Fintech & fraud: Microfinance faces balancing act in Africa
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Fintech & fraud: Microfinance faces balancing act in Africa

When microfinance banks in Africa speak of the rise of new technology, they usually focus on its potential and, perhaps disingenuously, play down the risks. They say the spread of mobile phones and internet access enables small loans to reach Africa’s rural poor more efficiently than ever before. But while international microfinancier Finca is aware of these opportunities, it knows from painful experience in Uganda that new technology opens up new vulnerabilities too.

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It happened four years ago, but the memory of the fraud hangs heavy on Rupert Scofield, co-founder and president of The Foundation for International Community Assistance (Finca).

“He worked for us for 10 years; we thought we could trust him,” Scofield recalls of the accountant at Finca’s Ugandan outfit, who he says embezzled $200,000 from the group.

The story, which Scofield now describes with regret but disarming openness, is one of collusion and poor supervision. The accountant gained access to more of Finca’s accounts than he ever should have been able to. Scofield says the accountant was colluding with employees at a third-party telecoms provider, South Africa’s MTN, which allowed him to transfer large sums of money out of the bank to himself and to his accomplices.

MTN vehemently denies that any of its employees were involved.

“It’s a breakdown in internal controls,” Scofield says. “He should not have been able to get his hands on this money.”

Ugandan police refused to pursue him, Scofield says, so Finca never saw its accountant – or its money – again. “The guy disappeared. For all we know, our employee could have been murdered once he served his purpose.

“They may have just killed him and dumped him in Lake Victoria – and split up the money.”

Finca has always faced fraud because, it says, of the places in which it operates – countries in Africa and beyond where corruption is as endemic as poverty. Just last year, some of Finca’s own lawyers defrauded the bank’s operation in the Democratic Republic of Congo, pocketing $180,000. The money, collected from Finca’s customers, was meant to cover the cost of registering land titles with the authorities, as collateral on loans. A few years before that, this time in Kosovo, Finca lost $800,000 to criminals who appropriated the loans of hundreds of the firm’s customers – again with the collaboration of a Finca employee. 

Because the average size of loans handed out by Finca is only a little over $800, and because its declared goal is “leveraging every available dollar to maximize impact” on the prospects of the needy, the sums lost were, to the group, substantial. None of the money was recovered, Scofield says. But while those cases indicate a concerning vulnerability to embezzlement, neither was enabled by new digital processes – they represent, if you will, traditional forms of fraud. 

Now the risks of embezzlement are even greater, Scofield says, because the introduction of new technology has given fraudsters additional means of accessing Finca’s funds. He says the Ugandan case was made possible by new risks brought about by Finca’s hazardous transition to mobile banking in Africa.  

If we do not get into tech, we are out of business in the next five years - Olaf Becker, Finca

Scofield, a 67-year-old veteran of microfinance with a gentle American drawl, is well liked by his employees. He readily shares anecdotes from his many travels around the world. He plays the guitar at work and freestyle raps at office parties, says Reena Vadehra, a spokesperson at Finca’s headquarters in Washington DC. 

But he is deadly serious when it comes to financial crime. 

“Fraud is his number-one fear in life,” says Mike Gama-Lobo, a long-time colleague and head of Finca’s African operations. “He keeps track of all the names of the big fraudsters, and he’s still after them in his sleep.”

To Scofield, there are more reasons to be fearful now than ever before. In a candid interview with Euromoney, in which he evokes the $200,000 Ugandan fraud, Scofield speaks of the new dangers brought about by adopting new technology and by partnering with third-party tech players. Skirting no questions, he paints a worrying picture of Finca’s anti-fraud systems around the time of the Ugandan embezzlement case. 

He says that, as that fraud shows, poorly monitored digital platforms can enable employees to embezzle more money, and do so faster than ever used to be possible. 

Though distinctly annoyed that Scofield has revealed so much about the Ugandan fraud, Gama-Lobo confirms that it was enabled by technological innovation. There is no mention of the Kosovan, Congolese or Ugandan frauds in Finca’s annual reports.

“This is something I warned my people about early,” Scofield says. “If we’re going to move to a new business model, especially one that is digital and involves the use of the internet, being ready for the hackers, being ready for the crooked employees, this is something that we’ve got to do a whole risk analysis of before we get involved. Even though we did that, obviously we didn’t do it thoroughly enough in the case of Uganda.”

