Mobile money is all the rage these days in inclusive finance circles, and for good reason. Mobile penetration has increased dramatically across the developing world over the previous decade, providing convenient rails for financial services to piggy-back on. It’s cheaper than Western Union and MoneyGram for the client, and cheaper than having to erect brick-and-mortar branches for banks. It’s faster than virtually any other method to send money to a relative in a pinch at the other end of the country, and safer than carrying cash around. And it has spawned an incredible array of services.
One of those is M-Shwari. It’s a savings-and-loan product offered by Safaricom in Kenya, in partnership with the Commercial Bank of Africa (CBA). M-Pesa clients can save into their M-Shwari account and earn interest, and take out short-term loans for a fee. It’s been hailed as a revolutionary product and discussed by the likes of CGAP, GSMA, NextBillion etc. highlighting fascinating aspects of mobile money adoption. And Safaricom promotes it as seamlessly blending convenience, safety and affordability.
I am totally sold on the “convenience” and “safety” elements of M-Shwari, but to buy the claim of “affordability” requires a somewhat unconventional understanding of that word.
But First, the Conventional Take …
So, how much does M-Shwari cost?
Q: Do you get charged interest on your M-Shwari loan?
A: The M-Shwari loan DOES NOT attract any interest. The 7.5% charged is a loan facilitation fee payable only once for each loan taken.
Q: If you have not paid your loan within 30 days, what will happen?
A: Your loan repayment period will be extended for an additional 30 days and you will be charged an additional 7.5% facilitation fee on your outstanding loan balance.
Q: If you pay your loan before the due date, will you still be charged the loan facilitation fee of 7.5% on the loan amount?
A: Yes, the 7.5% is a facilitation fee charged on the cost of processing the loan. Early repayment will increase your future loan limit qualification. Remember your loan limit is dependent on your previous loan repayment behaviour and usage of other Safaricom services such as Voice, DATA and M-PESA.
That’s a 7.5% flat charge on the nominal loan amount, with a maximum term of a month. The nominal and effective Annual Percentage Rates (APRs), “annualized” interest rates if you like, are:
- Nominal APR: 7.5% * 12 = 90%
- Effective APR: (1 + 7.5%)¹² – 1 = 138%
For additional details/nuances on APR voodoo please refer to MFTransparency or Wikipedia. XIRR comes to 146%, assuming the 7.5% is collected when the loan is repaid, and 164% if collected when disbursed.
Calling it a “facilitation fee” doesn’t change anything – for a month-long loan, the effective annual cost to the client is 138% or so.
In fact, that it’s a flat fee makes things worse. There is a pretty good reason why the 7.5% can’t be called an interest rate, since interest rates are time-defined. If the cost was actually 7.5% per month, someone borrowing for a fortnight only would be liable for a 3.75% charge. Not so with M-Shwari – you could repay in a day, but you’d still pay 7.5%. The nominal and effective APRs for a twice-a-month engagement comes out to be 180% and 462% respectively; anything shorter, and the APR is astronomically higher.
We’re hovering dangerously close to the “u” word, don’t you think?¹
Conventional Carrot-and-Stick Included
Two other “features” jumped out from the FAQs:
Q: What is the loan duration?
A: The loan is payable within 30 days. However, you can repay the loan before the due date and borrow again. If you pay the loan in less than 30 days your loan limit qualification will increase.
Q: If you have saved Kshs 5000 in your M-Shwari and have a loan of Kshs 2000 and do not repay within the loan duration (30 days), what happens to the money in your deposit account?
A: – When you borrow the Ksh 2,000, the money in your savings account will be frozen to the loan amount and the loan fee (loan amount Ksh 2,000 loan plus a facilitation fee of Ksh 150).
- You will only be able to access any balance above the frozen amount. The frozen amount will be accessible once you pay the loan. However you can continue to deposit money. Note: During the period the frozen savings will continue to earn interest which will be paid into your M-Shwari at the end of calendar quarter.
M-Shwari thus encourages faster loan repayment, offering an increase in the loan limit as the carrot. CBA sweetens the language even further by noting, “The earlier you repay your loan the better your chances of getting your credit limit increased!”
M-Shwari also seems to be fully collateralized, with both principal and “interest” held in escrow. Good incentive for borrowers to repay, also because they run the danger of being reported as delinquent 90 days after the loan is due, and potentially ineligible for another loan in 7 years. (See CBA FAQ, pages 6-7.)
