Two surveys were carried out to understand microlending through mobile phones, and the results are alarming. Indeed, “digital credit through mobile phones is leading in some places to overborrowing, hardship and – horror of horrors – even more financial exclusion”, writes The Economist [paywall].
The first survey, focused on borrowers, was carried out by the World Bank. Analyzing the data of 20m mobile money users it found that 35% of Kenyan and 21% of Tanzanian respondents had benefited from digital loans, but that 12% and 31% respectively had defaulted and that the money was rarely used for business needs (less than 40%). It is suspected that many made use of the money for gambling, but it’s difficult to pinpoint when it’s users themselves that responded to the survey.
The London-based think-tank, Centre for the Study of Financial Innovation (CSFI) who has been carrying out surveys of microcredit lenders since 2008, found that for the first time respondents identified “technology” as their number one concern. Mobile money has certainly encouraged incredible growth for the sector, but it is also appearing to result in overborrowing, which leads to greater risk for loan repayments.
In Kenya, the number of people that have been blacklisted by credit bureaus has almost tripled in three years, from 150,000 to 500,000. And microlenders tend to use catchy phrases to attract new users, as in the case with a website in Myanmar, Mother Finance: “No paperwork or collateral required”.
Ultimately, the most effective solution would be better regulation, but fintechs are moving too fast for public authorities, states Deborah Drake of the Centre for Financial Inclusion at Accion.