Can digital microcredit take off in WAEMU?

Over the past decade, the level of financial inclusion in the West African Economic and Monetary Union (WAEMU) has seen notable advances. According to the Global Findex Database, the proportion of people with an account, including mobile money, has increased from 8% in 2011 to 50% in 2021. By 2021, the WAEMU region accounted for more than 50% of all mobile money accounts in West Africa, which, after East Africa, had the largest number of mobile money accounts in the world.

Financial inclusion, however, does not end at having access to an account, it also encompasses being able to access related services, such as borrowing. While the number of accounts has increased dramatically due to the success of mobile money in the region, the level of borrowing or credit taken out by households remains low. By 2021, the proportion of people who had access to credit from a formal institution was only 10%. Only 3% of those households had access to digital microcredit via mobile money, compared to an average 19% in East Africa[1] and about 7% in Sub-Saharan Africa. This seems like a paradox given that one of the objectives of mobile money was to allow populations excluded from the formal financial system to use it.

Customer readiness is key

The use of digital financial services, in general, including borrowing, also requires a certain level of financial literacy. This is where an important problem arises. Most people who need to be financially included are not sufficiently educated, which is generally highly correlated with financial literacy. Individuals generally lack information on the requirements of the Electronic Money Issuers (EMIs) to get these microcredits. For example, the amount of loan you can get approved for depends on the amount and frequency of transactions on your account, but also on your ability to pay back previous loans, your creditworthiness. To build credit, it is necessary to start by borrowing small amounts of credit and paying them back on time per the terms of the agreement, in order to gain access to larger amounts. Moreover, financial history is therefore very important in digital microlending, and clients often do not have this knowledge.  As a result, even creditworthy individuals can find themselves excluded due to an insufficient financial transaction history.

Equally important is the issue of lack of trust or household cultural habits. Due to cultural norms, excluded households, especially those in rural areas, are often not accustomed to taking out loans from financial institutions and rely more on savings groups. In WAEMU, while 10% of households take out loans from savings groups, only 3% access them via mobile money. These figures conflict with those of East Africa, where the proportion of people who received credit through mobile money accounts is higher than those using savings groups.

Finally, the low level of personal identification of households’ members, especially the lack of official documents, automatically excludes them from the digital microcredit process. Indeed, even if Instruction N°008-05-2015 of the Central Bank of West Africa member states, required EMIs to identify their customers by presenting an official document, it allows for more flexible KYC[2] requirements for what may be called “occasional customers”.  This type of customers can then have mobile money accounts and be identified without presenting an official card such as an identity card. They can therefore use the mobile money account although with certain restrictions. These restrictions include limits on the amount of transactions they can make and also does not allow them access to microcredit.

Compliance issues and regulatory framework constrain EMIs scope of activity

EMIs cannot make loans on their own and are forced to provide this service through a banking partner. The creation of Orange Bank Africa by the Orange group or the partnership between MTN CI and Bridge Bank for the Momokash loan offer in Cote d'Ivoire, are a few examples of this limitation and the means put in place to work around it. Since lending is carried out in partnership with banks, the compliance requirements of the banking sector apply to EMIs' clients.

In addition, the lack of a matured mobile money ecosystem in the region is a real challenge in assessing the credit capacity of customers. An ecosystem that facilitates the use of mobile money for everyday activities, even when it comes to the most informal purchases, as is the case in Kenya, is needed. This framework allows EMIs to have a more complete financial history and therefore a better knowledge of their customers since most of the everyday expenses can be done via mobile money. Though in some countries like Côte d'Ivoire or Senegal, the payment of various bills and purchases on the markets are carried out via mobile money, there remains more advancements to be made in the region.

Another important issue is that of debt collection or the default of payments that EMIs face. As an example, by the end of 2021, Orange Bank CI nonperforming loans (NPLs), Orange Money CI's partner in offering loans, represented more than 60% of customer receivables and provisions. When customers default on their loans, it is difficult to take individual punitive measures against them as the cost for these procedures may exceed the amount to be granted. In addition, when accumulated, these numerous defaults certainly undermine the performance of the partnership between the bank and EMI.

Avenues to improve access to digital credit

One solution that could improve access to digital credit in the WAEMU region is the acceleration and an effective implementation of the personal identification procedures of currently excluded households, particularly in rural areas. This is crucial because whether on the supply side or the demand side, the issue of customer identification is often the biggest constraint to accessing credit. Overcoming this challenge requires a general awareness of the importance of having proper valid I.D for ease of identification by stakeholders, but also requires an increase in the financial education and financial literacy of these populations.

EMIs should also communicate and educate, where possible, about how individuals are evaluated during the credit process. In addition, registration of microcredit borrowers with the Credit Information Bureau in the country is also crucial because it can be used as a deterrent for defaulting on loans. Failure to repay a microcredit could then be a disincentive to accessing more credit in the future. Of course, to start, better customer identification is required. Finally, better overall integration of the mobile money ecosystem into the economic dynamics of the region, as it is currently the case in East Africa, is necessary.