M-Shwari, the first digital credit and savings account service of its kind, was launched in Kenya in 2012, and has since gained tremendous popularity, prompting numerous similar deployments to emerge worldwide. While no digital credit product has gone to market in Pakistan as of yet, interest in this deployment has grown remarkably in recent months, as evidenced by the market response to the Digital Analytics and Credit Workshop jointly hosted by Karandaaz and CGAP in February 2016. Within this context, we aim to answer the following questions for the wider market:
- What is digital credit?
- What is its potential for advancing financial inclusion in Pakistan?
- How can its benefits be harnessed?
WHAT IS DIGITAL CREDIT?
Digital credit is defined along three key attributes: instant, automated and remote. Accordingly, digital credit refers to short-term micro-loans delivered via digital channels and with limited in-person interactions. Loan decisioning processes, including loan application and credit limit assessment, are streamlined as they run through a series of preset algorithmic decision trees; no previous banking history is required and no manual, case-by-case approval or rejection decision is made. As such, digital credit can be accessed more quickly than conventional credit. Many digital credit models leverage non-financial data such as mobile voice, airtime, and mobile money usage and tenure, among others, for initial loan decisions. These attributes make digital credit a powerful tool for meeting emergency liquidity needs of unbanked customers at the bottom-of-the-pyramid (BoP).
WHAT IS ITS POTENTIAL FOR ADVANCING FINANCIAL INCLUSION?
In 2014, half of Pakistan’s adult population borrowed money to cover emergencies, with only a small fraction (5%) borrowing from a formal financial institution and the majority (88%) borrowing through informal means. In fact, access to formal financial services in Pakistan is low (23% of adults), with many citing distance to a financial institution as the main barrier.
Digital financial services may help address this access problem, but even though mobile account ownership in Pakistan is higher than the regional average (6% vs. 2.6%), mobile money penetration is still low and mostly OTC based (0.3% versus 5.7% active usage).
Digital credit may help tackle these financial inclusion issues in several ways: It addresses critical liquidity needs and offers an alternative to generally more costly informal sources of lending. The prospect of access to credit may also drive uptake and usage of mobile money services, and provide a gateway to introducing a broader range of formal financial services beyond payments. Enabling access through digital channels and not tying loan eligibility to previous bank account ownership breaks down entry barriers, which BoP individuals are especially prone to facing with conventional credit products.
In light of this pool of opportunities, the question to be addressed next is: How?
HOW TO HARNESS THE BENEFITS OF DIGITAL CREDIT?
Capitalize on Existing Enabling Digital Infrastructure
Several factors constitute critical enablers of digital credit delivery, most of which are already in place in Pakistan: the majority of adults (79%) have access to mobile phones, and eight live mobile money services are currently available across the country. The availability of a digital payments infrastructure is fundamental for delivering digital credit services as the sending and receiving of information and payments occurs via digital channels. In addition, a competitive and dynamic provider market may encourage product diversification and create room for testing new partnership models. Pakistan’s reliable national ID system already facilitates remote account opening and customer verification efforts. The availability of a sound credit reference bureau will further support scoring and delinquency management processes. These enabling conditions ought to be taken advantage of.
Get Providers Onboard
Entering the “unknown” terrain of digital credit presents a risk for many providers; launching such new service requires significant planning efforts and entails substantial upfront investments. However, it also bears the potential of being a lucrative business decision. For example, some scoring systems tie active phone and mobile money usage to loan eligibility and loan limit criteria. In such a model, MNOs will benefit from increased usage of their mobile communications and money services.
Uptake of this new digital finance offering is not just in the interest of MNOs; for financial services providers, digital credit may be a tool for attracting new (previously unbanked) customer segments at large scale. It provides an “entry point” to cross-sell advanced products and services down-the-line, thus growing their existing customer base. In light of these numerous potential gains and benefits, providers should come onboard and experiment with this new product offering.
Respond to Customer Needs
In order to promote awareness and stimulate uptake and active usage of digital credit services, products must address the specific needs of their target customers. For example, digital credit can help meet short-term liquidity needs of unbanked customer segments. Accordingly, when designing and marketing this service, the value proposition of “quick and ready access to loans at the palms of your hand” should be stressed. Hence, a clear match between customer needs and product features offered are critical for a deployment to succeed.
A RISK WORTH TAKING
Digital credit is a new and evolving product offering, with few successful precedents and many failed attempts. However, digital credit also bears many potential benefits — both to the customer and the provider. Given the advanced state of Pakistan’s enabling digital infrastructure, it is positioned well to experiment with this innovative product offering, and become a regional pioneer in this space. For Pakistan, this is the right time to join this global trend.
 Note: Some digital credit models are web-based and are not tied to mobile phone ownership. This blog post focuses on digital credit models leveraging existing mobile phone access.