He adds: “We’re getting involved with new partners, we’re getting involved with these technologies and it’s not just: ‘Do we have the internal controls?’, but: ‘Do our partners have them?’”

It’s a concern that could be echoed by any banker in Africa trying to increase banking penetration in the continent through the new digital channels now on offer.

'Village banking'

Finca was founded as a microfinance non-profit in 1984, only a year after Muhammad Yunus, an economist and now the leading figure in microcredit, set up Grameen Bank in Bangladesh. 

Just like Grameen Bank – grameen means ‘village’ in Bengali – Finca focused on what it called ‘village banking’, delivering small, uncollateralized loans to groups in Latin America through a collective guarantee – each debtor is responsible for every other, making repaying one’s loan as much a social commitment as a financial one. The goal: lifting clients out of poverty by giving them the financial means to start or develop a business. 

Back then, Finca was firmly rooted in paper money and face-to-face interaction with its clients: an early black-and-white picture taken when the idea for Finca was being conceived shows John Hatch, its other co-founder, in front of stacks of bank notes – his first loan disbursement – as a small group of Bolivian farmers smile and clap behind him.

At first, like Grameen, Finca lent primarily to women, because women, it found, were less likely to be banked, more likely to be responsible with their money, and disproportionately affected by poverty. Finca relied heavily on borrowed money and on donations. 

Now Finca is one of the world’s largest microfinance institutions and serves nearly 2 million clients. It has operations in 23 countries across Latin America, the Caribbean, the former USSR, Africa, the Middle East and South Asia. It operates as a normal bank, insofar as it delivers financial services – deposits, loans, transfers – and its revenues overwhelmingly derive from the return it generates on its services, rather than from charitable donations. Finca now lends in near equal measure to both men and women.

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Rupert Scofield, co-founder and president of Finca

Finca’s presence in Africa dates back to 1992, when Scofield set up shop in Uganda with just $100,000 of capital, raised from Minnesotan donors. The firm now has about 700,000 customers on the continent, across six countries. In each one of those countries – Uganda, the DRC, Malawi, Nigeria, Zambia and Tanzania – Finca has a banking licence. That enables it to compete even with much larger banks in the small-loan segment – a market with huge potential on the continent. 

“The vision for Africa is to be the number-one financial service provider for low-income individuals,” Gama-Lobo says. 

Its largest presence is in the DRC, with nearly 300,000 customers there. In Uganda, it has about half that number. Finca’s outstanding loan portfolio in Africa is a little over $150 million.

Sometimes referred to as the world bank for the poor, Finca has received the support of notable figures and financial institutions. Then US president Bill Clinton, together with Hillary, visited Finca on a state visit to Uganda in 1998. The Clintons have continued to support it since: in 2010, as secretary of state, Hillary Clinton praised Finca for providing “life-changing financial services to the poorest corners of the world”; and the Clinton Global Initiative, an arm of the couple’s charity, has afforded Finca a platform to publicise its work. Scofield has donated, in a private capacity, to the 2016 Clinton presidential bid. He has also advised the campaign, though he will not say on what.

Hollywood and Wall Street have paid attention to Finca, too. Former Goldman Sachs vice-chairman Bob Hurst and his wife Soledad have been long-time supporters of the bank. So have actresses Natalie Portman, Finca’s ambassador of hope, and Zoe Saldana, its goodwill envoy.

Credit Suisse, GE Money and MasterCard have been partners with Finca on various projects. The firm has more than 80 lending partners, among them Citi, Deutsche Bank and the World Bank.

Despite all this goodwill, Finca knows that banking is changing and that it has to stay on top of developments if it is to survive. To keep delivering on its promise of financial inclusion – bringing the unbanked poor into the financial fold – it has to adopt new tools to reach an ever-larger pool of potential customers, as well as deliver better services to its existing clients.

Nowhere is that more true than in Africa, where in 2014, according to the World Bank, just one in three adults had an account, but where access to financial services is growing fast thanks to the spread of mobile phones, which connect even remote customers to banks and mobile money providers.

Finca has been slow to embrace these changes, and when it has, their adoption has been fraught with challenges. The Ugandan fraud is a case in point.

