A “new wave” of digital credit products has entered the digital financial services (DFS) market in recent years. These products differ from traditional credit by offering loans to borrowers that can be applied for, approved, and disbursed remotely (often without any brick-and-mortar infrastructure), automatically (generally minimizing or eliminating person-to-person interaction), and instantly (often in less than 72 hours). Digital credit also increasingly considers creditworthiness by using alternative (nontraditional) data—ranging from mobile phone activity to utility payments and social media data—potentially allowing for loans to populations previously unable to access bank credit. Two EPAR reports review the characteristics of digital credit offerings in India, Kenya, Nigeria, Tanzania, and Uganda, and regulations specific to digital credit in Africa and Asia.
351a: Review of Digital Credit Products in India, Kenya, Nigeria, Tanzania, and Uganda
We conducted a review of digital credit products in India, Kenya, Nigeria, Tanzania, and Uganda, focusing on products established within the last 10 years that offer loans to individuals or small business owners (rather than groups or business entities). This report summarizes findings from a review of 68 digital credit products in these five countries, identifying common technology platforms, business models, and loan terms used. In addition, we outline major types of partnerships and stated customer segments of digital credit products, and summarize the types of alternative creditworthiness data used to score potential borrowers. We then present early information about digital credit default rates and potential risks to the consumer as the market develops.
Some features of digital credit products, such as interest rates and repayments lengths, differ by geography: Indian products, on average, typically offer longer repayment terms and lower interest rates than African products, potentially because they more frequently require links to bank accounts so may perceive lower risk in their loans. Due to limited loan volumes and performance data it is currently unclear how these digital credit products might impact borrowers and markets, but we find that the digital credit products reviewed often have relatively high interest rates and charge multiple fees, which may adversely affect borrowers if these are not clearly communicated. Most products require borrowers to provide social media and other personal information to receive loans, potentially supporting individuals without a formal credit history to access formal loans but raising privacy concerns. 15 of the products we identified specifically state that they target underserved populations such as low-income populations, but it is not clear what efforts they make to reach these populations or how successful they are in doing so. Many of the products are very recent (16 products are less than a year old or in the planning stage) so their uptake and impact among target populations remains to be seen, though some provider claims on client numbers suggest widespread use.
351b: Digital Credit Regulation in Selected Countries in Africa and Asia
We conducted a targeted review of peer-reviewed and grey literature to identify specific regulatory concerns arising from the growth of digital credit products. We identified five regulatory issues related to digital credit that concern market conduct (data management and privacy, product disclosure, customer redress, consumer over-indebtedness, and rates and pricing) and five issues that concern systemic risk (licensing and reporting requirements, lending prohibition, regulatory sandboxes, capital requirements, and governance requirements). All of these issues concern financial services more broadly, but we find evidence of specific concerns related to characteristics of digital credit.
We found no regulatory documents from Africa or Asia that specifically mention "digital credit," but identified 20 regulatory documents from multiple African and Asian countries and jurisdictions that specifically target different aspects of the online and mobile credit and lending industries and that include regulations addressing the digital credit regulatory challenges highlighted in the literature. Existing regulations that do not specifically mention online/digital credit/lending may also be applied to address these digital credit regulatory issues, so a low number of regulatory documents does not mean a particular issue is not covered in country regulations—only that few new regulatory documents have emerged to address the particular potential concerns around digital credit.
While we found few documents with regulations addressing the ten current regulatory issues we identified and specifically mentioning digital/online credit/lending, countries may implement additional regulations or modify regulations if they determine existing regulations inadequately cover digital credit challenges. For example, more data management and privacy regulations may be needed to address the unique nature of using alternative data as criteria for financial decisions. Existing regulations may be amended to more clearly specify whether different types of digital credit business models and providers are covered by the terms of the regulations. Additionally, as more information is collected on the digital credit market (e.g., the amount of new debt created by digital credit products; the number and types of new consumer groups that access digital credit products), regulations may be developed to address issues that have yet to be identified.
Read the blog post summarizing findings from our study.
Visit the website of the Digital Credit Observatory, hosted by UC Berkeley's Center for Effective Global Action (CEGA), to see updates on new research into the impacts (both positive and negative) of digital credit products in emerging markets and low-income consumers.