Credit market development

Living on the cusp

September 8th, 2016


African economies are currently undergoing dramatic changes, including a changing consumer base. Absolute poverty is reducing as a new class of consumer—the cusp group—emerges. This group (which we call “cuspers”) now accounts for 23% of sub-Saharan Africa’s population, covers a segment of active earners getting by on $2-$5 per day and is straddling the formal and informal worlds. For this group, healthy credit markets could expand opportunity and enable upward mobility, helping to build a true middle class. But, for this to happen, credit needs to expand and to do so in healthy ways. We conclude that donors and policymakers ought to take an active role in enabling cusper credit markets to open up in a positive way, seizing a once-in-a-generation opportunity to leverage financial markets for upward mobility.

Across the entire sub-Saharan Africa region:

  • Regulators, donors and lenders in all markets should take note of shifting demographics and the key importance of the cusp group as a market, political force, and as the future middle class in countries that create the right conditions for them and their children to thrive.
  • Regulators should improve their credit market monitoring by refining market developments in finer grained detail in terms of product type and market segment.

In markets where cusper credit remains constrained, but could open very quickly through new digital channels:

  • Regulators could encourage the expansion of a diverse range of credit offerings over electronic channels as a means of expanding access at significantly lower cost and potentially at lower risk than previously possible, especially in places where credit information sharing mechanisms lag behind and only a small share of cuspers have formal salaries.
  • Donors could support experimentation with new kinds of person-to-person (P2P) lending (an eBay for P2P lending, for example), helping to open the cusper credit market in ways that traditional banks have not.
  • As new electronic lending takes hold, regulators and banks could introduce machine learning e-arbitration of small disputes, enabling efficient and smart management of disagreements in a quickly-growing market.
  • Regulators ought to invest in digital identification and digital asset registries. Outdated and largely manual systems are inhibiting market development, rendering effective credit information sharing impossible in some markets and making it difficult to turn assets into collateral. This is also exposing vulnerable consumers to fraud in some of their largest Blockchain technology and ubiquitous mobile phone utilisation open new opportunities for registries that are clear, reliable and easily available to all.

Where credit access is already very open and indebtedness begins to pose a new kind of threat to cusper welfare:

  • Regulators—or even private lenders—could introduce the concept of a learner’s licence for credit, helping borrowers restrict their borrowing in early years while they learn the rules of the road and work towards a longer-term financial future of building assets.
  • Regulators should consider new approaches to restraining lender behaviour, such as by introducing “Last in, last out” rules, which would rank lenders’ claims on borrowers’ incomes in the order in which lenders issued loans. In the event of default, the last lender to give a client a loan—tipping the scales of affordability—would have the lowest priority in terms of repayment, thus encouraging lenders to be disciplined in the issuing of loans to already strained borrowers.
  • Donors could support fintech tools that actively remind borrowers of their own debt service at the moment of temptation by, for example, lighting up a credit card in red when the balance is approaching a dangerous limit, or sending borrowers a warning text message when the balance grows at too quick a pace.

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