Microfinance Sector in Kenya: Musoni, A Cashless Microfinance Institution by Stanley Munyao

Interview with Stanley Munyao, CEO of Musoni

What is your assessment of the microfinance sector in Kenya? What are the latest trends? Is the environment competitive?

The microfinance sector in this country is currently going through some huge changes and evolution. This comes from emerging technological solutions that are coming into the market, primarily disruption through fintechs, digital lenders, and even traditional institutions that are adopting technology as a way of reaching customers. The financial space at large has three main players. There are our peer microfinance institutions that are small in scale and targeting smaller scale entrepreneurs and farmers using traditional, crude methods. There is then another category of fintechs coming into the space doing shorter nano-loans of smaller values for consumption purposes. But they offer costly credit to the bottom of the pyramid. Then, there are commercial banks that have been in the market for a long time, close to 100 years. For a very long period of time, they have focused on just the cream of the society. But, because of the changing environment, technology, legislation, and especially interest rate capping, they have been forced to rethink their business model and deploy technology in a manner that allows them to reach the bottom of the pyramid with small ticket loans that are cost effective. They have avoided small ticket loans in the past because they are costly to deliver and deemed risky because the ability to pay cannot be quantified so they would rather not touch the segment. However, technology has made it possible to make those barriers to extending credit to the bottom of the pyramid a thing of the past. It is now easier and cheaper to extend loans of $200, $10, or any amount through mobile telephony. Credit scoring through use of sophisticated algorithms now makes it easier to make credit decisions without necessarily involving human interaction, viewing loan applications, and processes. So, it becomes cheaper and faster. But then, the interest capping occurred and it reduced the ability for commercial banks to make as much as they would have wanted in terms of interest income from loans. If you package the small ticket loans as commission-based credit facilities, you can circumvent that kind of legislation. We have seen that nearly every other commercial bank has come down to that target clientele. Therefore, the microfinance landscape in the country has been completely redefined over the last three to five years. Kenya has a population of 55 million people, but 80% are now what is called financially included, simply because they are able to access financial services through mobile telephony. This is a major milestone. But the biggest question is what financial products and services are being delivered? Are they products that actually suit the needs of those customers? Are they products that are able to support business growth and development at a small-scale level? Are they working capital loans or consumption loans that therefore contribute to the well-being and growth of the economy? In most cases, the answer is no. That is where Musoni comes in. We are not a fintech, nor are we a traditional lender. We are a financial institution that leverages technology in order to reach the customers we need to. Those customers are then able to access sensible loans and sensible financial services from us. That is what the population at the base of the pyramid is looking for. They are not just looking for easy credit, expensive credit, short term credit, and nano-loans. They are looking for financial solutions that will help their business prosper and that is what we offer as Musoni. We come in with financial solutions that are suitable and tailor made to these customers in terms of loan profiles, loan sizes that are commensurate with their business needs, loan tenures that are aligned with the cash flows of the business, and pricing that is sensitive to the needs of the client. It is not exploitative, there are no hidden fees, and it is as transparent as possible. That completely defines us as an institution and separates us from the rest of the players in the market.

What are the two major loans you offer?

Our partners on the ground come in with good agricultural practices, crop monitoring, etc., and we bring onboard insurance companies and risk sharing partners who help us mitigate the risk of extending loans to farmers in the rural areas.

We concentrate on loans that are geared towards addressing working capital needs, financial facilities that will help the entrepreneur generate more worth rather than consume compared to consumption loans. Our loans are very clear. They are not nano-loans. Generally, we offer big ticket loans. Our average loan size is $500. But when we focus on rural populations, our average loan is $200 at 9 to 12 months tenure. It is not a one month loan where we are taking a risk. We are investing in businesses that are based on cash flow. We invest in them to grow their business and make more sales. Out of the sales, they generate enough surplus to pay our installment and then retain a portion of that surplus to grow their business. That is how we have come in to help redefine the microfinance space. Technology can be used for the benefit of both the institution and the target clientele. If you look at the demographics for sub-Saharan Africa, close to 80% live in rural areas. Unlike other continents, our rural areas are sparsely populated. There is a high chance that you will never go to a village and get the critical mass that you need to be able to have a business case in lending in that village. Therefore, it makes it very unwise and less prudent for a financial institution to be located in rural areas. They are all crowded in urban centers. For us, through the use of technology, we are able to serve those rural customers in their own small pockets where they are. They can transact from the comfort of their businesses and the comfort of their own homes using the mobile phones they have where we embed our services into those mobile wallets. We have also looked at the environments where we operate since we are a business model that is tailor made to reaching rural populations. The main activity for those populations is agriculture. It is a much older format of business. Farmers focus on a one or two acre piece of land and their financial needs are $200 to $400 at maximum to buy a dairy cow or farming tools for production. We have specialized in providing financial services for those small farmers. Today, they make up 40% of our current business. There is a myth that lending to smaller farmers in rural Africa is risky and dangerous. We have been able to prove that myth wrong. The payment rate that we witness from extending loans to small farmers is quite high. As long as you do it right and in a structured manner, you will be able to reach that niche clientele and extend to them good, solid financial packages and you will get your money paid back to you on time. We have been able to prove that to the market. As we extend more into rural areas, agriculture lending to smaller farmers will be our flagship product.