This is all well and good from a profitability and prudential lending point of view, but it could be argued that simultaneously making the current loan costly and increasing future indebtedness on one hand, and conducting a complete bait-and-switch between savings and credit balances so that there is no net increase in availability of funds to the saver on the other, are not inclusion-friendly “features”.²
The “Affordable” Case
There is no math that can known down the glaring APR of 138%. Context, however, can help explain why M-Shwari has 2.4 million active users within 1 year of operations. Here are some of the reasons I think it’s been so :
- M-Shwari is primarily a savings product, with an option to take an emergency loan, as promoted by Safaricom and CBA. The maximum amount one can save is KES 100,000, but the maximum loan amount is KES 20,000.
- People are willing to pay fees on short-term loans akin to a service fee. It’s why payday loans can charge $15 for every $100 borrowed in the US. People are also willing to pay a fixed, simple fee compared to a more complicated, constantly adjusting rate, which is why microcredit interest is often charged at a flat rate. There may also be an element of pay-as-you-go, where bank clients are willing to pay a transaction fee each time they use a service, as opposed to pay a fixed monthly ledger fee.
- APR is not particularly useful for short-term loan products. No one expects a borrower to roll over 12 times in one year, bleeding KES 90 to access KES 100 through the year – we know even the unbanked are more sophisticated financial users than that.
- But most importantly, it’s convenient – it’s on that phone that is attached to your hips, it’s on the M-PESA rails that is ubiquitous in Kenya, and it’s near instant, secure and private. I know I would pay a 7.5% premium for a service like that.
M-Shwari therefore seems to be “affordable” despite having an APR of 138%. With no cash-handling or client interaction costs at branches, a relatively cheap source of capital in deposits from the same clients³, and non-performing loans at around a low 3.8%, this is one partnership that must make for quite nice margins for CBA and Safaricom.
¹ The “u” word is usury, in case you’re still wondering.
² It’s not clear if one can borrow more than one’s savings amount – the product pages and FAQs are deliberately vague.
³ Tiered interest rate is in the 2-5% range per annum.
Author: Ignacio Mas, Senior Fellow, Center for Emerging Markets Enterprises at the Fletcher School, Tufts University
With M-PESA and the whirl of innovations that it has triggered, there is no doubt that Kenyan payments are becoming more electronic. But, at the same time, are they any less paper-based? It’s hard to argue that is the case, if one looks at the Central Bank’s data. (Currency and GDP are from its statistical bulletins, and check volumes are from its Annual Reports; and remember that M-PESA was launched in April 2007).
The value of currency in circulation has remained essentially flat, especially if you discount the 2007 high blip (I doubt that M-PESA’s cash-busting bang was largest during its first nine months of operation). Likewise, the volume of checks is on an exceedingly gentle decline. The average check value has dropped quite significantly, but surely that’s due to competition from electronic funds transfers at the high value end rather than from M-PESA with its small-ticket transactions.
To me this lack of visible impact on paper highlights the two key pending transitions that M-PESA –and mobile money more generally—needs to undergo.
First, customers need to see value in storing their balances electronically. As long as most customers have the practice of withdrawing any electronic money they receive immediately and in full, M-PESA will remain essentially a cash-to-cash service, and as such it sustains rather than reduces the role of cash in the economy. (My recent mantras: M-PESA is better cash, not better than cash and you can’t go cash-lite on empty accounts.)
Second, businesses need to see mobile money as an easier way not only of paying and getting paid, but also of managing the information around those payments. It needs to link with order management, invoicing, accounting, reconciliations; possibly even inventory and fleet management. Mobile money needs to have the kind of flexible application programming interfaces that allows corporates to handle transaction flows seamlessly within their own systems rather than as a separate universe of transactions. It must solve basic trust issues that arise when there is no prior relationship between buyer and seller. (My recent mantras: solve business paint points around mobile payments and think of cash as a highly-evolved visual-acceptance payment instrument.)
Without these two transitions, to more electronic storage of value and flexible interfaces into business IT systems, mobile money will continue to be an extremely useful extension of the Kenyan payments system, but it will hardly be at the core of it. The core remains very paper-centric.
Ignacio Mas is currently a Senior Fellow at the Fletcher School’s Center for Emerging Market Enterprises at Tufts University, a Senior Research Fellow at the Saïd Business School at the University of Oxford, an Associate with Bankable Frontier Associates, and an independent consultant. You can find further details of his work at: http://www.ignaciomas.com.