Lessons learned

In August, Euromoney travelled to Dar es Salaam, Tanzania’s most populous city, to see what lessons Finca had learned from those early mistakes and how it intends to adapt to the technological changes afoot. Though only its third-largest African operation, with 100,000 customers, Finca says Tanzania represents the forefront of its push to innovate. Its hopes for successful change lie here.

At first, the Tanzanian outfit does not look much like a modern, digital operation. Nestled between Morogoro Road, a busy six-laner that runs through miles of central Dar, and an open dirt patch where old tyres lie in piles of trash and herons feed on the dump, Finca’s Tanzanian headquarters hardly have the feel of a Silicon Valley powerhouse. An armed guard lingers by the entrance to the rugged-looking, discoloured yellow building, which is four storeys high.

Inside, too, the feel is more that of an NGO from the last century than of a financial institution on the brink of a technological breakthrough. Employees huddle in small, half-collapsed wooden cubicles, among printers and piles of cables. There are only a few computers around.

Though he has grown fond of these offices, Gama-Lobo says: “I’ve been worried for the last eight years that the building was not built so well. I remember trying to put up something on my wall at some point in there, and half the wall would chunk out when I put a nail in.” 

Before that, Finca’s Tanzanian head office was in an even worse spot – a “real shit-hole”, Gama-Lobo says.

Compare that with National Microfinance Bank (NMB), perhaps Finca’s most advanced rival in Tanzania, and you get a sense of the calibre of the firms it is up against. At NMB’s bright new headquarters, overlooking central Dar’s only golf course and, beyond it, the Indian Ocean, hundreds of bankers manage the bank’s operations around the country. More than 40 of them focus on conceiving and implementing the latest banking technology. 

Ineke Bussemaker, an elegant, self-possessed Dutch woman who has been NMB’s chief executive since May last year, is well aware of the need to constantly update the bank’s practices. She says of digital and mobile banking: “That is, to me, where the growth is – where you can actually reach millions of people, where systems are scalable and you can do it at low cost.” 

NMB has the advantage of being part-owned by Dutch lender Rabobank, which has provided it with the kind of training and technical support available to few microfinance institutions in Africa. Bussemaker joined NMB from Rabobank. Though microfinance is in the bank’s name, NMB has been diversifying its activities: only about a quarter of its loan book can now be categorized as microfinance and SME lending. Tanzania has a population of about 50 million, of whom just 7.5 million have a bank account, Bussemaker says. With its 2 million clients, NMB reaches more Tanzanians than any other bank in the country.

Because of the size of Tanzania’s unbanked population, Finca knows it has a card to play in the country. And Bussemaker doesn’t dismiss its chances. Asked if she considers Finca a rival, she says: “They’re doing a good job”. 

But it is clear that taking on advanced businesses like NMB is a challenge for Finca. Benoni Katende, who is based in Kampala, Uganda, is Finca’s head of alternative channel delivery for Africa, meaning he is in charge of the provision of services through mobile phones, the internet and physical agencies across the continent. 

Katende knows how far behind some of Africa’s big financial institutions Finca is, from having worked at one. He joined the group at the start of the year from Stanbic Bank Uganda, a subsidiary of South Africa’s Standard Bank, a technologically advanced firm with operations in 20 African countries. He says he still has to come to terms with the pace of change at Finca.

Asked to compare Stanbic and Finca, Katende says his new employer has the advantage of being more flexible, because it is less hierarchical. But, he adds: “Finca is a lot slower.”

Scofield says a friend of his at the World Bank goes so far as to call Finca and other legacy microfinance networks “the walking dead”, because of their apparent inability to adopt modern banking practices.

Gama-Lobo too knows the operation is bloated. In Tanzania, Finca has 650 full-time workers, for a balance sheet of $40 million – “a really small balance sheet” for “a huge number of employees”, Gama-Lobo says. Of those employees, 240 are loan officers. Their number, and role, has changed little in recent years. And while they provide valuable face-to-face interaction with customers – a personal touch many at Finca view as essential to what the bank does – they also represent what some would consider an antiquated form of banking: loan officers spend hours travelling to customers in remote areas, rather than serve them through mobile phones or via the internet. (Gama-Lobo says nearly all Tanzanians have access to a mobile phone.)

Jimmy Ngoye-600

Jimmy Ngoye manages Finca’s main branch in Dar es Salaam

Jimmy Ngoye, a shy young man who manages Finca’s main branch in Dar es Salaam, used to work as a loan officer in the Geita Region of northwestern Tanzania, on the southern edge of Lake Victoria. 

