Why mobile lending struggles to take off

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2022 marked the the15th anniversary celebrations of the launch of M-Pesa, the ground-breaking mobile money service in Kenya. The impact of mobile money services like MTN momo, Airtel Money and M-Pesa is portrayed as success stories in deepening financial inclusion. Indeed, they are worth celebrating.

The number of people aged 15+ years in Sub Sahara Africa with bank accounts grew from 34.3% in 2014 to 51.5% in 2021. The rise is attributed to mobile money services. However, the growth of mobile money services has been far from uniform.

The growth in financial inclusion brought about by mobile money and luckily instant payment systems like NIP in Nigeria have only prompted a small rise in e-payment. Less than 10% of all transactions in Uganda are made via digital or mobile channels. This has hampered the growth of the next digital financial services notably digital lending which remains in its infant stages. To understand the impact of mobile money services, we revisit the great successes over the 15 years.

What drove mobile money services growth?

It’s been a tremendous decade of significant change. Across Africa, an estimated 1.2billion have access to basic financial services thanks to mobile wallets. However, the growth is concentrated in some African markets. East Africa alone controls over 40% of the transactions of mobile money. This is attributed to the deliberate government efforts to promote financial inclusion. This gave birth to mobile money services for people to access financial services. Less strict requirements to register for mobile services. In Uganda, you only needed a sim card registered in your name to open a mobile money account. The mobile money agent network was key to the success of mobile money services. This drove the uptake of the services.

We are now at the stage where mobile money is no longer a new thing. Digital financial services are not a new phenomenon.

Mobile money service providers have been building basic infrastructure to move money electronically – sending and receiving money. We are coming to the end of this phase. We are seeing the emergence of where products built on top of that infrastructure that do more than send and receive money.

A lot of the infrastructure has been built to facilitate domestic payments. We have seen this work well. Money mobile has been growing over time. Statistics from the Bank of Uganda as of May 2022, the value of mobile money transactions was UGX64,370,882,077,640.

Figure 1: Mobile money transaction volume growth month on month from Jan 2022 to May 2022

The number of agents stood at 2,465,419. The agent network is transitioning from a captive mobile money agent network to an industry platform facilitating utility payments and account opening for banks.

Figure 2: Mobile money agent growth in number month on month from Jan 2022 to May 2022

Why mobile lending struggles

In the recent past, several fintech in Uganda has entered the space of mobile lending. In August 2016, MTN Uganda introduced Mokash.  The penetration has been low. First, we need to understand what drives mobile lending. Lending just like insurance is a fundamentally underwriting product. This means you need to understand the risk to underwrite it. The data a fintech requires to build a robust model has two dimensions – volume and depth of transactions. Unfortunately, in Uganda, mobile money has been primarily driven by two factors; cash-in and cash-out and peer-to-peer transactions.  An upward of 70% of monetization is cash-in and cash-out transactions. This makes it hard to determine clients’ potential to pay.

In the next years, the drivers of financial services will be those with business models that are well prepared to win in the dynamic markets. Even fintech is not granted success despite leveraging technology to deliver financial services. Traditional players such as banks are fast adopting and changing business models to match evolving customer preferences.

At Summit Consulting, we support financial service providers respond swiftly to the waves of industry disruptions.

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