The pilot scheme was designed to test the effectiveness of specific indicators identified that correlate to financial stress.
The pilot scheme was designed to test the effectiveness of specific indicators identified that correlate to financial stress. [Photo/ Courtesy]

4G Capital Group Limited (4G Capital), a technology-driven financial inclusion company for MSMEs across Kenya and Uganda, has partnered with the Consultative Group to Assist the Poor (CGAP) on developing a new tool that identifies financial stress and helps protect low-income consumers against over-indebtedness.

Together with Social Performance Solutions (SPS), a consultancy firm supporting social impact organisations, 4G Capital and CGAP co-created a pilot scheme that researched and tested a client financial stress Early Warning System (EWS). By incorporating financial stress monitoring into risk management processes, EWS enables an early assessment of and response to borrowers experiencing financial stress to help reduce the risk of over-indebtedness. The pilot aims to establish a market monitoring tool that can be shared with regulators and digital lenders across Kenya.

The pilot scheme was designed to test the effectiveness of specific indicators identified that correlate to financial stress. This was done through client interviews, using fifteen key questions via the 4G Capital call centre before a broader survey of five questions via SMS to existing 4G Capital borrowers. 4G Capital staff also conducted field surveys during the course of regular loan officer visits.

4G Capital’s micro-entrepreneur client base typically has a very high repayment rate (over 94 percent), without the need for refinancing, which 4G Capital attributes to blending business training with right-sized working capital credit and human with technology, “touch-tech”, client liaison channels. Nevertheless, data from the survey of 692 of 4G Capital client surveys showed that some MSME borrowers utilised mild to severe coping strategies when faced with stresses upon their revenue and had changed their spending and consumption patterns. These changes in behaviour include switching to lower-cost foods, spending less on entertainment, or more severely selling their assets to support cash flow.

The survey showed that 27 percent of MSMEs participating in the pilot had experienced a high level of financial stress due to Covid-19 effects on the economy and used coping strategies such as selling assets to meet basic needs. 30 percent experienced moderate stress, such as reducing expenditure on food while 26 percent experienced mild effects, such as reducing expenditure on basic household items. 17 percent of respondents did not experience any level of stress.

By sensing mild changes in financial well-being, the EWS gives lenders the opportunity to intervene and improve lending decisions and risk management. Further testing, as part of the pilot, will reveal the predictive power of these indicators on borrowers’ behaviour and to what extent they translate to repayment challenges, such as delinquency, default, and rollover.

“The Financial Stress Early Warning System trial is a ground-breaking exercise in data-led client protection,” said Wayne Hennessy-Barrett, CEO and Founder of 4G Capital. “Client-centric product design has been central to the 4G Capital approach, whereby we succeed when our clients succeed. Partnering with CGAP and SPS has harnessed industry-wide experience to build an agile, algorithmic solution to protect vulnerable clients during challenging times and improve wider market conduct as we share our findings with the wider fintech community in Kenya and beyond.”

4G Capital and CGAP believe that this tool can be applied across the microfinance industry internationally once it has been tested on different business models and across markets. As the tool allows filtering of data by customer segments, sectors, products, and regions, it can be leveraged by portfolio management at individual institutions and for tracking consumer issues at a market level.

“Through our partnership with 4G Capital and SPS on this pilot scheme, we hope to make it possible to estimate financial stress before borrowers, lenders, and the overall financial sector is harmed,” said Juan Carlos Izaguirre, who is leading the pilot scheme at CGAP.

“While the indicators used to test this tool are specific to Kenya, many jurisdictions collect sufficient data on financial stress and coping strategies to develop similar early warning tools that can help lenders and supervisors pre-emptively deal with over-indebtedness. This pilot is part of CGAP’s broader efforts to foster the use of market monitoring tools to identify, assess, and track digital financial consumer risks and outcomes.”

Over the coming few weeks, 4G Capital and CGAP will share findings from the pilot testing about the extent to which existing stress levels predict future customer behaviour and serve as an EWS for problems such as delinquency, default and rollover. In addition, CGAP will host a roundtable discussion for digital lenders, regulators, and supervisors in Kenya to engage in a larger discussion about how to take this tool forward to affect positive change across the sector as a whole.”

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