Asked if he misses that previous role, which he held for just nine months, he vigorously shakes his head, noting that the job was “hard”. He adds that, as a loan officer, he was given no company car and had to travel to his customers wherever they lived, by whatever means he could find: most often by public bus, sometimes on the back of a truck or motorbike, and, on those occasions where the tracks became wholly impracticable to motorized vehicles, even by bicycle or on foot. A one-way journey to a client could take up to two hours; sometimes he would find on arrival that the prospective client would not want a loan after all. 

Ngoye would often see just two or three clients in a day – four was considered a successful day’s work. That was three years ago. Since then, travel time for loan officers has been reduced to a maximum of one hour, and the documentation needed to sign up a new customer has been reduced from about nine pages to about six. But apart from that, little has changed. Conditions for loan officers are still arduous, employees say. The number of loan officers and the slow pace at which they work drive up operational costs, in turn driving up the interest rates on loans. Finca’s outfits in the rest of Africa operate on a similar model. 

It didn’t have to be that way. Scofield speaks sadly of an early partnership idea with Grameen to create a mobile phone aimed at providing customers in Uganda with easy access to microfinance.

The project, the first of its kind, went ahead as the Grameenphone (GP) in 1997 – but in Bangladesh, and without Finca. Gama-Lobo says that missed opportunity is one of Scofield’s greatest regrets.

Not only did Finca miss the opportunity to be the first in mobile banking, but the most impressive financial innovation story of recent years, certainly in Africa and perhaps even worldwide, also passed it by: the huge expansion in Kenya of mobile-powered financial services, owing largely to the impressive rise of M-Pesa, Vodafone’s mobile phone-based money transfer and microfinance service. Finca has never been active in Kenya, and thinks that it is too late to enter that market, seeing how far ahead and saturated it now is. 

Launched in 2007, M-Pesa has 17 million active clients in Kenya – nearly the size of the country’s adult population. The firm expanded into Tanzania early last year, causing a further headache to banks like Finca trying to get ahead in that country.

Real force

If one man can turn things around for Finca and make it a real force in this challenging new digital environment, the bank thinks that man is Olaf Becker. Becker moved to Dar last year to become Finca’s chief operations officer for Tanzania, tasked with dragging the bank’s legacy operations there into the 21st century. 

Because Tanzania is now where Kenya was a few years ago – huge mobile phone penetration coupled with a large, unbanked population – the bank believes the country is the perfect place to try new things out. If it works, Finca hopes to deploy the tools Becker will have introduced in Tanzania to its other outfits in Africa and, eventually, around the world. 

Forcing a laugh, Becker, who is aware of the responsibility placed on his shoulders, says: “It’s no stress, no pressure at all.” But he is resolute in the face of these expectations. “In Kenya we missed the boat. We’re not going to miss it again here,” he says.

A young, hard-working German who has lived abroad for much of his life, Becker has worked at Finca Africa for eight years now. He gives off, behind the thick frame of his glasses, the eager and genial, if at times somewhat awkward, air of a Mark Zuckerberg. He studied finance and development economics, and, before Finca, worked for five years at ABN Amro and Royal Bank of Scotland. 

Colleagues regularly cram into his small, second-floor office, overlooking Morogoro Road, to discuss his plans for innovation. On the walls are taped a Finca poster, with the misspelt tagline ‘Bank anywhere at your convinience’, a map of Tanzania showing the location of Finca’s 25 branches, and a white-board that was originally meant to serve as a calendar but is now fully taken up by a jumble of equations and tables. By the entrance to his office are taped four A4 sheets of paper detailing the ambitious timetable to implement the projects on which he and his team have been working. The final deadline is June 2017.   

In our bank in Georgia, in our IT room, we have this big screen which shows all the hackers trying to attack the firewalls around the world. A lot of them are coming out of Russia, some of them are coming out of Nigeria - Rupert Scofield, Finca

Becker speaks enthusiastically about his work, and his passion for new technology is contagious. But he is also keenly aware of the danger Finca faces. “If we do not get into tech,” he says, “we are out of business in the next five years.” 

Because the pressure to digitise is so high, Becker can get frustrated at the slow pace of change. A fortnight after Euromoney’s visit, Finca Tanzania was due to start moving its headquarters into new, swankier offices, to its employees’ great delight. The modern premises give a sense of where the bank wants to be. 

