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  • How microfinance is going mobile – and why an East African start up is leading the way

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    By Hallvard Barbogen, Content Manager.

    Even though microfinance and mobile seems like a match made in heaven, it hasn’t quite taken off yet. But now a US-Kenyan start-up is taking the lead.

    Here’s a stat for you: In Indonesia, 16 out of 100 people have an internet subscription. Not that surprising, perhaps. But what about this one? The Indonesians have 125 mobile subscriptions per 100 people. That’s the exact same figure as in the UK.

    Only a few years ago, mobile banking in Indonesia meant a couple of bank tellers and a security guard in a van, driving around in remote areas of the country. “Banks on wheels” has been, and still is, an important way for rural Indonesians to get access to financial services.

    Now, however, a real push for mobile banking is underway. Many obstacles are still making the situation complicated, such as conflicting regulations for different types of banking systems. But because the biggest bank in Indonesia, BRI, is also a leader in microfinance, the potential for mobile microfinance is huge in the south-Asian island nation.

    Just like in many other parts of the world with similarly high levels of mobile penetration and low levels of banking access, Indonesia could be looking at a bright future in mobile microfinance in the years to come.

    In the UK as well, mobile banking is an increasingly hot topic, with Atom Bank planning an early 2016 launch as Britain’s first mobile-only bank. Rivals Mondo, Starling and Tandem are not far behind, meaning 2016 could be a very interesting year for mobile-only banking in the UK.

    But where can microfinance and other mobile-only banks find their inspiration?

    Looking to East Africa

    According to the most recent World Bank Findex report, only 2 per cent of people worldwide have a mobile bank account. In Sub-Saharan Africa, however, 12 per cent of adults have one, making the region a global leader in mobile banking.

    Moreover, almost half of mobile banking customers in Sub-Saharan Africa have access to banking only through their mobile phones. In Europe, North America and many other places, mobile banking is often just an add-on to existing traditional services.

    Musoni in Kenya is said to be the first microfinance institution in the world to go one hundred per cent mobile. In 2014, it won the Frost & Sullivan Award for Technology Leadership for its innovative practices. By using mobile-only services, the company has been able to provide loans to clients within 72 hours –significantly faster than the one or two weeks usually needed in Kenya. And even though consumer uptake is a gradual process, the company has proved that the mobile business model is more than viable, financing tens of thousands of local enterprises and individuals.

    Perhaps the most exciting start-up in East Africa right now, however, is Branch. Launched last year by online microfinance pioneer Matt Flannery – co-founder of Kiva – Branch is an app that creates a credit score based on SMS history, call logs and Facebook data, and offers small loans based on the perceived risk.

    Users that don’t appear creditworthy at a first glance, however, can also build up their credit rating through “micro-micro-loans”, starting at only £5. By repaying their initial loans on time, customers can climb the Branch app’s trust ladder and become eligible for bigger loans with time.

    Branch is Flannery’s first for-profit venture. He explains that he saw a huge business opportunity in mobile microfinance and that the only way to realise it was to go for-profit and raise investor money. As of December, they were paying out 1,000 loans every day with a default rate of just five per cent.

    And Flannery is bullish when it comes to the future of Branch: “You will see in a matter of time the enormity of money that I am going to raise with this”.

    Keeping an eye on what Flannery and Branch can achieve in 2016 will be very exciting for anyone interested in innovative fintech – be it BRI in Indonesia, Atom, Mondo, Starling and Tandem in the UK, or banking start-ups on any other continent. If truly successful, Branch can be a guiding star for mobile microfinance institutions across the world.