Sacco Growth And Profitability

Through ICT

By Sirengo Maurice
What to be Covered

Impact of
Risks and
Online Digital
Challenges
Lending to Credit in
in Digital
Sacco Emerging
Credit
Growth and Markets.
Markets.
Profitability
 Impact of Online Lending to
Sacco Growth and Profitability
What is the Cause
of Growth in our
Sacco?
Growth Mindset
Digital lenders go by
many names:
Marketplaces, Peer-2-
Peer, Online Lenders.
 With Online/digitization comes
several benefits (1 of 3)
Increase in SACCOs’ transparency,
accountability and improved reporting,
which places the SACCOs in a better
position to receive financing from third
parties.
 With Online/digitization comes
several benefits ( 2 of 3)
Increased productivity and
operational efficiency through
reduced costs, and satisfied
customers.
 With Online/digitization comes
several benefits ( 3 of 3)
If done properly, SACCOs that digitize
manage to drive down risk exposure
while increasing their profit margin. As
a result, they can stabilize their
operations and gain competitive
advantage by offering better and faster
service to their members.
 Opportunity to improve
productivity, close more
loans and increase revenue
per loan with cheaper,
faster and automated
services.
Digital channels improve
the customer experience
• For customers, non-digital loan
processes translate into slow
turnaround time, low
transparency and low
predictability.
Digital channels reduce the
cost of managing loans
• Automation can also reduce the time
banks spend to underwrite loans, so
they can make more loans and offer
more products. Borrowers can
receive loan approval and funds
more quickly.
 Better Oversight and
Operational Efficiency
Digitization makes it easier for
management to have oversight on what
is happening in real time. This is
because reports can be generated in
real time and causes of any
inconsistencies easily tracked.
 Managing Portfolio at Risk
• Easy tracking loan repayments
• The ability of SACCOs to recover
loans has equally improved
liquidity positions and made it
possible to give out more loans.
Significant Reduction
in Cost of Stationery
 Impact on productivity
• Reduction in Time Spent Performing
Tasks
• Processing Member Deposits
• Time to Process Loan Repayments
• Time to Generate Reports and
Complete the Auditing Process
 FinTech

• A contraction of “financial technology”.

• FinTech companies are businesses that leverage
new technology to create new and better
financial services for consumers and businesses.
• Use innovative business models and technology
to enable, enhance or disrupt financial services.
• FinTech includes companies of all kinds, which
may operate in personal financial management,
insurance, payments, asset management or other
areas.
• You have to, to serve these
markets, re-imagine how money
can be managed and moved
because there’s going to be
more change in the next five
years in financial services than
happened in the past 30
• Financial Institutions must be
able to deliver and easy to
navigate, a seamless digital
platform that goes beyond a
miniaturized online banking
platform
Growth Imperatives
 Digital Credit in
Emerging Markets.
Digital lending is the use
of online technology to
originate and renew loans
in order to deliver faster
and more efficient
decisions.
Digital lending is the process of
offering loans that are applied
for, disbursed, and managed
through digital channels, in
which lenders use digitized data
to inform credit decisions and
build intelligent customer
engagement.
Digital lending takes many
shapes and forms – from
automating small pieces, to a
fully digital lending process,
from acquisition to renewal.
Features of Digital Credit
 Digital credit products

• The currently dominant form of digital credit is short-

term, high-interest rate loans made directly to
consumers.
• A financial -telco partnership, the financial institution
originates the loan, but customer interactions –
including loan disbursal and repayment – are done via
Consumer the mobile money platform.
• Loan amounts are not very large
credit • Loan terms are typically no longer than a month but
may be as short as a week
products • Consumers are not usually officially charged an
interest rate; they are instead charged a fixed
“facilitation fee
• Digital credit employs dynamic incentives and
punishment to reduce moral hazard and to incentivize
repayment.
 Digital credit products

• Several financial technologies (“fintech”)

companies:
• Provide intermediary credit-scoring services,
Other • aggregating customer data and applying
machine learning algorithms to convert the
digital data into credit scores, which are then
provided to financial institutions and other
loan originators.
credit • Another set of companies directly originate loans
to customers but require applicants to install an
products app on their smartphone that tracks and analyzes
phone usage (including phone and SMS activity,
handset details, GPS data, and so forth) to
determine loan eligibility.
 Digital credit products
Other digital credit products
• There are several digital credit products that do not directly target micro-
loans to consumers.
• Grundfos Lifelink works with Safaricom to provide pay-as you-go
solutions for clean water distribution systems to rural Kenyan
communities.
• Safaricom partners with M- Kopa and MTN with Mobisol and Fenix
International to sell solar home solutions on a down payment.
• Future payments are collected via regular mobile money transactions.
Enforcement of repayment is accomplished through technology which
allows the firm to turn off the solar panel remotely if the account is in
default.
• Another Safaricom credit product - Okoa Stima -allows customers to get
cash advances to pay for electricity
• Some lenders provide digital credit to businesses, usually to business
owners who use mobile payments platforms. Transactions on the payment
platform is an important factor in determining creditworthiness.
What Is New About Digital
Credit?
• Credit scoring
What • Mobile phone usage can be used to predict loan
default and broader range of socioeconomic
characteristics of would be borrowers

Is New • Using mobile money to generate scores could

expand credit access, especially in countries with
high usage rates of mobile money accounts.

