The evolution of retail credit in the banking sector in UEMOA
Covid – 19 has hit the world with a “double shock”: an unprecedented contraction in supply and demand coupled with a health-economic conundrum. For Africa, and the UEMOA region, the immediate picture is bleak. However, there is hope if the financial sector uses the situation as a trigger for accelerated transformation of lending processes and products, taking the lead from other sub-Saharan markets and levering advantage of the robust financial infrastructure in place.
The IMF forecasts a GDP contraction of 1.6% for Sub-Saharan Africa. For the UEMOA regional powerhouses, Senegal and Côte D’Ivoire, it forecasts growth of several points lower than before the pandemic. The drying up of remittances by 19.7% in Sub-Saharan Africa, the inevitable decline in tourism and shrinking world demand for exported goods will leave profound economic scars. The physical lock downs have enormously impacted workers, MSMEs, and especially the informal sector, which in emerging economies constitutes the backbone of economic output and the largest reservoir of employment. A recent study conducted by the Direction générale de l’emploi in Côte D’Ivoire puts the number of jobs in the informal sector at 93% of total.
Prior to the pandemic, the lending industry was already faced with several challenges. In the region, there is low formal credit coverage (12% in OAMU, compared with 41% in Kenya*), especially for MSMEs, who consistently report difficulty in accessing credit. Low automation, outdated risk management tools leading to inaccurate risk assessment and high collateral demand generate burdensome costs for borrowers, and in many cases, high rates of non-performing loans. Such an environment creates unnecessary risks and uncertainty for banks and other lenders.
A significant drop in lending
Faced with these challenges, how has the banking sector in UEMOA responded? So far, the pandemic and the lockdowns implemented to counter it have seen three negative and self-reinforcing trends: First, the increased reluctance of banks to provide credit to individuals whose risk level is no longer considered acceptable. Second, many clients are unable to repay existing loans due to a halt in economic activity and loss of income. Third, customers have been unable to go to branches, meaning adjustments cannot be made as credit granting at a distance is unfeasible. The UEOMA saw a year-on-year declines in applications for new loans to Creditinfo West Africa of 18.5% in May, and no growth in April. Regarding non-performing loans, an increase seems imminent and inevitable due to economic impact of COVID-19. Information providers, banks and regulators must work together to identify best practices and implement them to counter this phenomenon, since financial data processing during the pandemic may negatively influence the integrity of credit reporting and credit markets. Observing global trends, the most pragmatic solution seems negotiation between borrowers and lenders of a forbearance period. Data submitted concerning these loans should be “flagged” so as not to unduly impact the risk profile of the borrowers and thus prevent future access to finance. Access was already a challenge pro-Covid. It has now become a battle is unlosable.
Looking forward, the lending sector needs to demonstrate it feels the urgency and that they are prepared to act. The new guiding principles for the credit industry in the UEMOA will be evolution and innovation. Because responsible lending comes down to accurate risk appraisal, the key will be new data and new technologies. Crises have historically accelerated and stimulated already existing trends, but never like this time has technology been the main force that prevented human lives and economies to be completely wrecked. In Rwanda, for example, decisive action by the regulator combined with flexibility from mobile phone operators led to a five time increase in mobile transactions, and a six times increase in their value during lockdown. In Indonesia, transactions doubled in the first fourth months of 2020. Similar steps were taken in the UEMOA and more can be done by the banking sector to fully harness the power of information and new financial technology and intercept the post-crises opportunities.
While the last 10 years have seen a constant diffusion of credit bureaus in Africa, it takes a collective mindset to fully exploit the benefits. Creditinfo West Africa has the responsibility to gather the payment history on every credit granted in the 8 countries in the region, and it now holds information on more than 8 million people and 17 million contracts, rich data for better lending processes. The credit bureau and its wealth of information is an essential tool to accurately assess credit risk. Credit scores – statistical indicators showing the potential risk level of a client and the likelihood that a loan will be repaid – have proved their value in giving reliable, objective, and timely risk evaluations, reducing bad debt and non-performing loans, decreasing lending operational costs, improving client service quality, and modernizing the credit industry. Recent analysis by Creditinfo West Africa demonstrated that customers with good credit scores were 10 times more likely to be good payers than those with a poor credit score. While this hinges on regular uploads and data quality, their predictive power is undeniable. All actors in the financial sector should truly participate. There is no reason to believe that tools and technologies that have so well performed worldwide, will not be successful in the UEMOA.
A renewed focus should be in efficiently increasing lending volume to avoid a drying up of credit. In such a crisis, the response from the banking sector cannot be anything other than counter-cyclical. While keeping risk control as the main driver, the next step should be a low-cost client acquisition process to make small size loans profitable, and therefore to encourage banks in granting them. This will be achieved first and foremost through automation, as the future will also be made of faster, smaller and automated loan decisions. Covid – 19 has exposed weaknesses: a transversal and global one has been the lack of a digital financial agenda and systems in many developing countries. A fully automated loan processing system equipped with new alternative scoring models based on mobile alternative, and Big Data (as explored below) would certainly help for example to prevent indiscriminate and unjustified portfolio reductions.
The future of the lending industry sector looks uncertain. Online, fintech, shadow banking and other unregulated lenders benefit from more flexibility and are eating into commercial banks’ market share. It is high time for embracing new technologies such as mobile lending as well as the incorporation of big data such as telco, utilities and psychometrics in assessing risk. During lockdown, with empty bank branches and movement constrained digital onboarding and mobile money proved critical. In developing markets where mobile lending is nascent or inexistent, and the credit market is relegated to physical interaction between underwriter and customer, physical confinement and countrywide lockdowns are the equivalent of death sentences. In Kenya the benefit of data driven decisions is clearly visible, Kamau Kunyiha CEO of Creditinfo Kenya says that “we are working with lenders who with a combination of mobile wallet data and credit bureau data can deliver loans instantly of as much as 750 USD although the typical loan size is nearer 50 USD.”
Credit markets are frozen because critical communication is impossible. On the other hand, where digital credit, e- wallets and e-money exist, and modern risk management are common, there are no such barriers. This, combined with new data sources will include a much wider portion of the previously uncovered population, especially the informal economy, MSMEs, and underserved individuals. Data from mobile operators, utilities providers, and psychometric quizzes can be used to complement profiles of thin-file customers or to build credit histories from scratch for the completely unbanked. This is already done on massive scale in other countries (ex. Kenya and Tanzania). Access to finance is crucial in normal times, and critical in recovering from a crisis, especially in one where the informal sector is deeply impacted.
Instead of being the great equalizer, Covid-19 has highlighted and amplified differences, whether social, economic or health related. The economic rebound will be contingent on the fluid and continuous financing of enterprises and households. In rare moments like these, lenders, borrowers and intermediaries can take the responsibility to transform the market. The credit market is competitive and volatile: innovators will be rewarded.
Adamou Sambaré, Managing Director, Creditinfo West – Africa.