![]() Many in the financial inclusion community have looked to digital credit as a means of helping small, often informal, enterprises manage daily cash-flow needs or as a way for households to obtain emergency liquidity for things like medical emergencies. Most borrowers are using digital credit for consumption This can have potentially long-lasting negative repercussions when these borrowers are reported to the credit bureau. These data reveal a worrisome side of digital credit that, at best, may help borrowers to smooth consumption but at a high cost and, at worst, may tempt borrowers with easy-to-access credit that they struggle to repay.įurther, the transaction data show that first-time borrowers are much more likely to default, which may reflect lax credit screening procedures. These may be informal traders who stock up in the morning and turn over inventory quickly at high margin, as observed in Kenya.īorrowers who take out loans after business hours, especially at 1 or 2 a.m., are the most likely to default - likely indicating late-night consumption purposes. Interestingly, the transactional data from Tanzania also show that early morning borrowers are the most likely to repay on time. The transaction data show that borrowers under the age of 25 have higher-than-average default rates even though they take smaller loans. ![]() Who’s at greatest risk of repaying late or defaulting? The survey data from Kenya and Tanzania and provider data from Tanzania show that men and women repay at similar rates, but most people struggling to repay are men simply because most borrowers are men. Indeed, the transactional data show that Tanzania’s poorest and most rural regions have the highest late repayment and default rates. These would be high percentages in any market, but they are more concerning in a market that targets unserved and underserved customers. Additionally, supply-side data of digital credit transactions from Tanzania show that 17 percent of the loans granted in the sample period were in default, and that at the end of the sample period, 85 percent of active loans had not been paid within 90 days. About 12 percent and 31 percent, respectively, say they have defaulted. Roughly 50 percent of digital borrowers in Kenya and 56 percent in Tanzania report that they have repaid a loan late. Photo: Jay Bendixen High delinquency and default rates, especially among the poor Masai people try mobile banking in Kenya. The data suggest a market slowdown and a greater focus on consumer protection would be prudent to avoid a credit bubble and to ensure digital credit markets develop in a way that improves the lives of low-income consumers. We have also reviewed transactional and demographic data associated with over 20 million digital loans (with an average loan size below $15) disbursed over a 23-month period in Tanzania.īoth the demand- and supply-side data show that transparency and responsible lending issues are contributing to high late-payment and default rates in digital credit. But CGAP has now gathered and analyzed phone survey data from over 1,100 digital borrowers from Kenya and 1,000 borrowers from Tanzania. For years the data didn’t exist to give us a clear picture of market dynamics and risks. Others have cautioned that digital credit may be just a new iteration of consumer credit that could lead to risky credit booms. ![]() In recent years, many in the financial inclusion community have supported digital credit because they see its potential to help unbanked or underbanked customers meet their short-term household or business liquidity needs. The data show that there needs to be a greater emphasis on consumer protection. First-of-its-kind data on millions of loans in East Africa suggest it is time for funders to rethink how they support the development of digital credit markets. ![]()
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