About • Most lenders from (or associated with) the

telecom industry use the applicant’s history of
mobile phone usage, including phone calls, text

Digital messages, airtime purchases, data use, and

mobile money transactions.
• When the applicant has an app installed on her

Credit? smartphone, this app collects all of that

information as well as GPS data, information on
social media use, contacts lists, and the like.
What Is New About Digital
Credit?

What • Reduced transaction costs

• Digital credit can dramatically reduce these
Is New transactions costs, since e-cash can be
transferred instantaneously and there is a
much larger number of mobile money
About agents than bank branches
• Instantaneous loan approval and

Digital disbursement
• Loans can be made remotely and
instantaneously, with no need for human
Credit? mediation.
 What Is New About Digital
Credit?
What Is New About Digital Credit?
• Product customization
• There is a culture of applying recent algorithmic developments – many
of which were first tested in the context of internet-based advertising –
to customize and optimize lending decisions and loan terms.
• Data-rich environment of digital credit is particularly well- suited to
such targeted customization.
• We can predict default risk to be updated frequently, quickly adapting
to changing lending conditions and aggregate risk.
• Digital credit loans will employ dynamic incentives, such that
borrowers become eligible for larger loans if they reliably repay
smaller loans.
• More sophisticated systems offer different loan repayment periods.
• Given the near absence of regulation in this space (more on this
below), lenders have considerable scope to develop proprietary and
discriminatory pricing and lending systems.
Three Core Components Of Digital Lending
Digital Lending Models
Typical features of different types
of digital lending products
 Kenya’s digital credit
revolution 5 years on
• Digital credit has become a leading source of credit
in Kenya.
• More than one in four Kenyans has taken a digital
loan
• M-Shwari leads the digital credit market, but
market entrants are catching up
• Kenya’s digital borrowers are more diverse today
• Digital credit is used mostly for working capital
• Many digital borrowers struggle to repay on time
• Digital credit complements other forms of lending
• Any Lending Product Can Be “Digital”
 Early errors made by digital
credit pilots and deployments:
• Offering credit without a strong remote identification
system. When you can’t verify customer identity, offering
remote services is difficult, especially at scale.
• Poor targeting, where credit offerings attracted a high-risk
applicant pool.
• Cumbersome loan application processes that meant few
people came forward to apply.
• Credit scoring models that were too conservative and did
not allow credit to be extended to more than a small
fraction of applicants.
• Poor product design, such as a transfer fee for moving
money to/from a mobile money account that quickly made
the product unviable.
• An excessive focus on credit scoring but the absence of a
sound collections strategy.
Areas to be Digitised
Risks and Challenges in Digital Credit
Markets.
 Question

What fears do you

have on adopting
Digital credit in your
respective Saccos?
 Key Concern?
• The advent of digital credit has extended
access to instant, automated, remote credit to
millions of borrowers.
• But who is accessing these loans?
• How are borrowers using the money?
• And to what extent are we seeing risks
emerge such as:
• Late repayments and defaults,
• lack of transparency in loan terms and
requirements,
• Debt stress or over-indebtedness?
 Risk Types in Digital World (
1 of 4
Business Strategy risk
• Non traditional institutions are entering into the
market
• Leaner organization structures that will allow fast
response in new challenges
Conduct risk
• Establishment of processes and controls for the digital
era in order to prevent poor business practices
• Reputational risk if data are used in a questionable
way
Risk Types in Digital World (
1 of 3

