Microfinance Practice: Re: [MFP] article on digital credit & potential for over indebtedness

Thanks Srini, happy new year to all, and (from the distant past) I agree, sort of. Like most innovations, digital cash is superb for most people (except old ones like me who cannot manage it, but that's thankfully another issue !), including many quite poor people who were excluded before, but it tends to exclude the poorest. See Sanjay Sinha's and Yasmin Rabeya's paper on just this subject in Enterprise Development and Microfinance in March last year.

When I've been 'selling' the notion of microfinance, 'academically' but also in communities in Somalia and so on, I've always been rather ashamed of the fact that it's clients have to access the services in groups; after all, which of us who reads this exchange does their banking in a group or would willingly do so ?

But digitisation, mobile money, even in as humble a form as a personal SIM card and a phone that is shared with lots of others, means that the physical 'excuse' for group banking, the need to collect and distribute cash, no longer exists. And, they no longer have to endure the indignity or waste the time involved in going to a bank branch, or trusting a neighbour to do it for them. Nor do I, I've not been to my bank for fifteen years or so, I don't even know where the branch is when I e-mail it or (very rarely) telephone it to complain about something.

So, we cannot and should not be Luddites, and deplore the disappearance of cash. We should work very hard to get digital money usable down and down the poverty scale, as the GoI has been doing, with extraordinary success, but accept that people who are at the very bottom, like the 'woman dying at the back of the tent', as the sad phrase went in Somalian refugee camps many years ago, are in no position to make use of digital money or anything else except direct assistance, handouts in fact.

Malcolm

On Thursday, 3 January 2019, 19:00:19 GMT, 'N. Srinivasan' shrin54@yahoo.co.in [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Hi Jamie

I wish you and all MFP followers a happy and exciting new year.

From what I see in many places, digitisation is taking the focus away from the financial inclusion objective. In most emerging economies cash is still king. The digitisation adds to the costs and still the people have to find their way to cash. Digitisation for example ensures that MFIs do not handle cash - they can get a bank account opened for each borrower and directly credit the loan amount to that account. Repayments are made by customer by sending an electronic transfer from their bank account using their mobile or a standing instruction with the bank. But when the loan is credited to the bank account by the MFI, the borrower has to use the ATM card to draw the cash - and in rural areas the ATM can be some distance away. Earlier the loans were disbursed in a place determined by the MFI either in the group during its meeting or in MFIs office. Now the rest of the group does not even know when the loan was disbursed. For the repayments the customer has to keep sufficient money in the bank account. So the customer has to go to the bank branch or a business correspondent to pay in the money to her account. The customer is still having to convert digital money in to cash. Repayments as a result require a visit to the bank branch or agent for depositing case in to the account and also attendance in the group meeting. The time spent by the customer on making a repayment thus increases unreasonably. Group liability for repayment is difficult to enforce when repayments are digital - others in the group might find ti difficult to verify onetime payment on the due date.

Unless the entire ecosystem is geared to run on electronic records, not much will be achieved by digitisation. It will transfer the problem of dealing with cash from institutions to individual customers and they will have a higher cost of transaction.

My view seems pessimistic and runs counter to the popular urge to 'go digital and all problems are solved'. Kenya in many might a unique story - not easily replicable in other markets.

Best regards

Srinivasan

On 03-Jan-2019, at 7:25 PM, hugh@vsla.net [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Hello Jamie,

I read the SGAP paper a couple of weeks ago and I really wonder if the rush to digitise everything isn't confusing the ease of lending with the wisdom of lending. A 50% late payment rate tells me a) that lending institutions probably are not paying much attention to the difference on this point, beguiled by the siren song of things-made-easy and b) whoever thinks that credit should be easy to obtain should speak to my mother-in-law, who is German and wise in the ways of managing money with extreme prudence. The key point here is that borrowing should never be easy, in the sense that if there aren't credible and immediate sanctions for failing to repay, then high levels of delinquency are inevitable. That's why Savings Groups have low levels of delinquency: your neighbours will look askance, publicly, if you are in arrears so you think much more modestly and carefully about how to repay – before getting in to debt. But if the complaining voice is just an SMS it's not the same at all. Getting smart about how to lend using a digital solution is a long way from being certain of repayment, in the absence of tangible consequences. Good luck on that one, especially when you have to compete with SGs that allow for flexible repayments and are way ahead in terms of KYC.

Hugh Allen

From: MicrofinancePractice@yahoogroups.com <MicrofinancePractice@yahoogroups.com>
Sent: 03 January 2019 08:28
To: MicrofinancePractice@yahoogroups.com
Subject: [MFP] article on digital credit & potential for over indebtedness


Greetings Group & Happy 2019!

I believe I may be the first to post on this bright, shiny, new year.

I want to share an excellent blog post from the Center for Financial Inclusion (I just noticed it while looking for research on the impact of digital credit on consumers, though it dates from summer of last year):

https://www.centerforfinancialinclusion.org/start-ups-and-digital-innovation-are-fintechs-in-africa-over-indebting-their-customers/

I have also seen the recent, also good CGAP research on lessons from digital credit in E. Africa:

https://www..cgap.org/topics/collections/digital-credit

And, wondering if anyone has seen related research on the impact of more, short term digital debt on a population that potentially has existing money lender, MFI, SACCO, salary loan etc. debts?

And, any existing research on whether or not these digital credit products are actually financially including new clients?

Last question, what happens to clients who default on these digital loans in the markets you are familiar with; are they just rolled over forever with more and more fees attached? I believe E. Africa has the in duplum rule: would that apply to limit fees? Are defaults reported to the credit bureau?

Thanks in advance and wishing you all a wonderful New Year.

Jami Solli

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Posted by: MALCOLM HARPER <malcolm.harper@btinternet.com>

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