Still, Finca finds it hard to shake off its old ways. Talking with colleagues ahead of the move, Becker bemoans the fact he will have to drive back and forth between the old and new offices, moving piles of paperwork. Hardly how one would expect the man pioneering a bank’s digital shift to spend his time. 

So Becker is well aware that Finca’s operations are still, in many ways, old-fashioned. 

As things stand, Finca Tanzania already offers agency banking – meaning it has a network of 90 shop owners around the country who provide a physical point of contact for Finca customers, spreading Finca’s reach on the ground beyond its 25 branches. The bank also provides some services on mobile phones, through a platform that seems both safe and practical. The mobile interface is easy to use, requires password entry for every task, logs out automatically if the user is passive for too long, and produces a receipt for each completed job. No internet access, only mobile reception, is required.

Olaf Becker-600

Olaf Becker moved to Dar last year to become Finca’s COO for Tanzania

But Becker knows those services are far from enough. He is working on three projects that he thinks could revolutionise the way Finca works: digital field automation (DFA), credit scoring and mobile savings.

Under the DFA plan, perhaps the project Becker speaks of with the most enthusiasm, Finca intends to equip all of its loan officers with 3G-connected tablets. On these tablets, the officers will be able to open accounts and deliver loans via electronic forms, using fingerprint registration, rather than reams and reams of paperwork. 

Officers will still be required to travel the country, but at least it will make the process of signing up customers less cumbersome, Becker says. “Every loan officer is going to be a small mobile bank,” he adds. 

Becker thinks Finca’s biometrically signed e-contracts may not be upheld in some of Tanzania’s courts, where judges will never have heard of such a practice. “We will lose money on this in some courts,” he says. But overall, he believes this change will reduce the bank’s operational costs.

On credit scoring, Finca has partnered up with First Access, a US data analytics firm. First Access runs through basic personal information about prospective customers – age, gender, number of dependents, house ownership – to score creditworthiness. It also runs through the individual’s repayment history with mobile network operators. 

So far, First Access has partnered with Vodacom to do this, and it is working on creating similar partnerships with mobile operators Airtel and Tigo. It does not intend to use clients’ social media activities, as other financial institutions have done, because it does not wish to intrude too heavily on people’s privacy and because it deems that information irrelevant, Becker says. An analysis of credit risk, which may have taken two days for a loan officer up till now should take just five minutes under this new system, he predicts.

Lastly, changes to Finca’s mobile offering will enable clients to get what the bank calls ‘nano loans’ – credit between $5 and $50 – without the need to travel to any branch, or meet a loan officer. As the credit scoring develops, Finca plans to continuously increase mobile loan amounts to support business investment. And Finca hopes eventually to allow both clients and non-clients to log onto its mobile platform, open an account, deposit and withdraw savings, from anywhere in Tanzania.

Becker says these changes represent a complete upheaval of how Finca operates: “We’re changing everything around this.” 

But he is realistic about the pace at which they will fall into place. “This is a lot of work, and it’s not going to work from day one.” 

On the ground

Euromoney visits Tanzanian agents and clients of Finca to see how some of the early changes are playing out on the ground, ahead of the big roll-outs expected later this year and in 2017. Through an employee of Finca, who acts as a Swahili interpreter, Euromoney speaks to Perpetua Richard, owner of Cape Stationery and General Supply, a small store on the side of the road that leads from Dar es Salaam to the port town of Bagamoyo 40 miles to the north.

Richard is an agent for Finca, as well as for mobile firms M-Pesa, Tigo Pesa and Airtel Money, and for three banks: Dar es Salaam Community Bank, Access Bank and Postal Bank. 

She has had to hire someone to help with the agency part of her business while she handles the stationery store, yet all in all, the collaboration with banks and mobile firms has substantially increased her income. She says four out of every 10 shillings she earns come from her activities as an agent. From commissions on Finca transactions alone, she makes about $200 a month (the average monthly income in the Tanzanian private sector is estimated to be a few dozen dollars).

Finca gave her a payment terminal that can read fingerprints to verify the identity of clients who present themselves at the small hole in the wall of her store to deposit money into their accounts, retrieve cash, or make a transfer.

