Client protection and digital finance, practices from Kenya

  • Speakers
  • Peace OSANGIR, Kopo Kopo Inc., Kenya
  • Anup SINGH, MicroSave
  • Isabelle BARRÈS, The Smart Campaign
  • Laura FOOSE, Social Performance Task Force (SPTF)

    Lucia SPAGGIARI opened the session by briefly introducing the panellists, to whom she yielded the floor to elaborate on the inclusion of client protection principles in digital finance. 

    Isabelle BARRÈS highlighted the overarching client protection challenge in digital finance. She explained that MFIs and other institutions working with social goals have their traditional mechanisms, and belong to a homogeneous and aligned group. However, when they start moving into the digital world and working through the value chain, they encounter organisations that are not necessarily familiar with the issues of vulnerable populations. Barrès elaborated that this situation brings in risks regarding client protection. 

    She also explained the opportunities that digital credit offers in terms of client protection: there is increasing interest from investors and donors in adapting their due diligence; there is demand from digital credit providers to get certified in their client protection practices; and there is demand from regulators to explore new ways to approach digital finance services. 

    Barrès affirmed that the Smart Campaign has a unique position to help in the development of standards for digital credit. It has the potential to involve all industry stakeholders as a neutral facilitator, and to make sure that the client protection standards are not only aspirational, but implementable. On this note, she explained that the Smart Campaign is currently in the process of updating its standards with a product-centric lens (starting with digital lending), and adopting new modules, so as to incorporate digital credit elements. The Campaign has been working together with two microfinance rating agencies to conduct field assessments and to identify current gaps in the existing standards, which will lead to an update of the tools. The inputs for the standards are coming from the FinTech community, industry research and two pilots conducted in Kenya. 

    Among some of the lessons learned during this process, Barrès mentioned that algorithms in many automated models learn by doing; there may be high loan losses in the beginning, but the system becomes more intelligent as it progresses. This requires special treatment to clients that are part of the pilots; e.g. not reporting to the credit bureau; compensating for credit losses; and excluding variables which are discriminatory. She also noted that a combination of low and high touch is needed, in such a way that data can expand the service area, but the human touch is still required; e.g. algorithms can only indicate repayment rates, but not whether the client is facing more stress and what cost. 

    The next steps in the adaptation of the standards will include a series of webinars to get more direct and live feedback from the industry, and by the second quarter of 2019 the standards are expected to be updated and ready for certification of digital providers. 

    Anup SINGH briefly contextualised the subject to the Kenyan microfinance landscape, an overcrowded and competitive market where clients expect MFIs to deliver services digitally. He highlighted the importance of the MFI Musoni in shortening loan deliveries in the last years, and detailed that 3.2 million Kenyans have borrowed digitally in the last year. However, he also stressed the several challenges that different financial business models are facing with the emergence of digital credit, noting that 34% of the clients who borrowed digitally did not re-pay their loans. 

    Singh stated that digital credit brought three new elements into the industry: remote (no interfacing between a borrower and MFI staff); automated (data are used to decide on customer’s credit score); and instant (loans can be disbursed in five minutes). These elements produced issues such as lack of regulatory clarity, poor technical assistance, tech-touch dilemma and digitisation benefits not being passed on to the clients. He explained that MFIs still operate in traditional loan models, and usually believe that digitisation is the end, not the means. Singh also highlighted the five key factors in digital finance that should be kept in mind: 1) Product; 2) Processes; 3) Channel; 4) Technology; and 5) User experience. 

    Laura FOOSE brought the perspective of over 120 investor organisations that are part of the Social Performance Task Force (SPTF) Social Investor Working Group, who are currently diversifying their portfolios into FinTech. Foose explained that investors want to make sure that the FinTech organisations they are working with will still add value for their clients and protect them. The different conversations which SPTF is currently having with various providers and experts through its webinar series is leading to the development of a due diligence guide and the development of the client protection standards. There are two main questions addressed by the webinars: 1) How do we evaluate client protection risks? and; 2) How do we assess the value for end customers? She further revealed that the main investor concerns about digital credit lie mainly in pricing and transparency, which are the themes of one of the webinar series.

    Peace OSANGIR described a case from Kenya, focusing on the pricing and transparency mechanisms and tools of the payment aggregator Kopo Kopo. Osangir explained that Kopo Kopo aims at automating payment systems and encouraging customers to go cashless, adding that customers are always looking for value-added services especially around credit and lending. In this respect, Kopo Kopo offers a cash advance system through mobile and QR payments, and that integrates credit decisions, customer management, disbursement and collection elements. The fees range from 4% to 6%, of the loan per month, based on the customer’s risk profile, which integrates different data collected from customers into the system and credit decisions. Osangir clarified that the development of this algorithm enables Kopo Kopo to provide advance credit to their customers and, at the same time, cross-sell products. She added that Kopo Kopo works according to consumer protection principles, thus ensuring that the customer is fully aware of the terms of service; a digital slide ruler detailing the type of loan and its amount is used by the institution.


    The first question from the audience revolved around the use of absolute amounts versus annual percentage rates (APR) to discuss loan pricing with clients. Both Barrès and Osangir agreed that the measure or unit used by the institution should be understood by the client, and that it is important to explain to the client the interest rate per month, but also how that translates to overall re-payment pricing. Osangir added that there are other factors which are important to the client when discussing pricing, such as how fast the loan can be disbursed.

    Another discussion point addressed the General Data Protection Regulation (GDPR) and its applicability to client protection in digital inclusive finance. Singh clarified that some providers are already using the GDPR as a framework, but that there needs to be more discussions on what it means significantly to this sector and how to adapt it to the framework of inclusive finance. 

    Finally, the digital divide issue was discussed with the audience, especially in light of women’s financial exclusion due to their lack of access to technology. Singh quantified that 28% of women still need the assistance of an agent to perform transactions, while Osangir reminded the audience that women are often not formal owners of businesses in rural areas. Foose stressed that there are several webinars available online on how investors and operators can address customers that remain excluded from the financial system. She also emphasised the need to combine human touch and technology, and get MFIs to talk directly to FinTechs which in their turn can adopt the best interfaces for these customer groups.