Groundbreaking: When the mobile phone became a bank

Kampala.

At 17:46 on a Monday, a mobile money customer transfers Shs20,000 to a bank account known as MoKash. Two minutes later, the customer receives a message, that in part, reads “…You qualify for a MoKash loan Shs30,000.” The customer goes ahead and applies for the loan and at 17:51 hours, the loan is approved.

Within a month, the customer is required to payback Shs32,700. The loan approval process happened in a few seconds, which is unlike in the traditional banking sector.

Last week, Commercial Bank of Africa (CBA) Uganda and MTN Uganda launched a service that allows mobile phone owners to save and apply for micro-loans. After at least more than six months, the product secured approval from Bank of Uganda (BoU) to eventually become operational. This will make Uganda the third country after Tanzania and Kenya to launch a similar micro savings and micro loans product.

“We have invested $20m (Shs67.3b) in research and development in innovative products such as M-Shwari in Kenya and M-Pawa in Tanzania. The era of bank branches spread all over the country is coming to an end. The mobile phone is now your branch. It means that millions of mobile money subscribers can now have the full service of a bank on their phones,” says Mr Samuel Odeke, the chief executive officer, CBA Uganda.

In 2012, CBA Kenya partnered with Safaricom, Kenya’s largest telecom company to provide a micro-savings and micro-lending platform. Statistics show that M-Shwari has about 15 million customers as end of June 2016. In terms of savings, the total for the same period is estimated at $82m (Shs276b). CBA had also issued loans worth $1.3b (Shs4.4 trillion) through M-Shwari alone.

Following the success of in Kenya, CBA teamed up with Vodacom in Tanzania in 2014 for the launch of M-Pawa, a product similar to M-Shwari. As at end of June 2016, 63 per cent of users had saved about $5.7m (Shs20b). Borrowing had hit $22m (Shs75b) by end of June 2016. In Tanzania, there are about 5 million people using this M-Pawa.

Both products use the mobile money service, M-Pesa.
The Kenyan and Tanzanian story had to be replicated in Uganda since mobile money has become the most popular form of transferring money. It is estimated that Uganda has about 20 million mobile money users, of which more than 7 million are with MTN Uganda. According to Mr Phrase Lubega, the general manager mobile financial services at MTN Uganda, the telecom transacts about Shs900b a month.

Already by Thursday last week, MTN Uganda reveals that about 83,000 people had signed up to MoKash. The projection is that by end of September 2016, over one million people will have subscribed to the service. Already, mobile money users exceed the number of people who hold bank accounts. Bank accounts are estimated at just short of 5 million people.

A threat to banking
Traditional banking is known for its bureaucracy in the various processes, including account opening and applying for a loan. On average, it can take up-to a month to process a loan in a commercial bank. Additionally, borrowing small amounts Shs100,000 to Shs1m is in most cases close to impossible.

“MoKash allows one to securely save money and take out loans in no more than six seconds on a savings account. MoKash will allow a parent, teacher, boda-boda rider, farmer to have an actual operational bank account on the mobile phone. You can automatically save as little as Shs50 and earn interest on your savings. A conventional bank account will not give you this sort of saving amount. You can borrow Shs1m instantly without being asked for collateral such as a land title and there is no need to sign documents,” Mr Odeke adds.

In Kenya, the service is popular with small corner shop businesses that may require short-term funds that a bank may not have. It has been noted before that mobile money is the most popular cashless payment option in Uganda. It is also considered a threat to traditional banking – according to some. However, for some bankers, mobile money is not a threat but rather serves a market some banks cannot reach.

“The telecoms have been able to provide a product at a much less cost than banks. Mobile money is quick, simple, easy to use and cheap to deliver financial services. We cannot sit here and pretend that the mobile money territory is something a bank can do,” says Mr Patrick Mweheire, the CEO Stanbic Bank Uganda.

He adds that commercial banks will be able to serve many once agency banking comes into force. Stanbic Bank is looking to add at least another 400 agents around the country to deliver banking services. In February 2016, a law was approved that will see commercial banks use agents instead of setting up new “unprofitable” bricks and mortar branches, which the sector had been demanding for.

“We need to get agency banking to work. Also, Stanbic is working with MTN to have a similar product to MoKash,” Mr Mweheire points out.