Perpetua Richard-600

Perpetua Richard, owner of Cape Stationery and General Supply

Dressed in a richly patterned grey-blue dress beside her daughter Devota, Richard, who stands in the middle of the store she founded seven years ago, is hardly intimidated by the presence of a journalist and the three Finca employees accompanying him. 

Though she is happy with the financial benefits of her collaboration with Finca, she also has some grievances to air. She says the network connection on her payment terminal sometimes fails, meaning clients, some of whom travel a long way for financial services, leave empty-handed. (Finca says it provides its agents with two Sim cards from different operators to prevent this from happening.)

Richard is also unhappy with the fact she has to travel back and forth to a Finca branch, which might take 20 minutes one way on public transport, to collect cash when she has too little in her agency, or deposit cash when she has too much. (A Finca employee concedes that this is impractical.) She says she sometimes has to close her store for this sole purpose. Finca agents are responsible for procuring their own security on these trips; many do not bother to get any.

Later that same day, Euromoney meets four women who, along with a fifth who is otherwise occupied at the time of the visit, have borrowed several times from Finca. Each of the women – Maria, Monica, Verena, Amina and Prisca – owns and operates a small store along a street in central Dar. They are neighbours at work and formally sit down together once a week to discuss the state of their finances.  

Unfortunately, we put people on suspension and fire people every month [because of fraud] - Ineke Bussemaker, NMB

Because they borrowed the money using a collective guarantee, the financial health of each one affects the prospects of all of them. They clearly support one another in their everyday work, too. In the middle of being interviewed, a client comes to purchase water. Though it is not their store, two of the women quickly get to their feet, and proceed to throw half a dozen packs of six bottles across the crammed store, above our heads, to a third one standing at the till. 

They named their team the Watano group, Swahili for the ‘group of five’.

The women already owned their stores before borrowing from Finca, but the loans allowed them to expand the range of goods they offered, sometimes in surprising directions. Verena, for example, used to sell cosmetics only; now she also sells food and provides financial services as an agent. In her store, which is just a few square metres in size, hair extensions and shampoo bottles compete for space with massive bags of rice. 

The group has gone through several cycles of loans, starting in 2013. Each one borrows what she needs and is able to repay, rather than necessarily the same amount as her peers. Monica’s first loan, for example, totalled TSh1 million (about $625 at the exchange rate of the time). She repaid TSh1.3 million eight months later – a hefty interest rate but one she could manage thanks to her increased income. 

All five already had mobile phones when they started dealing with Finca, but the bank back then offered none of its services through mobile, they say. The middle-aged women, who rush to take group pictures on their phones once the interview has ended, are happy Finca now allows them to make repayments through their mobiles. They say it spares them the boda boda (motorcycle taxi) trip to a branch, which would cost them TSh12,000. They voice no complaints about Finca’s mobile system.

Soon the situation on the ground could look quite different, as loan officers start carrying fingerprint recognising tablets and existing customers begin to borrow small amounts of money straight from their phones.

Tanzania has poor infrastructure, even in Dar es Salaam. Though Gama-Lobo spends hundreds of dollars a month on electricity at his home, he still requires a generator to cope with Dar’s many power cuts. Euromoney counts five such cuts in just two days. Yet on mobile technology, the country is increasingly sophisticated, certainly sophisticated enough for the kind of innovation Finca wants to implement.

Third-party reliance

But Becker knows, as Scofield does, that risks exist when going digital. One big challenge comes from the increasing reliance on third parties. To offer mobile banking services, Finca is having to partner with mobile network operators across Africa. That exposes the bank to any weaknesses in those operators. Where Finca could once focus exclusively on its internal vulnerabilities to financial crime, it now has to think about its external ones as well. 

Finca’s relationship with MTN, for example, is strained since the alleged incidence of fraud in Uganda. MTN, a South Africa-based telecoms company that operates across the continent, was Finca’s third-party operator at the time, in 2012.

Scofield and his colleagues claim that MTN employees also took part in the fraud, that the South African company also had poor internal controls and that the telco did not assist Finca in its investigations to a full and proper extent. These are allegations that MTN vehemently denies.

“There was no collusion between Finca and MTN employees,” says Chris Maroleng, executive for MTN group corporate affairs. “MTN’s internal controls were not at all relevant to this case.”

