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In the previous article, we discussed the important role credit markets play in developing countries, facilitating growth, opportunity, and financial inclusion. Indeed, lack of access to credit is cited by businesses in developing countries as the most severe constraint on their economic growth, more severe than corruption and even access to basic services such as electricity. Sadly, in the developing world, limited access to the loans is the norm, not the exception, with an estimated 131 million micro, small and medium enterprises having unmet financing needs worth $5 trillion.
In the previous article we discussed in detail two primary obstacles to credit-related financial services: poorly developed lending infrastructures, and poor market information. For the sake of this article I will rephrase these problems slightly. There is an accessibility problem, essentially traditional brick & mortar banks cannot reach millions of users. Secondly, there is an informational/funding problem whereby uncertainty deters investment. Banks do not like investing when they cannot gauge risk. As customers in the developing world have no financial records, banks do not lend.
As for today's oh so fun topic, we're going to be delving into some of the technological trends and developments, basically smartphones, which are radically transforming the way millions of people in the developing world access financial services. With two (somewhat) simple things, smartphones and the internet, financial services can be delivered directly to the fingertips of millions of new people through the power of banking apps.
Currently, we are still in the middle of this process, millions of people still remain unconnected and unable to afford these technologies, but nevertheless adoption of these technologies is rapidly expanding, and will continue to expand as the global middle classes continue to grow. In Africa, smartphone adoption grew by 10-20% between 2015-2018, particularly among younger people, and by 2025, 200 million new smartphone users are expected on the continent. That's a lot of people and a lot of new customers.
In fairly developed African countries, such as Kenya, smartphone usage is already estimated to be between 40-60% of the population. Unsurprisingly, Kenya is also one of the countries with a relatively well-developed microfinance industry. This is no coincidence. Banking apps such as M-Pesa are now used by millions of people, and along with it, banking services including credit. In Kenya, 91% of all loans are now distributed digitally. Smartphones, directly connecting users to financial institutions, open the door for financial services to reach millions of new customers.
Yet crucially, smartphones not only provide lenders with a new vehicle to access millions of new customers, but they also provide them with the keys to evaluate the risk profiles of individual lenders (at least partially). Mobile phone data provides rich behavioural insights into potential customers which can be used for credit scoring. Indeed, one study showed that, by using mobile phone data to predict loan repayment, individuals in the highest quintile of measured risk were 2.8 times more likely to default on repayment than those in the lowest quintile of risk.
In other words, in the absence of ‘thick’ and concretely reliable financial records, data analytics can provide a very good rough estimate on general risk profiles. By using mobile phone records in lieu of other financial records, companies such as Aella, can provide personalized rates of interest and reduce their general risk exposure, meanwhile they can also build up users ‘thick’ and concrete financial records on the CTC network.
Whilst I can’t tell you the exact details, I can promise you that, using these data analytics, Aella can assess risk far better than most competitors 😉. It is also the reason behind their highly variable interest rates. Micro-targeting is a hell of a tool.
However, data analytics alone doesn't solve our funding issue. Banks, the largest liquidity providers in every market, are still reluctant to lend when risks are somewhat uncertain and so the deployment of capital is left to innovative new start-ups like Aella. The only issue for them? How do we raise the liquidity/capital needed to serve millions of new customers? A company which relies on liquidity to make money, must have a way to effectively raise capital.
Fortunately, this is where Creditcoin can help. Digital currencies, as well as blockchain technologies, enable the borderless transaction of value and information. By registering transactions on the blockchain, debt companies such as Aella, just like their customers, can build trustworthiness. Anybody can monitor Aella’s debt repayments to monitor their risk profile. Creditcoin provides investors with a real-time and transparent database from which do so.
Now, liquidity providers of all types, in any country, not just banks, but everyday financial players, have access to the information they need to gauge risk. Gluwa simply provides a financial service layer on top through which people can directly deploy their liquidity to companies such as Aella. By virtue of these two systems, low-yield but abundant capital from the developed world can be connected to developing countries with low liquidity and high-yields, expanding access to basic financial services for all.