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Why are commercial banks adopting online lending?

Kampala, Uganda | THE INDEPENDENT | The idea of mobile phone lending was first made a reality in Uganda IN 2016 when Commercial Bank of Africa, CBA, partnered with MTN to launch the MoKash product.

This was an expansion of MTN’s Mobile Money services to diversify into savings and loan products away from just money transfers, with the bank as the custodian of the cash.

This model was then adopted by more mobile phone networks.

Over the past year or so, several banks in Uganda have introduced their stand-alone products where bank loans are processed online via a computer or the mobile phone, with the phone only being used as a channel to process the credit and receive the money from the bank.

“We need to remain proactive while coming up with solutions that relate to the needs of customers in our ecosystems,” Housing Finance Bank Managing Director Michael K. Mugabi said on their quick access loan products in partnership with Airtel. “Our purpose as a bank is to enable homeownership and provide financial independence to Ugandans.”

The kind of loans offered online and via mobile phones are usually termed unsecured, in smaller amounts, payable over shorter periods and with higher interest rates than those charged on ordinary conventional loans.

The banks say these products were aimed at reaching out to Ugandans who do not have acceptable security under conventional banking requirements, and are easy for the banks to manage, as well as time-saving since they are instant.

First requirement for the borrower is a mobile phone (feature or smartphone), a history of saving, and a financial card from the bank among others. For first time borrowers, getting the financial card is a tedious but necessary process.

Centenary Bank’s CenteMobile loan service, for example, offers a minimum loan amount of 5,000 shillings and a maximum of 5 million, for periods of 1, 2 or 3 months.

These micro loan services are accessed via short codes (USSD) on any type of mobile phone or via smartphone applications, which enable the customer a self-service process “to conveniently access small quick loans instantly for purposes of emergencies,” according to Centenary Bank.

Interest rates charged average 7% per month for the selected loan tenure, while late payments attract 1 percent per day on the outstanding balance to a maximum of 15 percent. All these are aimed at encouraging the borrower to pay in time.

On the security of the loan, most banks require one to have a financial card which holds the number used to report one’s credit information to the credit reference bureau.

It includes information on the borrower’s payment records for all loans processed through any financial institution, and can be accessed by any bank while assessing the credit worthiness to borrow.

“We have harnessed the power of technology to deliver our services and products more efficiently to our customers, and we have stripped away a large chunk of processes required in the usual mode of accessing loans,” said Dfcu Head of Personal Banking, Miranda Bageine Musoke, on the six-month old Dfcu mobi loan. This product offers quick loans of between 10,000 and 2 million shillings for a one-off repayment after 30 days, but there is an option for early repayment with no penalties. Bageine says it was created to cater for low cost emergency needs of the customers.

“Most of our customers, we have reassessed them so you will get that money in less than 30 seconds,” says Israel Arinaitwe, Head of Personal Markets at Stanbic Bank Uganda. “You probably don’t have access to a bank, and on any mobile phone, even kabiriti, you can dial *290# and get 2 million into your account in a moment.”

Equity Eazzy Loan product by Equity Uganda provides quick loans of up to 3 million shillings, to customers who have been with the bank for at least six months.

Interest rates range between 4 and 9 percent per month on reducing balance basis, but the loans also carry insurance, processing and appraisal fees totaling 5 percent.

So generally, according to the bankers, the digitally processed micro loans were a response to emergency financial needs, and are an offshoot of the mobile money loans products.

Salary earners are the main target of the banks for the loans because in default, the system makes an automatic deduction from the borrower’s bank account, the reason there is a minimal rate of defaulting.

Before he died, former BOU Governor Emanuel Tumusiime-Mutebile predicted the domination of digital technology of the banking sector and warned those reluctant of adverse effects.

“There will continue to be disruption in the banking sector. Institutions that fail to keep up might lose out and at the very worst be pushed out of business in the long run, however, this disruption to bank business models works in the interest of customers and the general populace,” he said.

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