Maroleng goes further and says MTN actually spotted the fraud in the first instance. “It was in fact a tip-off by an agent to MTN on December 2012 about the suspicious behaviour of a subscriber that led to discovery of the fraud,” he says. “MTN promptly investigated the lead provided by the tipster and found that the lead traced back to the actions of a Finca finance manager. This was brought to the attention of Finca, and they investigated.”

MTN also says that it agreed to assist Finca in its investigations. “The only condition for assistance made by MTN was that, where any records related to subscriber accounts, MTN was obliged by law to only provide such records under valid court orders,” Maroleng says. “MTN has an excellent track record of promptly providing information requested under valid court orders.”

The extent of the strain in the relationship is further evidenced by the fact that Finca and MTN cannot even agree on whether they have continued to collaborate since 2012: Gama-Lobo says Finca pulled back from the third-party agreement with MTN in Uganda following the scandal, while Maroleng says MTN’s business relationship with Finca has been continuous.

Gama-Lobo tells Euromoney that Finca is now working to enter into a new partnership with MTN in Uganda – a sign of how dependent on mobile groups microfinance institutions have become, regardless of the problems such partnerships may have caused them in the past. Without MTN, he says, the bank had fallen behind in the Ugandan market.

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Hillary Clinton praised Finca when she was US Secretary of State in 2010

Mobile network operators are not the only businesses Finca cannot do without anymore. Aggregators, firms such as Selcom and MaxMalipo in Tanzania, have carved themselves a central role in the African market for mobile financial services. By forming partnerships with both the payment instrument providers – for instance, the mobile operators – and the groups that want to transfer money, be they businesses needing to pay salaries or utility companies needing to receive payments, aggregators have become key middle men that banks need to cosy up to.

Negotiations with those players can be tough and can open Finca up to further third-party risk. When Euromoney meets Grace Akinyi, Finca’s head of Tanzanian banking services, on the evening of August 4, she has just come out of a meeting with Selcom, which has lasted the whole day: an indication of the importance and complexity of doing business with these firms.

Having previously worked at Equity Bank Uganda and Uganda Microfinance, Equity’s microfinance arm in that country, Akinyi knows the dangers that come with digital innovation and has a keen eye for spotting them. She recently identified a new system of fraud: some agents have been trying to inflate their income from Finca by repeatedly withdrawing, depositing and transferring their own money in the bank to obtain the commissions from those activities. In July alone, six of Finca’s 90 Tanzanian agents tried that method, and were found out.

Hacking, too, has been a concern. Though Scofield says there have been no big breaches yet, Finca has been assailed by online attacks trying to access the bank’s customer data. “In our bank in Georgia, in our IT room, we have this big screen which shows all the hackers trying to attack the firewalls around the world,” Scofield says. “A lot of them are coming out of Russia, some of them are coming out of Nigeria.

“You have to be constantly upgrading that and watching it because people attack you and look for a weak point.” 

He concludes, in a worried tone: “It’s a new world.”

That new world also has its advantages. For example, the introduction of national identity numbers in Tanzania will make it easier for Finca to know its customers – a key part of fighting money laundering and other forms of fraud. By collecting those numbers from prospective clients, Finca will be able to access key information about them from the government database. That information will then feed into First Access’s credit scores. Registering clients’ fingerprints should also prevent fraudsters from gaining access to the accounts of others. 

The use of automated systems via tablets on the field, meanwhile, should enable Finca to keep its many loan officers in check. That is important, since loan officers often provide services to people who have little or no experience of dealing with financial institutions, and could be easily manipulated. 

“The amount of faith and trust on the loan officer was huge,” Becker says of the way things have worked up till now, ahead of the introduction of tablets. “And of course the risk of fraud or mismanagement or noncompliance with procedures was gigantic.” (A Finca loan officer was in on the Kosovan fraud, Scofield says.)

Becker adds: “The clients used to see the loan officer as Finca, and the loan officer could threaten them and say: ‘You know what, if you don’t do this and this and this, I’m not going to serve you guys anymore.’ He had this huge amount of power, and we’ve taken that power away from the loan officer now.” He says not all loan officers are happy about this.

Becker is also convinced default rates will fall as a result of this new technology. Default rates are already low: only 6% of debtors do not repay on the day their loans mature, and that falls to 4% after 30 days. Annual loan write-offs total just 2.5% to 3%. Becker thinks write-offs could fall to 2% or less, thanks to the new credit scoring introduced. Finally, statistical analysis of transfer patterns can bring up outliers and quickly reveal fraud: that is how Akinyi and her team spotted the agents’ commission con, for example.

