M-Kopa: Disrupting African Retail Banking
The telecom executives laying out the new banking model in Africa.
Michael Joseph, “father” of M-Pesa [1], stated at a conference in 2012 that “access to financial services were a basic human right.” Mr. Joseph asserted that barriers to financial markets can be overcome through several supply side interventions which will result in the lowering of costs to entering the formal financial system. In M-Pesa and M-Kopa, the traditional banking model in Kenya has been disrupted by several telecom executives.
2.6 billion people have no access to formal financial services in low and middle-income nations [2][3]. One of the great problems with banking the unbanked is the nature of their customer profile:
- Low transaction amount & high transaction costs: they are high touch low value customers.
- Lack of uniformity making formulaic credit decisions difficult: The financial lives of the poor are precarious, with income low and irregular and not at all uniform across the population. A financial product for one would be unsuitable for the other. [4]
- Lack of data: This group of customer predominantly sit outside of the formal economy, making it hard to build a credit profile on them.
- High cost of capital: Even should this customer be provided a loan, there is usually a high cost of capital for the loan provider, which is then passed onto the consumer.
- Lack of collateral: Finally, this customer is unlikely to have any collateral against which they could take a loan.
The introduction of M-Pesa in Kenya saw a whole swathe of households enter a formal financial system for the first time. Introduced in 2007, by 2015 M-Pesa had 20 million subscribers, representing roughly 70% of the Kenyan adult population. It is estimated that $30m is transacted through the system daily [5][6].
Mobile financial services (MFS) solves the problem of opportunity cost associated with making long, time consuming, trips to bank branches, to be met by inefficiencies of service [7][8]. MFS has the potential to solve certain information asymmetries. [9] makes the case that with a platform that allows the cost per customer to fall dramatically, and effectively ‘piggy back’ off other services, similar to the business model of retail financial services should be dissimilar to the low value high volume business of prepaid phone cards. It is in this context that what M-Kopa have achieved is so interesting.
M-Kopa
M-Kopa primarily operates in Kenya (80% of 300,000-customer base) off the M-Pesa platform. The company provides solar kits to low income households on credit. The customer pays a $35 upfront fee, and agrees to make a daily payment of $0.35, taking on a loan of around $165. The solar panel is enabled through a piece of technology that has a sim card as its control switch. Should the customer fail to pay the daily repayment amount, M-Kopa disable the device. The cost of power to the average off-grid customer is $0.75. The cost of capital to the customer is 20%, cheap in the context of a Kenyan treasury priced at 23%. [10]
Once the customer has paid-off the loan they own the solar panel outright. What makes M-Kopa a financing company, however, is that they offer their customers the chance to re-mortgage their solar kit, and acquire a stove, smart phone or a solar powered TV. At this point the company has a year’s worth of financial data on its customer as well as clear collateral. Default rates are low in the context of micro-credit, with repayment rates in the mid-90%. [11] The company is growing rapidly, extending $100,000 of loans to 600 new customers, daily. [12]
Challenges Outside of Kenya
There is, however, inherent challenges to their capacity to scale this model outside of Kenya. Other African countries have not had the adoption rate of mobile money. Without a liquid financial transaction platform, it is difficult to see how this system could reach their target demographic (the unbanked less than $2 a day off-grid consumer). Once the company moves up the wealth pyramid, their solar proposition no longer continues to be price competitive, and the households require greater power than that provided by the M-Kopa panels. This doesn’t seem a permanent road block to M-Kopa expansion, rather that growth will be pegged to the growth of mobile money in these countries.
As the complexity of product offering and the scale of the customer base increase, M-Kopa will likely see increasing default rates. Whilst the collateral can be disabled, it cannot necessarily be recovered (meaning total loss on that particular loan). With scale, therefore, M-Kopa could see a spike in their cost of capital, this having knock-on effects to the interest charged on their loans, causing further increases in default rates – a vicious cycle.
Transferable Lessons
This model is going to have to adapt to markets where mobile money is not the norm. But there are key points that are transferable across markets:
- Aggressively collect data on your prospective customer base.
- Ensure that credit is only used for purchases that have productivity improvements (i.e. power & communications).
- Create opportunities for the customer base to re-leverage once they have paid off the initial loan.
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[1] McKinsey (2012). Mobile Money: Getting to Scale in Emerging Markets, June.
[2] Beshouri, C and J. Gravrak, “Capturing the promise of mobile banking in emerging markets.” 2010, McKinsey Quarterly, February.
[3] GSMA (2009). Mobile Money for the Unbanked, Quarterly Update, March (London, UK: GSM Association).
[4] Collins, D., J. Morduch, S. Rutherford, and O. Ruthven, Portfolios of the Poor: How the World’s Poor Live on $2 a Day. 2009, Princeton: Princeton University Press.
