August 10th, 2015

With the rapid uptake of M-Shwari, Commercial Bank of Africa (CBA) is the envy of the digital financial services industry. As CGAP’s newest Forum publication, co-authored with FSD Kenya, points out, many factors set CBA up for success: the service was offered directly on Safaricom customers’ SIM toolkit menus, was seamlessly integrated into M-PESA, and was introduced to the Kenyan mass market via Safaricom’s well-resourced and incredibly effective marketing machine.

However, something else sets M-Shwari apart from other value added services that have been introduced via M-PESA. M-Shwari solves a real problem faced by Kenyans: on demand liquidity.

The Kenya Financial Diaries carefully tracked the cash flows of 300 low-income Kenyan households for over a year. Carrying out that study, my team and I were struck by the difficult tradeoffs families make between investing in the future and making ends meet today. Most households were net savers, rather than net borrowers, and total financial assets were substantial, about 39 days’ worth of household income. But, only 9% of those savings were held in a liquid form in which they could be immediately tapped. Instead, those assets were circulating inside savings groups or locked up as shares in SACCOs. Keeping assets in this form was important: this is how low-income families were building up investible lump sums that could be used for things like school fees, home improvements, livestock, and business expansion.

The trouble was, when smaller, sometimes unexpected needs arose or income dropped temporarily (which was also very common), the families we studied failed to come up with the money they needed quickly, even with substantial assets sitting on their balance sheets. Thirty-eight percent of our households delayed or decided to forego medical care at some stage during the study, unable to come up with the funds to access or complete treatment. Fifty-six percent of our households had a child sent home for late payment of school fees, and 25% slept hungry due to temporary shortfalls. Often this was for want of only small sums of money—typically less than $20—that couldn’t be accessed immediately.

For very small needs, people would turn to cash in the house. As needs got bigger, they might call on friends and family for support. But, family and friends take time, and there are a wide range of needs where the size of funding needed falls between the sweet spots of financing from cash in the house and soliciting social networks.

Lydiah and Morris, for example, are a hardworking couple who live in a rural community in Vihiga with three children, the eldest in her second year of secondary school. During the year of the study, Lydiah and Morris used most of their large savings to install electricity in their rural home. They considered this an investment as installation would help them open a barbershop and salon, diversifying their income away from brewing local beer. This cost them about $560, an enormous expense relative to their $56 per month average income. After the installation, they continued to save with a little money kept in the house and some money in Lydiah’s savings group. But, when their daughter was sent home from school for unpaid fees worth about $50, they could only come up with $30 from their liquid sources, leaving a $20 gap that kept their daughter home for more than two weeks and jeopardized her end of year exams. She almost had to repeat the year of school. If only there were another way to boost the pool of on demand liquidity, a tool that wouldn’t mean sacrificing on the big investments that would help to get them ahead while still staying on top of urgent expenses from time to time.

Enter M-Shwari

M-Shwari’s appeal was not in saving; after all, the savings feature wasn’t much different from the existing M-PESA wallet. The appeal was the possibility of being able to borrow on demand, in real time, to stretch families’ ability to make ends meet in the short term.

This is the feature that excited our respondents when M-Shwari was first launched. This is why they registered. This is why they tested and retested the product, hoping to learn how the product worked, so that they could best use it to meet their needs. M-Shwari offered liquidity bigger than credit from local shops; faster, more private, and more reliable than friends and family, and cheaper than moneylenders. Here was a product that connected to Kenyan’s mental models of managing money and solved a very real financial need while also getting delivery right: being accessible, having simple rules, providing real time feedback, paying interest on savings, helping people build a credit history, and building reciprocal relationships with “good” savers and borrowers.

By reaching millions of first time formal borrowers very quickly, M-Shwari certainly poses new risks in the low income market. CBA still has much more scope to refine and improve its fit for customers, communications, and consumer protection.

Still, with M-Shwari, CBA has introduced a truly helpful product to the mass market on a 100% digital channel. That is worthy of applause.

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