Financial inclusion – its efficacy, implication and urgency – is becoming one of our industry’s biggest talking points. And this is a good thing. The more light that’s shed on the issue, the more likely we are as a collective to push its agenda.
However, there are still question marks over what exactly financial inclusion means. For some, it’s tied intrinsically to demographics; for others, it’s about politics. Most interpretations are not wrong, and almost all are well meaning, but perhaps the clearest and most succinct definition comes from the World Bank:
“Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.”
Without this “access to useful and affordable financial products and services,” people may not have a secure place to store money, no effective and free means of receiving payment, and no safe, reliable way to make payments.
And while great strides have been made around financial inclusion, there’s still a long way to go. According to the most recent Findex data, there are still close to 1.7 billion adults in the world without access to basic financial services.
Financial inclusion in Africa
Of course, financial inclusion is not a challenge limited to a particular country, region or continent; rather, it affects areas all over the world. However, for the purposes of this article, we’re going to look at financial inclusion in Africa, and how digital lending can help to improve the financial lives of millions of Africans.
According to Global Finance, 50 percent of the African population is unbanked, equating to 350 million people. This is already a problem that needs addressing, but with the African population rising quickly – it’s set to double over the next 30 years, adding an additional 1 billion people – it could quickly go from bad to worse.
The role of digital in expanding access
Extending access to borrowers who are otherwise unlikely to receive it is key to improving the health of a society. Among all financial services, access to credit is perhaps the most important as it’s a force multiplier. To this end, innovative digital strategies and new technologies are enabling lenders to reach traditionally underserved people while securing their own interests.
Indeed, the use of big data, artificial intelligence, machine learning and open banking-enabled solutions is expanding the scope of what’s possible. Thanks to new products and soaring internet penetration rates, geographical limitations are being overcome. More sophisticated data analysis tools have come online and are enabling easier credit decisions in lieu of traditional credit scores.
This is particularly relevant to lending in Africa, where access to physical branches is an issue for many people. In a recent white paper published by Sopra Banking, we explained how the rise in mobile money users in Africa is an opportunity and challenge that many incumbent financial institutions have yet to rise to.
Thankfully, that is changing and many lenders are coming up with solutions that will allow them to provide digital loans to their customers in a safe and effective way for all parties. With the introduction of video KYC and account aggregators, lenders can easily access permissioned customer data and conduct better due diligence. And the digitization of the entire loan application lifecycle means that borrowers can apply for loans remotely—a benefit both in terms of reducing friction and expanding reach.
New-to-credit (NTC) customers
Historically, credit institutions have been cautious with NTC consumers, due to the lack of credit history to assess their probability of default. However, given technological advances, lenders can now more confidently lend to NTC borrowers. They can do this by leveraging some of the solutions mentioned above, solutions that afford new ways of analyzing data, predicting a customer’s creditworthiness and gauging the risk involved in lending.
Analyzing mobile and web data makes it possible to offer credit to individuals and SMEs without financial footprints. Over the past decade, this practice has emerged and really caught on in Africa, where fintechs, microfinance institutions and traditional financial institutions like NCBA Group, Equity Bank and Orange Bank use SMS data to inform credit decisions.
While alternative credit scoring systems show great promise, they also bring up privacy and data reliability concerns. And in at least one case, have led to a large group of digital borrowers taking on unsustainable levels of debt.
Open banking as a catalyst
On the regulatory side, open banking is also driving improvement in lending processes. With access to more data (including non-financial data), lenders can do enhanced credit scoring and risk assessment. This provides additional insight, allowing lenders to assess a borrower’s eligibility more accurately. This not only drives down costs for the lender, but it improves the customer experience and, because it’s digital, it works in places without existing infrastructure.
For those most likely to be denied credit, the sub-prime loan application process can still be paper-heavy, involving the manual submission of payslips or statements. Furthermore, COVID-19 has underscored just how inefficient traditional loan processes are.
As an antidote, open banking is pushing solutions that make it easier to verify customer details in real-time—in some cases, going as far as automating the entire interaction. This makes the process easier for the user and significantly increases the chances of applications being accepted.
The good news is that African banks are taking notice of open banking and starting to take huge strides in furthering its implementation. For instance, in 2020, the Central Bank of Kenya – a country where 44 percent of the population is unbanked – included open banking as one of its main strategic objectives; and last year at the height of the pandemic, Nigerian startup Okra announced that it had received significant funding to develop an open banking infrastructure.
Such developments are becoming increasingly common throughout Africa and bode well for the future of financial inclusion across the continent.
Looking ahead
Digital lending is redefining the dynamics of the credit market in Africa. With a lower cost base and improved reach, financial institutions – including banks, MFIs, neobanks and Telcos – can simply do more with less. Digital lending cuts the cost of offering services and streamlines onboarding. It also enables instantaneous and remote approval and supports data-driven mechanisms to initiate repayment. At the same time, open banking facilitates greater access to data than ever before and unlocks new use cases.
Ultimately, expanding access to credit requires careful planning and is more of a journey than a destination. The use of alternative credit scoring is still in its infancy, and open banking is only a few years old. At its best, digital credit can be responsible, inclusive and affordable. And it’s something every financial institution should strive for, as it not only helps individuals and communities, but it drives economic growth, too.