Loans based on digital footprint: Bangladesh enters the digital credit era

How do you top-up your mobile phone?

Do you use bKash, Nagad, or Rocket?

Mobile recharge - a task that would once require you to purchase a top-up card, enter the long digits followed by "#", can now easily be carried out using a digital wallet.

Bangladesh is gradually adapting to digitalisation - people are now more inclined towards mobile banking than ever.

However, there is more to digitising a country's financial sector than just introducing digital wallets.

Revolutionising Bangladesh's fin-tech sector, this year in July, City Bank, along with bKash launched the country's first collateral-free instant digital loan service.

The campaign is currently at its pilot stage and selected bKash users can request instant loans amounting to Tk10,000.

Upon providing their KYC (know your customer) information, users will instantly receive money in their bKash accounts.

At this stage, borrowers are being offered three equal monthly instalments (EMI) loan repayment option with the interest being charged daily.

The data from this project will allow City Bank to analyse borrowers' loan repayment behaviour.

It will also allow Ant Financial – technology partner, to carry out credit assessments on potential borrowers.

Regarding digital credit assessment, during an interview with The Business Standard, Associate Professor and Director of EMBA Programme at the University of Liberal Arts (ULAB), Sajid Amit mentioned that data scientists working for fin-tech firms analyse call patterns, social network presence, application usage, and more to assess borrowers' alternative credit rating (ACR).

He said, "ACR is more reliable than the traditional credit rating method; a person's creditworthiness can be better assessed than evaluating their income. However, we must make sure the interest rates stay within limits so that it does not turn out to be a loss for borrowers. And the media has a huge role to play behind this."

Following bKash and City Banks's collaborative campaign, in August, telecom company Robi launched a digital financing campaign offering smartphones on credit to its eligible customers.

Robi is also using ACR to assess users' willingness to buy a phone on a collateral-free loan. Customers can avail 6-12 months EMI without having a credit card.

Providing consumers with digital credit options can result in a wider outreach for companies aiming to expand their customer base.

Individuals who usually do not seem to be "eligible" for loans in the eyes of traditional banks can easily avail digital credit.

All banks are offering a uniform product range and are forced to charge the same interest rate. Thus the differentiating factor is service quality - a multidimensional concept. This is where digital credit comes in

"All banks are offering a uniform product range and are forced to charge the same interest rate. Thus the differentiating factor is service quality - a multidimensional concept. This is where digital credit comes in. Global practices and customer preferences will be the impetus for change," said Raihan Amin, who is a retired banker.

Since bKash and Robi have already paved the way, the future of digital credit can turn out to be very promising in Bangladesh.

But let us take a look at some financial platforms across the world that are excelling with digital credit services. 

EarlySalary - a fin-tech start-up, introduced the concept of digital credit in India.

Since its inception in 2015, EarlySalary disbursed loans worth more than INR1,800 crore.

Any Indian citizen, residing in major cities, with a monthly salary of INR20,000 can avail cash loans of up to INR200,000 with interest rates as low as INR9 per day.

EarlySalary users do not necessarily need to have a credit score to be eligible for loan, it assesses loan applications based on users' social worth score drawn from their social media activities.

Tala, another fin-tech start-up based out of California, has expanded across Kenya, Philippines, Mexico, and India since its launch in 2014 with one service - instant credit. 

Tala claims, it has disbursed over $1billion in loan to more than 4 million customers.

Users can fill out their profile in the app and instantly apply for loan.

Upon approval, they are given loan offers; the amount of credit ranges from $10 to $500, and repayment terms range from 21 to 90 days.

Tala charges a one-time fee on each loan and the percentage varies according to customers' creditworthiness which is assessed by analysing the smartphone data users share with the company.

A Nigerian start-up - KiaKia, also operates on a similar business model - offering instant personal and business loans to Nigerian citizens.

Any Nigerian who does not qualify for the traditional banks' critical assessment can avail loans within NGN10,000 (Tk2,211) – NGN200,000 (Tk 44,220) from KiaKia with repayment options starting from 7 to30 days.

The start-up charges a loan application processing fee of NGN800 and the interest rate is set at 15 percent if the borrower pays back within 14 days and 20 percent if payment is received within 30 days.

Since its inception in 2016, KiaKia has managed to disburse over $10.4million in the form of personal and business loans.

Start-ups mentioned above have managed to break barriers and establish a system that makes access to finances faster and convenient.

The credit function comprises five processes: application, verification, assessment, decision and follow-up. All components cannot be digitised at the same speed

Raihan added, "In order for us not to fall behind, Bangladesh should adopt digital credit in phases. The credit function comprises five processes: application, verification, assessment, decision and follow-up. All components cannot be digitised at the same speed."

Judging by the economies the fin-tech start-ups operate in, Bangladesh, too, can reshape banking and break barriers with digital credit.

"The wind of change is already blowing in Bangladesh. It is just that we do not see it on a daily basis; digital credit is no different. Big data, analytics and artificial intelligence are waiting in the wings to aid digital credit as soon as banks are able to access credible and timely personal data," mentioned Raihan.

With instant digital loans, MFS providers can reach the greater extent of the population.

It can be beneficial for both parties; a larger pool of customers for the service providers and a better standard of living for the consumers.

Raihan added, "For financial inclusion, digital credit is crucial. Moreover, expanding reach geographically and shortening the credit cycle will bring multitudes to the formal economy. As a result, we will have better data regarding GDP."

Apart from the business-to-customer model, if digital credit service providers also focus on offering instant loans to businesses, the more businesses borrow money, the better it will be for the economy to prosper in the long run.

"When people spend, the economy grows. In order for the economy to grow, people have to make more purchases, more loans need to be disbursed, and credit is, of course, an important tool for growth," said Sajid while talking about the prospects of digital credit services.

Though digital credit services and products can turn out to be a "win-win" for all stakeholders, there are chances of loan defaults as well.

In this regard, Sajid mentioned, "There are risks but such financial institutions will find a way to protect their investment. They will offer the right services and charge the right interest rates."

The government should take a regulatory sandbox approach where they allow start-ups to conduct pilots and grow to a certain stage without necessary licensing and regulations

Adding to this, Nirjhor Rahman, CEO, Bangladesh Angels Network said, "The government should take a regulatory sandbox approach where they allow start-ups to conduct pilots and grow to a certain stage without necessary licensing and regulations."

ACR for digital loans can require a borrower to provide the company with their financial information.

Reflecting on this, Sajid said, "People seem to be okay with providing their personal information to companies all over the world but the larger question is - do people know what they are doing? They need to have the necessary tech literacy to understand what they are signing up for."

Prior to making digital credit available across the country, we need to ensure tech literacy among the general people.

Nirjhor believes there is scope to use data sources and digital means to be able to create and deploy digital finance solutions to consumers and small businesses. "We desperately need more innovation in this sector if the economy is going to digitise and become more productive."