The Essence of What Digital Lending Entails
Pandemic, global inflation, and the Russia-Ukraine-skirmish compel the economy of Africa to underperform at 3.6%, slower than last year’s 4%. Though the unemployment rate slightly rose from 35.3% last year to 34.5% in the 1st quarter of 2022, a rapid shift is still necessary to attain financial inclusion.
To aid the African population survive the global financial crisis, digital lending companies are now taking an active role, especially after the pandemic. We have witnessed how digital lending platforms such as Safaricom, Zumo, and Kiakia started gaining traction in Africa in recent years. It was only in the mid-2010s when alternative credit scores began to emerge with the help of AI. Now, AI helps the digital credit providers analyse mobile and web data of the individuals and SMEs who don’t have any credit footprint earlier and sanction loans.
Let’s explore various types of loans available in Africa.
Different Types of Loans in Africa
You can avail of various types of loans from digital lenders such as Personal, Secured or Study loans and Instalment loans. You can also appeal for Home loans, Business loans, Payday, Asset finance, Overdraft, and Pension loans to meet unforeseen expenses.
These loans differ in terms of the loan amount, application procedure, tenure for approval, eligibility criteria, and disbursal procedure. To illustrate: a personal loan is a long-term loan with a higher interest rate, whereas a payday is a short-tenure loan, and the borrower must repay the amount within 28 days.
Let’s delve deep into the digital lending market and its impact on the African economy.
3 Components of Online Lending
62% of borrowers prefer digital lending rather than going to friends and families. Hence, it is becoming one of Africa’s main methods of obtaining loans. To understand how digital loan disbursal works, let’s explore 3 main components of digital lending: digital channels, digital data, & customer experience.
1. Digital Channels
Customers no longer have to traverse to a bank or its agents to get the relevant information- they can get it via mobile apps, websites, and even SMS notifications or WhatsApp alerts. For example, web apps such as Loanspot lets the customers get relevant loan information by creating educational content for loans and credit. Moreover, mobile apps such as Tala loans, Branch loans, etc., even enable you to apply for loans and get instant disbursal.
2. Digital Data
It helps the financial service providers lessen the time and effort to assess the customer’s credit history and behaviour. With the help of AI, lenders are now able to get a prediction for the customer’s repayment capacity.
3. Customer Satisfaction
This includes measures such as self-service loan applications, almost-instant loan approval, and faster and easy disbursal from the loan lending companies.
What is Digital Lending?
It is a money lending method managed and disbursed through mobile or web applications. Now, microfinance institutions, Neobanks, and telecommunications companies can provide reliable lending services to the African population- simply through smartphone apps and stable internet connectivity.
Digital Lending Trends in Africa in 2022
The unbanked individuals, which account for 57% of the total African population, depend on digital lending companies. It is because Fintech companies offer services inaccessible before through traditional lending.
Here are 3 digital lending trends in Africa available in 2022.
1. Mobile Money
According to a report in 2021, 84% and 60% of internet users of Kenya and Nigeria transacted using phones. This depicts the country’s paradigm shift from cash-centricity to digital transactions, promising the coveted economic inclusion soon. Trevor Good, director of Unlimint, thinks that cash usage will reduce in favour of mobile money in the coming days.
2. BNPL or Buy-Now-Pay-Later
3. Online Lenders
Some FSPs offer money lending through mobile or web apps such as Kiakia, and FastCredit even sanctions a quick loan without any collateral deposit.
Benefits of Digital Lending in Africa?
The benefits of digital lending can be learnt in light of the difference between digital lending vs traditional lending. An underwriter analyses an interested borrower’s credit history and repayment capacity in the conventional lending system.
In contrast, digital lending apps do not need rigorous documentation, credit history, or critical eligibility. Also, online lending companies such as Lydia can disburse the amount in a day, whereas traditional banks take a week to sanction the loan disbursal.
Traditionally, the students or young professionals found it difficult to obtain credit due to their lack of credit history. The traditional credit institutions were reluctant to sanction loans to new-to-credit customers due to the risk of loan defaults.
But AI is now giving the digital lenders access to a borrower’s eCommerce history, mobile details, and geo-location. Lenders can now use a wide array of data points to assess a person’s creditworthiness and its risk.
The other benefits of online lending are transparency, time and effort saving, minimal or zero documentation, etc.
Digital Lenders' Take on to Support Financial Inclusion
Financial inclusion has a broad spectrum than it sounds. Poor financial inclusion in Africa is due to several factors such as:
- lack of financial literacy
- lack of formal identification documentation
- urban-rural divide and gender disparity
- strict eligibility criteria for opening bank accounts or obtaining a loan from traditional banks
Since the arrival of Fintech companies in the 1990s, their endeavours and innovative tools started to augment financial innovations in the country.
Earlier, SMEs could not get loans from banks for difficulty accessing creditworthiness. Now fintech companies such as Lydia can disburse loans to a borrower within a day, while if one applies for a loan through a bank, it will take weeks to get the disbursal.
In addition, one needs to apply at least $50,000 through banks as a regular bank will refuse to give a small amount such as $500 as Fintechs like Lydia grants. It has only become possible thanks to AI, enabling an individual to access loans immediately. For example, lending companies like Safaricom offer a facility to the intending borrowers to get a loan in their M-Pesa account and a 1-month tenure for repayment.
Digital lending platforms are working at the grassroots level to provide financial inclusivity and the economic stimulus needed for the growth of the nation and continent at large.
CIT Vericash is a leading regional technology provider that enables different lending institutions with its fintech enablement platform helping them to digitally transform the way they deliver their different lending products both domestically and internationally across multiple digital channels. With the flexibility and agility the platform provides digital lending providers can easily configure omnichannel solutions and deliver innovative digital financial services to all customers. The right tech can help FinTech lending platforms better serve their customers and bring more unbanked, underbanked, and MSMEs under the folds of financial inclusion.