Digital credit products like M-Shwari, KCB M-Pesa, Equitel’s
Eazzy Loan, Tala and Branch have been extremely successful at providing access
to credit for millions of people in East Africa. The convenience, reach, and
efficiency of these lending products has resulted in the financial inclusion of
a large percentage of people who have traditionally not had access to financial
services. The products are accessed either through an app or USSD. Credit
worthiness is assessed based on a user’s phone usage, mobile money usage,
demographics, and other factors. Upon approval, the microloan is disbursed to the
user’s mobile money wallet, and they have some specified period of time, usually
one to two months, to pay it back, with some fixed interest rate (~10% per
month) and escalating fees if the set repayment period is not met.
While the impact these products have had cannot be disputed,
there is clearly room for further innovation, to design additional varieties of
digital financial products that could fit the demands of poor households,
further lower interest rates, provide more flexibility with regard to their
purposes and use, provide greater freedom in terms of repayment terms and loan structure,
and offer greater transparency to the customer on the loan structure.
IBM Research – Africa
For the last 3 ½ years, the Inclusive Financial Services Research
Group at IBM Research – Africa has been looking at ways we can design, develop
and deploy new solutions and products that further extend financial inclusion.
These solutions have included credit scoring methods, alternative lending
platforms, and blockchain.
One area of work that we are currently exploring is the
space of Islamic Finance. Unlike other forms of financial services, it is still
relatively underdeveloped. On the surface, the notion of Islamic finance seems
like an oxymoron. Under Islamic Finance,
it is not permissible to charge, pay or receive interest. Moreover, Islamic law
(Shariah) does not recognize the time value of money and therefore one is not
allowed to make money by lending. However, what is permissible is earning a
return from investing money in allowable commercial activities. A rough
equivalent, in Islamic finance, to an interest bearing loan (a concept that
violates its core principles) is a deferred payment sale. A third-party may buy
goods or services from a retailer on behalf of a customer, and resell it to the
customer at a higher, agreed upon price, following a specified payment
Such a deferred payment sale represents a fundamentally
different approach to the more traditional one that is focused on interest
repayment, in that it focuses on buying goods rather than giving out cash. This
approach can benefit individuals who are bound by Shariah law and are in need
of goods and services, but who do not have the cash in the short term. There
are two additional benefits beyond conformity with Shariah law; namely that the
transaction is asset based, and there is a level of transparency in the
transaction that does not always exist for interest based loans. Asset based
loans are advantageous as they have been shown to have a lower default rate,
and the loan can be directed towards more economically advantageous assets.
Transparency is a significant advantage as individuals are often not clear what
fees and surcharges are levied if loan timelines are not met.
We foresee this type of asset based lending filling the
large gap in credit access documented above, for both the Muslim and non-Muslim
communities in poor populations with similar settings in Africa. The digital
aspect of the product facilitates more rapid scaling
We set to investigate the feasibility of a digital Islamic
credit product with both Muslims and non- Muslims across seven cities in Kenya.
We conducted qualitative studies with consumers through focus groups, and also
conducted quantitative retailer surveys with over 500 retailers and households in
Our results indicate that 43% of consumers interviewed had
borrowed money recently, with a majority using it for payment of school fees
for their children, utility bills, emergencies and medical costs. M-Shwari was the
lender of choice, with easier access processes in comparison to traditional
banking loan requirements, better payment terms and lower interest rates of
7.5% being cited as the reason for choice.
Consumers mentioned that what they disliked about current
financial products was the high interest rates loan approval waiting periods,
the registration process, the need for guarantors, and the lack of transparency.
65% of respondents identified interest rates as being a barrier to adoption.
We tested a digital asset financing concept that provided
participants with the opportunity for asset financing to meet their needs. The
majority of consumers (71%) mentioned they would consider using it. Despite the
lack of previous use of Islamic Finance by non-Muslim consumers, consideration
of use of Islamic financial services was not found to be linked to religion.
Interestingly Islamic Finance or Sharia compliance was seen as a lower tier
benefit compared to other benefits that the product offered. 61% of
interviewees cited transparency (no hidden costs or charges) as a reason for
using Islamic Finance, and 56% also cited the promotion of the principle of
financial justice, implying an ethical consideration beyond religious
When testing the product with consumers, both the product
and process for the product were rated by nearly 50% of consumers as high in
absolute likability and relative likeability to other financial products
available. They were also rated by nearly 70% of consumers as being unique compared
to other brand products.
What Does This Mean?
The findings from the study suggest there is a need for alternatives
to cash based loans at the customer as well as the retailer level. These could
be asset based and have a deferred payment structure rather than the
traditional interest bearing loan format. We have seen evidence that such a
product could be well received by bot the Muslim and non-Muslim communities due
to transparency, as long as the interest rates are not prohibitive and the
processing time is as short as current alternatives. The next step in this work
for IBM Research-Africa would involve running small scale deployments to evaluate
its use and impact.