Digital credit scoring paves way for affordable microloans in East Africa
More than 2.5 billion people around the world – many of them in Africa – lack formal identification that enables them to access to financial and government services, according to the United Nations and the ID2020 project.
What’s more, less than 10 per cent of adults in low and middle-income countries are on file in public credit registries.
The result is that millions of people in East Africa are paying punitive interest rates for credit or are frozen out of access to financial services. Microfinance institutions (MFIs) in the region charge their borrowers notoriously high interest rates, often up to 30 per cent per year.
This is partly because these lenders face a higher risk of loan defaults than mainstream banks due to a lack of borrower data to support lending decisions.
MFIs in frontier markets have traditionally needed to make lending decisions without access to the sort of customer data and documentation commercial banks take for granted: credit scores, identification documents such as passports or government ID cards, bank statements, lending history and collateral.
Fintech providers, financial inclusion companies and digital finance applications are filling this information gap with alternative credit data. Credit scoring applications like Tala in East Africa, for example, collect masses of data about phone owners and use these data points to produce accurate credit scores.
This alternative credit data could help the credit officers at microfinance banks (MFBs) and MFIs who make lending decisions to make more accurate predictions about loan performance. This could, in turn, help improve collection rates and profitability for institutions and make credit more affordable for lower-risk customers.
With smartphone ownership in East Africa rising as the average selling price falls, an unprecedented amount of credit data is expected to become available in the years to come. Through API integration, fintech providers and Oradian will be able to provide access to real-time credit scores for credit officers at MFIs and MFBs.
Oradian, which currently serves a global community of over 50 financial institutions and one million end-clients, provides a cloud-based toolset designed for financial inclusion in hard-to-reach communities.
Third-party fintech software can plug into Oradian’s core banking platform via API integration so the two systems can ‘talk to’ each other.
When credit officers log into their Oradian dashboard to see loan applications, loan performance and borrower information, they can also see the credit score provided by an alternative credit scoring app, similar to Cignifi and Equifax’s partnership in Latin America.
With predictive data that enables lenders to make more informed decisions, fintech can help make credit more affordable for low-income borrowers in frontier markets. API integration is an efficient way for MFIs and MFBs to improve their service, product offering and rates, enabling them to differentiate their business in markets with increasing competition.