Why are commercial banks embracing online lending?

Kampala, Uganda | THE INDEPENDENT | The idea of ​​mobile phone lending became a reality in Uganda IN 2016 when the 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 simple money transfers, with the bank being the custodian of the money.

This model was later adopted by more mobile phone networks.

Over the past year or so, several Ugandan banks have introduced their standalone products in which bank loans are processed online via a computer or mobile phone, with the phone being used only as a channel to process credit and receive payment. Bank money.

“We need to stay proactive while delivering solutions that meet the needs of customers in our ecosystems,” Housing Finance Bank Managing Director Michael K. Mugabi said of their quick-access loan products in partnership with Airtel. “Our goal as a bank is to enable home ownership and provide financial independence to Ugandans.”

The types of loans offered online and via mobile phones are generally referred to as unsecured, small amounts, repayable over shorter periods and with higher interest rates than those charged on ordinary conventional loans.

The banks claim that these products aimed to reach Ugandans who do not have acceptable security under conventional banking requirements, and are easy for banks to manage, as well as time-saving as they are instant.

The first requirement for the borrower is a mobile phone (feature or smartphone), savings history and a bank card from the bank, among others. For new borrowers, obtaining the bank 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 accessible through short codes (USSD) on any type of mobile phone or through smartphone applications, which allow the customer a self-service process “to easily and instantly access small, fast loans in emergency,” according to Centenary Bank. .

Interest rates charged average 7% per month for the duration of the selected loan, while late payments attract 1% per day on the outstanding balance up to a maximum of 15%. All of these are meant to encourage the borrower to pay on time.

As far as loan security is concerned, most banks require one to have a bank card containing the number used to report their credit information to the credit reference bureau.

It includes information on the borrower’s payment records for all loans processed by any financial institution, and can be viewed by any bank when assessing creditworthiness to borrow.

“We have harnessed the power of technology to deliver our services and products more efficiently to our clients, and we have removed many of the processes required in the usual mode of accessing loans,” said Miranda Bageine Musoke, Head of personal banking services at Dfcu. , on the six-month-old Dfcu mobi loan. This product offers fast loans between 10,000 and 2 million shillings for one-time repayment after 30 days, but there is an option to prepay without penalties. Bageine says it was created to meet customers’ low-cost emergency needs.

“Most of our clients, we’ve reassessed them so you 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 in your account in an instant.”

Equity Uganda’s Equity Eazzy Loan product offers quick loans of up to 3 million shillings to clients who have been with the bank for at least six months.

Interest rates vary between 4-9% per month based on a declining balance, but the loans also carry insurance, processing and appraisal fees totaling 5%.

So generally speaking, according to bankers, digitally processed microloans were a response to emergency financial needs and are an offshoot of mobile money lending products.

Employees are the main target of banks for loans because in case of default, the system makes an automatic withdrawal from the borrower’s bank account, hence a minimal default rate.

Before his death, former BOU Governor Emanuel Tumusiime-Mutebile predicted the dominance of digital technology over the banking sector and warned the reluctant of the adverse effects.

“There will always be disruptions in the banking sector. Institutions that fail to keep pace could lose and, at worst, be pushed into bankruptcy in the long run, however, this disruption to banks’ business models works in the interests of customers and the general public,” did he declare.

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