And while Finca has had its fair share of fraud over the years, it is far from being the only one that has. 

Bussemaker tells Euromoney that NMB has been the target of skimming – a system by which fraudsters trap an ATM so as to pick up the personal information of all bank customers who use it. 

She adds, of recent, digitally enabled fraud: “We’ve had an issue with ex-staff who knew our systems quite well breaking into our [internal computer] systems. It was detected quite quickly, but still, the fact that they were able to get in is not good.”

She won’t say any more about that case, but concludes: “Unfortunately, we put people on suspension and fire people every month [because of fraud].”

Letshego, a microfinance institution which, like Finca, operates in several African countries, has also been targeted by fraudulent individuals. Only a few days before Euromoney meets Chris Low, its managing director, someone has sought to defraud the firm using a pointed scam email. Letshego’s chief financial officer, Colm Patterson, received an email from an address that follows the firm’s typical email format, but one that Low does not use. 

The email, as Low recalls it, read: “Dear Colm, I’ve been trying to get this payment done for a while now. Please would you make it happen more quickly?” Suspecting something, Patterson went to ask Low about the payment in question, and found that the message had not in fact come from him. 

Soaring competition

All banks face these challenges, and all are fighting for a place in this shifting market. “Competition has soared,” Becker says. “There are a lot more microfinance institutions. Banks are downscaling to microfinance significantly. The mobile network operators are also entering the microfinance sphere, with micro-loans, micro-savings.” 

Adverts for financial services providers have popped up all over Dar as banks and mobile money providers compete to attract new customers. 

In Becker’s view, the only way to stand out is to cut operational costs and listen to what clients want. “We need to offer something that our customers really want now. We have to start taking our customers seriously.”

Finca is nowhere near giving up the fight. On fingerprint technology and credit scoring, for example, the bank appears to be ahead of many of its competitors. Letshego, for one, is only just getting started on digital innovation. Of all the firms that rely on agency banking in Tanzania, Finca is the only one to have provided fingerprint payment terminals to its agents. Its partnership with First Access, meanwhile, represents one of the largest collaborations between microfinance and financial technology to date. And Finca is far from being the only bank in Africa to still rely on a large contingent of travelling loan officers. 


Only Equity Bank, which delivers financial services through its own Sim card, Equitel, and Kenya Commercial Bank, which has partnered with M-Pesa to provide small loans directly from mobile phones, can claim to be ahead on technological innovation. Meanwhile, on fraud, though Finca has been hit hard, Gama-Lobo is certain other financial institutions in Africa have suffered just as much, if not more. “The big banks have tonnes and tonnes of fraud,” he says. “People just don’t ever hear about them; they keep it very quiet.”

Bussemaker’s remarks certainly suggest NMB has faced issues as well. But, as Gama-Lobo concedes, the balance between innovation and security is hard to strike, especially in microfinance. 

“That is the concern,” he says. “Now if I have everything digital and I’m no longer having my 600 people meet on a monthly basis, or more often, with the customers, then you’ve got to have really a lot more control in terms of the technology and your reconciliation – and your data protection needs to be significantly beefed up. That’s one of the challenges that Finca has: we’re trying to, basically, comply with many if not most of the same prudential ratios and regulations that the banks do, but we’re trying to operate a business model that’s more high cost, and servicing way lower income people.”

Gama-Lobo does not claim Finca is immune to further losses. To him, fraud and change go hand in hand. “The reality in this business is if you don’t have fraud, you also don’t evolve. Because no risk manager or person sitting down in a room is going to figure out everything. These guys [fraudsters] figure it out much quicker.” 

Scofield says Finca’s Ugandan accountant embezzled the $200,000 in just two weeks. Finca could well have missed the fraud; it was MTN that detected it and alerted the bank. If it had gone unnoticed, Scofield says, losses would have run into the millions. 

As Finca seeks to leverage technological innovation to reach an ever-larger number of the world’s poor, to what extent can it mitigate the risks of a Ugandan repeat? And, crucially, how much more will it lose before it gets it right?

It’s a question facing all banks operating, not just in Africa’s poorer regions, but also those in developing markets around the world. 

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