By Simon Hardie and Denise Gee
This report, written by Baird’s CMC Associate Denise Gee and and Senior Consultant Simon Hardie appeared in the March/April 2013 issue of Payments Cards and Mobile. For more information, please click here
A preparatory study of unsecured and micro lending marketplaces in high growth and developed markets has underlined the following:
- The financial crisis has caused a sharp drop in emerging world access to basic financial services.
- There is a clear disconnect between the social and commercial objectives of consumer and micro-lending schemes.
- There is a clear need for measurable evidence of the impact of micro lending programmes on economic growth.
- There is an acknowledged need for a coherent approach to the regulation, provision and distribution of micro and consumer credit that cuts across government, the private sector, the financial services community, NGOs and multilateral agencies.
Although there are distinct peculiarities in the scale, individual loan size and distribution of microcredit in each of the regions and markets included in the study, early investigation also reveals a number of common themes that signal the approaching maturity of the microfinance industry.
Some common themes
Most significant of all perhaps for a form of lending originally born out of an informal community is the relatively urgent need for microcredit programme formalisation.
Whether on the side of the customer – or loan recipient – or from the point of view of the credit issuers, more formal processes for risk evaluation, pricing, regulation, market- ing and credit distribution are in demand by lenders and their customers across the emerging world.
The outcome is that, microcredit, sprung out of a developed world desire to use financial tools to aid development programmes, is no longer quite such a distant relative of the commercial, mainstream unsecured lending industry. As Santander Microcredit in Brazil demonstrates (see box), success in microcredit is best achieved when the programme is run on a commercial basis, albeit with some key founding principles that underline the commitment to responsible, sustainable lending.
This is reflective of the wider global economic scenario which has tightened lending belts and where, even in countries such as Brazil or India that have not suffered an economic recession, it would appear that the lessons of the Western credit crunch have been listened to and lending criteria adjusted to ensure programme sustainability.
It is therefore apparent that although linked closely with aid budgets, the microfinance industry is not ring-fenced as might once have been assumed. Indeed early investigation indicates that micro lend- ing initiatives have been more severely impacted in the more credit-impaired markets surveyed in the study, such as in Egypt.
Adapt or perish
The repercussions of this are evident across the countries in the study. A consumer credit-fuelled boom in South Africa for instance has provoked a sharp retrenchment in unsecured lending issuance in order to reduce unsustainably high levels of bad debt. Similarly in Brazil, close, careful management of microcredit business lines by commercial institutions such as Santander and Banco do Nordeste, has maintained levels of bad debt at less than 1% of total micro loans outstandings.
Meanwhile growing customer demand for the developed world equivalent of credit for marginal communities, in the form of payday lending, is emboldening regulators in the UK to act to oppose often pernicious rates of interest. Quite justifiably these legitimately provided products serve customers beyond the reach of regular bor- rowers and potentially reduce the number of lenders who might resort to more unreg- ulated sources of funds in their absence. The increased regulatory scrutiny however neatly highlights the balance that needs to be struck between higher costs of credit, business model sustainability and, the per- ceived or implicit responsibility of lenders to improve the lives of their customers.
In other parts of Africa, as well as elsewhere in the emerging world, the use of technology is also proving to be an essential tool that is helping both to reduce the risk adherent in previously cash-dominated lending markets and enable mainstream lenders to chase ‘the long tail’ by serving formerly unserved customers with products that previously were not commercially viable or sustainable.
The Musoni mobile microfinance institution initiative in Kenya is a particularly strong example of this. Musoni, a Netherlands-based social enterprise, has partnered with Kenya’s M-Pesa, the service that enables funds to be transferred electronically by SMS message, to assess and approve microloans using tablet computers. Once approved, loans are sent directly by SMS, avoiding the need for riskier, costlier cash-based transactions.
The Musoni initiative is one of the best examples worldwide of how technology is broadening the reach of financial services by reducing loan approval time, which allows more customers in remote areas to be served. At the same time savings generated by transferring funds electronically, and lower risk of funds being stolen, is creating a more attractive microfinance business proposition.
In time, this should enable new competitors to enter the marketplace, driving down the cost to consumers and improving financial inclusion for poorer or subprime customers. For more on the impact of technology on the global unsecured lending industry, see our follow-up article “Chasing the long tail” for publication later this year.
The study forms part of a unique global research project conducted by international communications management consultancy Baird’s CMC.
Full findings of The Global Consumer Credit Conditions Report will be released at a global conference in Rio De Janeiro in February 2014. It will use evidence from prime and sub-prime unsecured and microcredit lenders in high growth and advanced markets to inform the economic conditions that support creation of a vibrant lending market; the regulatory policy that can best ensure sustainable consumer borrowing; and identify the connection between unsecured credit and economic growth.