Financial inclusion: Sandbox set up to help fintechs fix finance in rural Africa
A new generation of digital products has slashed the cost of remittances and helped the unbanked meet short-term household or business liquidity needs, but there has been a downside.
Fintechs have helped make financial services available to people that banks have long struggled to reach, but this has come at a price.
Default rates among digital borrowers in Tanzania, for example, have reached 31% and in Kenya 12%, according to a survey by the Consultative Group to Assist the Poor (CGAP), a global partnership of more than 30 development organizations housed within the World Bank.
This is making a bad situation in Africa considerably worse.
Loans that are not repaid get the borrower blacklisted, blocking people from taking loans on more manageable terms. Instead of being a stepping stone into the formal banking system, digital credit has become another obstacle blocking the path into it.
Rupert Scofield, president, CEO and co-founder of Finca International – a non-profit, microfinance organization – says: “Fintechs have taken an increased interest in microfinance in recent years. Some have introduced new products that offer instant loans, but these often come with very high interest rates.
“The companies behind these products may have good intentions, but the high interest and default rates are no less damaging to low-income customers.”