Earlier 2020, when the novel coronavirus sparked a global pandemic, physical distancing was enforced around the world to limit the spread of infection. This led to a surge in remote working, sparking technological innovation within a number of industries. In the financial services industry, digital banking trends were quickly affirmed. Ivan Mbowa, the General Manager at Tala, East Africa speaks candidly to CIO East Africa about the role that Financial technology has to play in the recovery of the economy post the pandemic.
The International Finance Corporation (IFC) reports that SMEs are the backbone of any economy, accounting for 80% of all jobs, therefore playing a significant role in alleviating poverty and generating wealth.
These SMEs have been reported among the most financially affected businesses during the outbreak, particularly in developing economies. In East Africa, essential businesses such as pharmaceuticals and supermarkets have shown a need for stability and the right financial support, to protect jobs and keep operations on the go, in order to have the chance to scale in the future. To realise this, technological innovations, particularly in the fintech space, will play a major role. Technology must underpin economic recovery.
“Technology continues to remain a competitive differentiator for fintech against traditional players,” Ivan says, adding, “I believe that in the post-COVID economic recovery period, we will see a transition from the use of technology solely to improve user experience like quick approval of loans, to increasingly o enable enhanced credit underwriting and recovery.”
Leveraging technologies like Quick Response (QR) code payments he notes, may offer a solution in the recovery regard by facilitating instant payments for goods and services from different funding sources, including mobile wallets, cards, and even bank accounts. This system of payment is however relatively new in Africa, although Ghana introduced it in May 2020 and has hitherto shown a promising sign.
“The top tech trend that I foresee post-COVID-19 will be open banking. I believe that this may lead to the 2nd revolution of digital credit due to enhanced visibility of a customer’s financial footprint,” Ivan intimates. “Enhanced visibility will mean that any financial services provider, with the consent of the consumer, can provide customers with tailor-made offerings not limited to the customer’s primary bank.”
Expanding access to Finance
SMEs are considered the least financed globally, with the IFC estimating that there is a global funding gap equivalent to USD 5.5 trillion a year.
Digital lenders will therefore benefit SMEs by expanding their access to finance to solve the challenges of lack of collateral, limited access to physical branches, or exclusion from the formal lending system, with extensive documentation required to produce a credit score. In light of these conditions, informal lending through family and friends has traditionally been more a viable source of financing.
“We have already begun to witness the reduction of access to credit from many providers and I do not anticipate a quick reversal of the same,” he intimates. Adding, “Therefore the ability of SMEs to maintain credit lines is critical to their continued success.”
Regulating the Lender
About whether or not digital lenders are set for regulation, Ivan notes that contrary to public opinion, the majority of responsible digital lenders, who form the Digital Lender’s Association of Kenya for instance, are in favor of reasonable regulation to address some of the nascent issues seen in that space.
“We note with concerns that some digital lenders have engaged in actions that blatantly disregard consumer protection around loan collection practices, transparency of terms in contracts and use of consumer data,” he notes adding, “The ability to build closed network platforms for sharing data on fraudulent users will play a large part in reducing the rate of credit default.”
He, however, opines that the lenders would like to see reasonable and responsible regulation that takes into account the views of all relevant stakeholders such as consumers and service providers.
“We are concerned about the danger of regulation which may, to paraphrase, throw the baby out with the bathwater. Fintech is still a very young sector in Kenya which has ultimately done more good than harm and so the aim of regulation should be to address shortcomings and strengthen the space for continual growth,” he adds.
With a strong and growing fintech(digital lenders), SMEs are sure to get credit for growth and continuity even post-pandemic.
In conclusion, Ivan points out to SMEs being particularly vulnerable to the economic side-effects of Covid-19, such as increased operating costs due to supply chain disruption, or the need to diversify customer bases and suppliers.
He lauds fintech solutions for having helped the regional SMEs to overcome the many challenges, principally by enabling digital transactions and facilitating fast and convenient access to credit. He, therefore, urges them (fintech) to continue innovating in order to continually be of help to the changing economic needs.