Cyber risk
• Surge of e-services implies possible technical
vulnerabilities and increases “e-risk “ online
Privacy Risk
• Customers should be safeguarded by misuse of
their privacy data
• Data protection practices so as data not to be
accessed by third parties in a illegitimate way
 Risk Types in Digital World (
3 of 4)
Fraud & Legal risk
• Fraud prevention processes should be able to support
digital functionality and increased volume of online
transactions
• Legal risk is probable if IT systems are compromised
Liquidity risk
• Fund transfers / transaction execution becomes an
easy process that could potentially affect the liquidity
positions of the Sacco
 Risk Types in Digital World (
4 of 4)
Credit risk
• Current policies and processes inadequately
support the digital transformation since they
are either heavily relied on human factor, or
they are not set up to measure credit risk at a
“digital pace”
• Increased processing capabilities call financial
institutions to develop new underwriting,
customer assessment and monitoring practices
• regulators should adapt to new environment
 Key Risks/Challenges due
Digital Credit Markets
• High delinquency and default rates, especially
among the poor
• First-time borrowers are much more likely to
default, which may reflect lax credit screening
procedures.
• Most borrowers are using digital credit for
consumption
• Confusing loan terms and conditions are
associated with difficulties repaying
• Lack of transparency makes it harder for
customers to make good borrowing decisions,
which in turn affects their ability to repay
debts.
 Digital credit also raises serious consumer
protection concerns

• Will borrowers really think through their

decisions to borrow or just borrow on
impulse because access is easy and payment
instant?
• Do we really know enough about consumers
to make sure we are sending the right offers
to the right borrowers, and not encouraging
reckless borrowing?
• Are we okay with loans that have annual
interest rates above 100 percent?
 How to ensure Consumer
Protection
• Improving transparency of costs can
improve borrower decision-making.
• Providing additional educational content
can improve portfolio performance.
• Consumers need greater control of their
digital credit history.
• Framing of repayment messages with
the right context can reduce late
payments.
 Adopt stronger credit risk
assessment policies
• Better credit screening models and financial
product governance could also reduce
delinquencies and defaults.
• Regulators should assess the appropriateness of
existing models and require revisions based on
an analysis of the growing amount of granular
data available on digital credit and its effects on
borrowers.
• Regulators can also make digital credit work
better for consumers by requiring lenders to
carry out adequate customer and product
assessments so that they offer products that suit
customer needs.
 Strengthen information sharing
without harming borrowers
• Regulators can address this problem by
setting up a minimum threshold for
mandatory credit bureau reporting of all
digital loans that excludes the smallest-value,
first-time loans.
• This approach would facilitate compliance
with credit reporting requirements without
excluding good borrowers, who often take
subsequent, larger loans that would be
reported to the credit bureau
The use of high-cost, short-term credit
primarily for consumption coupled with
high rates of late repayments and
defaults suggest that funders should
take a more cautious approach to the
development of digital credit markets
 Credit Risk Management
Practice changes (1of 5)
• Advanced data governance structures
need to be developed to cope with
digital.
• “Digital dynamics” should be taken into
consideration when developing new
credit policies (what is / what is not
allowed, “digital” ethics, etc.). !
• Institutions’ systems should be adjusted
in order to facilitate digital
interconnectivity and compatibility.
 Credit Risk Management
Practice changes (2of 5)

Usage of multiple data sources to

facilitate:
• Dynamic modeling, model development
using non – banking data (e.g. payments on
utilities, on line transactional behavior, taxes)
◦ “Social” profiling
• Development of risk based pricing
propositions
 Credit Risk Management
Practice changes (3 of 5)

Existence of real time data

allows & calls for:
• Real time risk monitoring (monitoring
through mobile devices, portfolio
triggers, automatically enacting
corrective actions through sophisticated
mitigates, etc.)
 Credit Risk Management
Practice changes (4 of 5)
• In case of inadequate risk monitoring the
volume and magnitude of defects will make
the impact immediate and at scale
• Automation of credit underwriting and
assessment, e.g. pre – filled product
applications using public available data, credit
initiation, credit line authorizations, etc
 Credit Risk Management
Practice changes (5of 5)
• Regulators have initiated a series of structural
changes in an effort to create a more robust and
broad governance framework
• Development of new concepts that will
strengthen the regulatory overview (introduction
of new capital, liquidity, funding requirements)
• Request for the provision of detailed account
level data for enhanced monitoring
• Development of guidelines and safeguards to
ensure avoidance of mis-selling, incorrect
targeting, discrimination practices, etc
 Credit Risk in Digital Era –
Where we stand
Are these or similar developments far for being
implemented?
• Model development using data from financial institutions and tax
related information.
• Companies use social media data to evaluate credit risk of own
loan applicants.
• Monitoring of online transactional behavior used in marketing
strategies.
• Third parties help financial institutions to reduce risk by
incorporating data from social media profiles into scoring
systems.
• Daily monitoring of portfolio performance, e.g. blocking and
unblocking of revolving accounts.
Digital World reshapes Risk
in Financial Institutions
Internal aspects
Policy Operations Internal
development /Implementation reporting

External aspects
Customer touch
Regulators Stakeholder
points
 T]he only good loan is one
that gets paid back

Banking is very good business

if you don't do anything dumb
Thank You

Questions

My Contact details:
• 0722631770
• 0772631770