Without a doubt, mobile money platforms have created opportunities for a lot of unbanked individuals to participate in the financial system and contributed to the vision of a cash lite economy. Further, mobile money services are stepping up to provide a much-needed service for Ghanaians in that, they are providing a critical digital financing service and creating a pathway for millions of users to access instant unsecured loans.
A mobile money loan service is usually a loan provided to clients through their mobile money wallets. It is unsecured and approval and disbursement processes occur within minutes. Since mobile network operators cannot, per regulations, provide this service ordinarily, most mobile network operators provide mobile money loans working with loan providers such as QWIKLOAN, Xpressloan, Ahomkaloan, etc.
In addition to loans offered by mobile network operators through their partner financial services providers, users can also access micro digital credit through mobile apps such as FIDO and Paylater, etc. Typically, the user dials a short code that opens up a menu; the client must select financial services after following a number of prompts, agree to terms and conditions of the service and enter their passcode. The final stage will be the communication of a decision on whether the loan request is approved or not. The loan approval processes are done automatically without any human intervention. The decision is made based on a number of factors such as past repayment record, the number of years as a mobile phone user, the volume of mobile money transactions, type of device used by the client (smartphone or non-smartphone), volume of airtime and volume of internet data consumed over time.
Approved loan amounts vary from client to client, however, for first-time loan applicants, approval is given for GH¢100 (20usd), and this loan amount can increase over time based on loan decision-making factors. Currently, interest rates for mobile loans are pegged at a regulatory loan rate of 6.90% over a term of 30 days irrespective of the amount; this tenure is uniform across all the providers. The process is concluded with funds being credited instantly to the client’s mobile wallet and can be spent or utilized for payments. Only one loan transaction is permissible at any point in time; however, some users circumvent this limit of one loan at a time by registering multiple mobile numbers using different IDs. After 30 days, the system automatically deducts the principal and interest from available funds in the client's mobile wallet. If there are no funds in the account, the loan automatically defaults, and a flat punitive rate of 12 .5% is applied on the loan and interest until the funds are paid. However, if the loan is in default for six months, the loan provider may internally write it off as bad debt.
The main challenge facing mobile loan services is the high number of loan defaults, currently estimated at 20%. There are several reasons which account for this high rate of defaults, including lack of funds, forgetting to deposit funds in the mobile money wallet on the due date for repayment, short tenure of the loan, high-interest rates and some persons hold the perception it is "free money "therefore they are not obligated to pay and the use of multiple IDs which become untraceable. Since the loans are unsecured, there is no action to recover it except to rely on moral suasion and the threat of denial of future loans. There are many suggested solutions to these problems; however, the most persuasive one on the table are ensuring that only one ID is utilized for mobile money registration and strengthening the credit bureau mechanism, so such defaulter’s information is spread across to other areas such as renting a house or doing other financial transactions; this will make the cost of default higher and encourage payments on time. Another solution is to provide an option of spread-out repayment periods instead of a one-time bulk figure which is currently the case. In East Africa, some mobile money loan service providers have a guarantee system where a guarantor offers to make repayment when the loan recipient fails to pay on time.
In conclusion, mobile money loan service is creating opportunities for the unbanked in Ghana, who are in the majority, to access credits. However, this service provides strong evidence of how financial technology innovations can lead to financial inclusion.
Kwami Ahiabenu II, is a Technology Innovations Consultant