In March 2015, KCB also came on board with Safaricom and they launched “KCB M-Pesa Account” that also allows customers to save and borrow small amounts of money. Unlike the M-Shwari that charges a fee (read interest rate) of 7.5 per cent a month, KCB M-Pesa Account has rates as low as 2 per cent.

That same year, Equity Bank Group unveiled a mobile based financial service known as Equitel. The service allows customers to send, receive and borrow money using an Equitel sim-card. In Uganda, MoKash is being pioneered by a bank, CBA, with MTN providing the channel where the platform can operate.

The Uganda Bankers Association (UBA) also downplays the possibility of the product being a threat to banking.
“It addresses the whole intention of increasing financial inclusion by bringing financial services closer to many more people because the moment you have a mobile handset and you subscribe mobile money, it brings you to their banking services,” says Mr Wilbrod Owor, the new executive director at UBA.

“It will also mobilise deposits and savings which will ultimately work towards bringing the cost of the available pool of deposits cheaper and also reduce the cost of credit which in turn benefits borrowers and leads to growth of businesses and ultimately the economy,” Mr Owor added.

“Interest rate” too high?
MTN and CBA have tagged a 9 per cent for 30 days as a loan facilitation fee. Their argument is that it is not interest charged on the borrowed money. However, it is an interest rate charge on customers. The rate of 9 per cent per month is considered high by some since if it is annualised, it may result into 108 per cent per year, higher than any commercial bank. Even the alternative sources of short-term money like Savings and Credit Cooperative Organisations charge up-to 10 per cent per annum.

Other sources of short-term credit are Micro-Finance and Deposit taking institutions, whose average lending rate is 28 per cent per annum. Credit institutions also charge about 27 per cent per annum on loans. The average lending rate in commercial banks is currently about 23 per cent.

“The facility fee we are talking about isn’t interest; it is a facilitation fee that is charged on the money that has been taken out. In the economy there is a loan default rate of about 5 percent. Out of each Shs100,000 borrowed, there is Shs5000 that doesn’t get reimbursed. In order to cover the risk of defaulting, they (CBA) need to take out 5 per cent of the money. Already, the facilitation fee cannot be below 5 per cent, which is the default rate,” Mr Wim Vanhelleputte, MTN Uganda’s chief executive officer, explains.

Mr Vanhelleputte adds: “Whether it is taken every day, every month or every year, it is not an interest charge. Here, if the customer doesn’t pay back, the bank provides cover for the loss. So, 5 per cent of the 9 per cent is to cover the risk of not taking any collateral, and then you remain with 4 per cent. That 4 per cent is the cost of money and covers for the investment in the product.”

In Kenya, the level of Non-Performing Loans (NPLs) on the M-Shwari platform is 1.92 per cent, yet the interest rate is 7.2 per cent. The overall NPL rate in Kenya’s banking sector is 5.3 per cent. In Tanzania, the M-Pawa platform has an NPL rate of 8.52 per cent, slightly higher than the 8.3 per cent for the entire banking sector. The one-off charge on M-Pawa loans is at 9per cent.

Since the product across the region has more loans than deposits, then the cost of funds could be the challenge, especially for CBA. It should be noted that if Stanbic gets on board, the interest charge could be lower just like Equity and KCB in Kenya.

Regulation
There have been significant concerns about the regulation of mobile money in Uganda. Similarly, this product is not provided for in the Financial Institutions Act 2016. However, BoU regulates the service through CBA. According to the agreement signed between MTN and CBA, the bank is responsible for ensuring that the product is compliant with BoU regulations. It is CBA that went to BoU to seek approval for the product.

Mr Eric Maruiki, the general manager new business ventures at CBA, explains that “the MoKash savings account is a CBA account. That is why we require one to transfer money from the mobile money account to the MoKash account in order to comply with the law.”

The management of the accounts on the platform is done by CBA, a bank regulated by BoU. Once the money is transferred from the mobile money account to the MoKash account, then the deposits are secured by the Deposit Insurance Protection Fund at BoU. Additionally, BoU gave CBA a no-objection when they made an application.

“I want to reaffirm that as the head of supervision at Bank of Uganda, this product was brought to us, through the governor’s office. We looked at it, evaluated it and we endorsed it. We gave a no objection to CBA, a partner of MTN on the product,” Ms Justine Bagyenda, the executive director supervision at BoU.