M-Shwari to Charge More on Risky Borrowing

Safaricom and NCBA unleashes a new model where borrowers will have to pay according to their credit performance.

The bank will implement a risk rating model for M-Shwari similar to that used by commercial banks, according to NCBA Chief Executive John Gachora.

To determine how much to charge a specific customer, banks add a margin and a risk premium to their base rate, which is typically the cost of funds.

It will be a change for M-Shwari from its current business model, which charges all customers a flat rate of 9.0 percent (loans fees of 7.5 percent and excise duty of 1.5 percent).

The NCBA will rely on an algorithm that creates a customer’s financial profile based on their prior platform borrowing, M-Pesa transactions, and airtime purchases.

“Now that we have collected enough data about our customers, we can actually ‘risk-base price’ them a bit better than we have done. So it’s to try to offer differentiated pricing,” Mr Gachora told the Business Daily in an interview.

“Today M-Shwari pricing is the same for everybody. The regime we want to go into is different prices for different people depending on credit performance.”

It will penalize borrowers who take longer than the allotted 30 days to repay their M-Shwari loans as well as defaulters.

After partnering with telecom provider Safaricom in 2012 to launch the market-dominating service, M-Shwari, NCBA has reaped enormous rewards from pioneering mobile phone-based lending in Kenya.

It was an improvement over M-Pesa, which debuted in 2007.

M-Shwari made loan disbursements totaling Sh42 billion in the six months leading up to June, down 6% from the Sh44.8 billion in loans made during the same period in 2021.

In the six months leading up to June, borrowings on the Fuliza overdraft service through NCBA increased by 30.7 percent to Sh288 billion from Sh288 billion in the same period last year.

M-Shwari introduced its risk-based lending model days after President William Ruto pushed for less expensive mobile loans and Safaricom lowered Fuliza charges,

This translates to an annualized interest rate of 108 percent for a loan with a month’s term. The typical interest rate charged by banks was 12.38 percent.

According to Mr. Gachora, M-risk-based Shwari’s lending policy will take into account the borrower’s behavior rather than simply mirror banking rates.

Mr. Gachora also added that the bank is establishing a separate fintech business to house its digital loan platforms in Kenya and the other five countries where it conducts business.

The subsidiary, which will function as part of the parent company, will have a separate board and be run by a CEO.