outweigh the costs.

A utility in the United States has clearly benefited. In August 2006, DTE Energy, an electricity and natural gas company, began full reporting of customer payment data to credit bureaus. DTE customers with no prior credit history-8.1% of the total, according to a recent study-gained either a credit file or a credit score. And customers began to make payments to DTE a priority. Within 6 months, DTE had 80,000 fewer accounts in arrears[19].

A study in Italy looked at the effect of providing a credit bureau with payment information from a water supply company[20]. The credit bureau, CRIF, set up a credit scoring model, the "water score," which took up to 3 years of payment of water bills into consideration. More than 83% of water customers who previously had no credit history now have a positive one thanks to paying their water bills. This has made it easier for them to obtain credit. Those benefiting most include young entrepreneurs and families with only one income-2 of the groups that tend to lack bank accounts in Italy.

Today, credit bureaus or registries include credit information from sources other than banks in 6 economies in the Sub-Saharan Africa region (...). In these 6 economies, coverage of borrowers is 24 percentage points higher than in those where credit bureaus or registries do not include information from retailers or utility companies.

After 1 year of operation, Rwanda's first private credit bureau expanded the range of credit information distributed and included data from 3 non-financial companies. In April 2011, 2 mobile phone companies (MTN and Tigo) and an electricity and gas company (EWSA) started providing credit information to the private credit bureau. The results were rewarding: after just a couple months collecting the data from new sources, the credit bureau's coverage increased by 2%.

Lowering or eliminating minimum loan thresholds

Where the thresholds for loans included in a credit bureau's database are high, retail and small business loans are more likely to be excluded. This can hurt those that could benefit the most from credit information systems-namely, female entrepreneurs and small enterprises, whose loan values are typically lower. Because women make up 76% of all borrowers from microfinance institutions[21], credit bureaus and registries that collect and distribute data on microfinance (typically low value) loans are more likely to support female entrepreneurship. Note that public credit registries usually set relatively high thresholds for loans-$34,260 on average- since their primary purpose is to support bank supervision and the monitoring of systemic risks. Private credit bureaus tend to have lower minimum loan thresholds-$418 on average.

Today, 19 Sub-Saharan African economies (...) have minimum-loan thresholds below 1% of income per capita. Over the past 7 years, 5 economies in the region eliminated their minimum loan threshold (...). Rwanda's public credit registry eliminated its minimum loan threshold to open itself up to more credit information. The minimum loan reported was 500.000 FRW ($1,400) in 2010; now all loans are reported to the registry. Other EAC economies could follow suit.

 

* If you find value in this Excerpt, you may enjoy reading the full publication, Doing Business in the Eastern African Community 2012

Doing Business in the Eastern African Community 2012.© The International Bank for Reconstruction and Development / World Bank. http://hdl.handle.net/10986/5907 License: Creative Commons Attribution license (CC BY 3.0 IGO license)

 

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[16] Barron and Staten. 2003

[17] Turner and Varghese. 2007

[18] CGAP and World Bank. 2010

[19] Turner and others. 2009. Turner. 2011

[20] Preliminary findings of an ongoing internal study at the credit information services firm CRIF SpA, Italy.

[21] World Bank. 2010.

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