We Need to Talk About Credit

For more recent data analysis on Zambia read "The Credit Puzzle", Greta Bull's speech delivered to CGAP members in May 2019  >>

In the past five years, we have seen a lot of change in how credit markets are developing, not least because of the rapid growth in digital credit associated with mobile financial services. But how much do we actually know about digital credit? And how does it relate to other types of credit in the markets we care about? How is this new availability of credit contributing to the ability of low-income people to seize opportunities and manage risks?

Until recently, there has been very little supply-side data on the availability of formal credit in Africa, but that is starting to change. FSD Africa has been working with regulators over the past few years to start shining a light on how credit markets are evolving in the region — first in Zambia, with Tanzania and Ghana to follow. And what they have found is eye opening.

The Bank of Zambia has been systematically tracking data on its credit market since April 2017 and now updates this information quarterly. The data show that credit penetration is low in Zambia: private credit as a proportion of GDP was only 11 percent in 2017, which is well below the 22 percent average for Sub-Saharan Africa, according to the World Bank Finstats database. But in the 18 months leading up to September 2018, it grew by 69 percent in terms of value and tripled in terms of the number of loans disbursed.

Growth was driven principally by lending to households, which almost doubled in value over the same 18-month period. In the third quarter of 2018, lenders disbursed $487 million, with households and large corporates being the largest recipients in terms of value. But in number terms, the story is very different: there were 421 agricultural loans, 449 loans to large corporates and 41,178 loans to micro, small and medium enterprises (MSMEs). At the same time, 1.6 million loans were made to households and individuals. This, in a country with an adult population of around 8 million in 2018.

That is not so strange. After all, consumer credit often generates large numbers compared with other types of credit. But even by volume, household debt is sizable. It represented 41.5 percent of all formal credit in the market — the largest category of debt — and is growing as a percentage of overall debt.

If we look at just the household debt category and cut the data in a couple of different ways, they provide a pretty clear picture: digital credit has come to Zambia and is in large part responsible for driving the growth in the number of households accessing debt . Furthermore, this growth is largely concentrated on low-income households. Although debt to the lowest-income segment made up just 12.7 percent of total value of household loans disbursed during that quarter, it by far represented the largest part of the number of loans disbursed. Loans to households earning less than $166 a month accounted for 63 percent of the total number of loans disbursed. The average size of these loans was $25. The other indicator that this was digital credit is that almost 97 percent of the unsecured credit granted in that period had a maturity of less than three months.

The data also speak to how Zambian households are using these unsecured loans. Business, education fees and medical or funeral expenses are all significant, together making up around half of the total number of loans. But the largest single use — 40 percent by number of loans — is for living expenses. Digital credit is emulating the way credit cards work in developed countries, helping people manage cash flow on a short-term basis. And just like in the developed world, this comes at a high cost.  This is not the kind of credit that helps people invest and grow. It is the kind of credit that helps them manage day to day and get by.

This is not in and of itself a bad thing. Consumer credit plays an important role in an economy, and there is some evidence that digital credit can have positive development impacts. But if there is too much, it is the kind of credit that can get people in trouble, especially people who have limited income. Interestingly, in Zambia there was a sharp uptick in the number of loans paid late in Q3 2018 that has not yet flowed through to official delinquency rates, which only register when delinquency passes 90 days. This will be worth keeping an eye on.

What does the picture look like for productive lending to enterprises and particularly to MSMEs? This is the kind of credit that supports people’s livelihoods longer term and helps businesses create jobs. The conclusion I took away from the data was that this is still largely a subsistence market. Of the 41,178 loans made to MSMEs in Q3 of 2018, 92 percent by number and 33 percent by value went to microfinance groups or sole proprietorships (it should be noted that part of this reflects the growth of digital lending in the MSME sector). If you add in businesses employing up to 10 people, that accounts for fully 99.4 percent of all loans and 49 percent of the value lent during that period. On the plus side, this suggests there is a measurable formal microfinance sector in Zambia, with a decent number of loans in the $500 to $3,000 range. On the negative side, only 234 loans were made to businesses employing 11 to 100 people, which are most likely to be the engines for growth and jobs. And the performance of MSME portfolios is not great either, with persistent and high levels of nonperforming loans — averaging 23 percent by a 90-day measure — over the six reporting cycles.

In Zambia, we clearly have a credit market that is skewing increasingly in favor of short-term digital credit access, and while the market might not yet be exhibiting signs of stress, it is possible that this is on the horizon.  Aggressive growth in credit to low-income segments is associated with credit bubbles and mirrors some of the trends we are starting to see play out in other parts of East Africa, with signs of debt distress emerging in Kenya and Tanzania. But even if the loans were all performing well, short-term digital credit is not going to drive economic growth any more than credit card debt supports sustained growth in the United States. It is too expensive and short term to play anything other than a cash management role. In other words, it may help poor families with resilience, but it is not an appropriate instrument for growth.

So, what do these data tell us? They point to a number of areas where monitoring and deeper analysis might better inform policy making:

• What do the data (not) include? This data set includes formal credit from licensed providers. It does not include other types of credit available in the market, including nonregistered agricultural input suppliers, pay-as-you-go operators, supply chain lenders and sources of informal credit, like rotating savings and credit associations and individual lenders. This is not a complete picture of credit availability, and this is probably particularly true at the household level. This means, for example, that we don’t know whether the increase in digital credit complements or displaces informal credit to households. There could be a growing consumer credit bubble in Zambia, but there might not be. And if there is, we have no idea of the magnitude.
   
• Do we need to worry about the growth in digital credit? Maybe, but it depends on your point of view. From the perspective of financial stability, it may not be a concern, given low ticket sizes spread across many households. If a consumer credit bubble was forming today and was to blow up tomorrow, the ramifications for the Zambian economy are likely to be modest, given relatively low levels of credit penetration overall. But from a consumer perspective, it could be quite significant, and the data suggest that further monitoring and deeper analysis may be warranted. Understanding late payments, multiple borrowing and rollovers across the 30-day loan cycle typical of digital credit would offer a much more nuanced understanding of what is really going on.
   
• Finally, does it matter? Is the growth of credit good or bad for low-income households? How should we think about digital credit in terms of both consumer resilience and opportunity? And how much is too much credit, especially for families living on less than $166 per month? More granular supply-side data could be complemented by demand-side research that would shed light on borrowing and payment behavior and uses of these funds at the household level. It would also offer insights into groups that may be more vulnerable to over-extending on digital credit, as well as on how clearly borrowers understand the consequences of not repaying. Complementing supply-side data with periodic efforts to draw deeper demand-side insights — such as the Bank of Zambia’s periodic FinScope surveys — would provide regulators with a much clearer picture of what is happening in the market, so they can take appropriate corrective action, if required.

More importantly, in the longer term, how do we make sure that digital consumer credit evolves into something more favorable for consumers, something that helps build opportunity? The promise of digital credit has long been that thin-file clients with strong repayment histories would eventually qualify for credit on more favorable and sustainable terms. We still do not have information on whether this transformation is taking place. This is an important question if we want to create the conditions for growth and job creation in Africa in the medium to long term. Digital credit is a testament to the ways in which technology and new business models can help expand financial services to low-income households. But it also points to potential hazards of letting a market develop unchecked.  The Bank of Zambia is to be congratulated for building a solid foundation for future regulatory decision-making. Now the hard work begins. Let’s hope other central banks in the region begin to follow suit.

For more recent data analysis on Zambia read "The Credit Puzzle", Greta Bull's speech delivered to CGAP members in May 2019 >>