How do you ensure repayment? Do you go in person? Do you use technology?

Musoni is a hybrid of a traditional financial institution and a fintech. We have the right mix of technology and relationships. We have relationship officers on the ground who visit our customers and verify information that is obtained from our customers and development partners and put it together to help us make sound decisions. That is not to say that every other loan we give out is not verified by Musoni relationship officers. The key point has been us getting the right mix of technology and those relationships. We extend both financial services and non-financial services. Non-financial services play a very critical role in ensuring that our customers are empowered, digitally literate, financially literate, and that they understand good agricultural practices that will enable them to farm as a business knowing that that they have a responsibility to take care of their crop to get a good harvest and then pay their loans back to us.

How do you explain this to them?

We work heavily with partners where we bring together different value adds on the table and partners who are good in agriculture extension services to support our customers. We have limitations as a financial institution on how much we can educate our customers on good agricultural practices. We limit ourselves to financial literacy training, digital awareness, the dangers of overexposure on digital loans, multiple borrowing, overindebtedness, client protection. Our partners on the ground come in with good agricultural practices, crop monitoring, etc., and we bring onboard insurance companies and risk sharing partners who help us mitigate the risk of extending loans to farmers in the rural areas. This ensures that we have a conducive working environment for us to deliver our financial services.

How do they gather potential customers?

We put them into farmer groups which are already organized on the ground. We do not establish them, rather we leverage existing structures in the villages and the communities that we reach into. We then layer financial services onto those existing platforms, bring in other partners to deliver their services, and organize the groups. It is easier to work with groups that are well known to each other and have been in operation for years together. When we began our business in 2010, we began on a technology platform and Musoni was and still remains the sole cashless financial institution in Africa. Our transactions are completely done through mobile money both externally and internally in terms of disbursements and collecting payments. All our customers should have a mobile phone at the bare minimum. It could be the most basic mobile phone that has an M-PESA wallet in it and they are able to access our services. Then, we moved to the next level where we adopted a paperless approach. In order for us to gain maximum benefits out of technology, we need to get rid of paper. If you are sending relationship officers into villages that are 50 to 100 km away from the nearest office, they need to be able to comfortably operate out of their mobile phone and be able to close transactions. 80 to 90% of our transactions are near paperless. We have now moved to the next level where we are leveraging our existing data to make credit decisions for all of our clients, both with internal and external data from our partners. That has unlocked enormous potential for the business to scale and grow into the deep rural areas where you will only find one or two viable customers. But because of our technology, we can reach even that isolated client wherever he or she is. That is our unique business model. In order to safeguard ourselves from losing focus on the ultimate vision of the business of reaching the rural underbanked population with a socially oriented product offering, we have pursued social performance management or transformation agenda quite aggressively. We also became the first and probably only Smart certified organization in Eastern and Central Africa. We received this certification in April. This means that every step we make towards serving our customers, we are reminded of the need to be customer centric and keep our clients at the center of operations in every decision that we make.

Are you interested in attracting technological partners? Which area do you want to improve?

We are always out looking for partners because we believe our business model has been tested and proven in the Kenyan market. We are now ready to scale to every corner of this country and we are ready to become the leading financial institution in Kenya. Anybody who has a financial need and is looking for a financial solution should know that Musoni will be able to address those financial needs. We have a number of stable partners who are working with us on this journey of growing into a leading financial institution. However, when we do a larger scan of the environment that we are operating in, we see a serious need for our solution in other African countries. It is very clear to us that sooner or later we should be exporting our business model to countries like Tanzania, Uganda and Rwanda where financial exclusion levels are extremely high. For that, we will need serious partners to work with us. We began our business at a time where mobile money in Kenya was just beginning and we know the pains that we went through with our telecom partner in trying to make sure that access to liquidity, access to mobile money agents, was addressed so that our customers can be comfortable when consuming our products. That may not be the case in other neighboring countries. So, we will need strong, stable, and serious partners to help us extend our services.

Are there any other areas you want to enter into? Where do you see the company in three years’ time, the medium term?

Rural areas are where we want to be because that is where a huge chunk of the market is. 80% of the population is living in rural areas. A huge percentage of that 80% is engaged in small order financing. Other than Musoni, nobody is seriously doing small order financing. We want to really perfect our presence in that space. We want to have a national reach and be present in every corner of this country, especially in marginalized areas, arid and semi-arid areas, where it is even worse in terms of getting critical mass within one community in order to extend financial services. We want to be known for reaching those areas. But we are also very keen on growing and becoming a leading financial institution not only in Kenya but in the region. Our unique business model allows us to operate out of every part of Africa from the comfort of Nairobi and without necessarily having a lot of physical presence on the ground. We are thinking about how we can reach as many customers as possible and help in addressing the agenda of financial inclusion for everyone.

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