[5] Runde, Daniel, M-Pesa and the Rise of the Global Mobile Market, 2015, Forbes Accessed Nov 2016: http://www.forbes.com/sites/danielrunde/2015/08/12/m-pesa-and-the-rise-of-the-global-mobile-money-market/#5a53136f23f5
[6] Jack, William & Suri, Tavneet, The Economics of M-Pesa, 2010, MIT Sloan, Accessed Nov 2016: http://www.mit.edu/~tavneet/M-PESA.pdf
[7] Dermish, A., C. Kneiding, P. Leishman, and I. Mas, “Branchless and Mobile Banking Solutions for the Poor: A Survey”, 2011, Working Paper.
[8] Mas, Ignacio, “The Economics of Branchless Banking”, 2009, Innovations, 4(2), 57-76, MIT Press.
[9] Mas, I. ,”Why are Banks so Scarce in Developing Countries? An Infrastructure and Regulatory Perspective.” 2011, Forthcoming.
[10] Shapshak, Toby, How Kenya’s M-Kopa Brings Prepaid Solar Power to Rural Africa, 2016 Forbes, Accessed Nov 2016: http://www.forbes.com/sites/tobyshapshak/2016/01/28/how-kenyas-m-kopa-brings-prepaid-solar-power-to-rural-africa/#5658965570f4
[11] Faris, Stephan, The Solar Company Making a Profit on Poor Africans, 2015 Bloomberg, Accessed Nov 2016: http://www.bloomberg.com/features/2015-mkopa-solar-in-africa/
[12] Bright, Jake, Solar Startup M-Kopa Leapfrogs Africa’s Electricity Grid, 2016, TechCrunch, Accessed Nov 2016: https://techcrunch.com/2016/04/28/solar-startup-m-kopa-leapfrogs-africas-electricity-grid/
Hi N, I love this topic! What I would like to know is how the payments are made. Does every customer need to have a phone, and then M-Kopa puts money on that phone (the initial loan), then the customer gives that money back in $0.35 increments to pay back the loan? I guess I’m just trying to understand, for example, how the money a Kenyan makes selling produce at the market gets onto the phone and in the hands of M-Kopa without a formal bank deposit system.
Hi Nelly! Yes exactly – everything, right now, has to run through a mobile money platform with this system having been developed from M-Pesa (M-Pesa being the world’s largest mobile money platform). Therefore people must have phones (though no need for smart phones, and I think M-Kopa provide them phones should they not have them, but do have the $35 down payment).
I really recommend reading the economics of M-Pesa for an overview of the system (http://www.mit.edu/~tavneet/M-PESA.pdf), I originally included that but couldn’t fit it into this derisory word limit.
Thanks for this interesting piece. My main question here is just around the economics of the company – with treasuries at 23% and offering low income customers cost of capital at 20%, how exactly are they making money here? Or is the idea to use this line of business to establish a customer base first and then to monetize that distribution channel and database through up-sells and cross-sells later on?
Good spot Haibo. Basically, I think this company can exist due to concessionary USD loans from Development Finance Institutions – I have very real concerns with respect to the inherent exchange rate risk that this company has taken on (their equity and debt are priced in USD). I suspect that the company has some flexibility on the pricing of the loans they are making, as the micro finance bank competitors in the space charge 80% – 120% – so should they seek KSH debt they could achieve an attractive positive net interest margin in the 30% – 35% range (assuming default rates don’t go above 10%). I also think there is likely some amount of transfer pricing within the company with respect to the solar kits.
Great post! Any thoughts on how the M-Kopa model could be expanded to the SME sector? I think your general lessons are great, but apart from power/comms related products, it might be hard to apply the model (at least the first step) to many rural businesses (i.e., how do you cut off someone’s access to agricultural products using a sim card?). Of course, the household sector in Kenya (and the rest of mobile-payment-enabled east Africa) is probably large enough to support sustained growth, but it seems like there could be a lot of opportunity to break the traditional microfinance model in favor of something like this. Regardless, this is really cool!
Hey Ben, completely agreed! That is why they have to complete the Solar loan first as that is the only item they can dis-enable. Therefore when these guys take on new leverage for other small items, the collaterable becomes the solar kit. But as you note, this changes incentives a bit.
Really interesting! thanks for the post TN. This is a really innovative way to reach the tier of the society that is currently unavailable to be brought into market by traditional means. In a way this is a positive spiral if the financing is so designed that the consumers are able to pay back and the cost of capital for the firm in question is lower than what is in Kenya. As you mentioned to make it possible to work the technology & product has to be something that directly improves the productivity of the family that purchases it. Any particular reason why you think this model (in conjunction with M-pesa/mobile money equivalent) is not replicable in other similar countries?
Mainly because M-Pesa caused a ripple through the banking sectors across the continent, where Central Banks blocked the telecoms from operating an M-Pesa model in its purest form – thereby stymieing their growth. Without the easy payment systems for these previously unbanked customers, you can’t create the same daily repayment schedule which I think is vital to their success.
Interesting read! It sounds like M-Kopa has found a unique way to serve the underbanked. By offering financing to customers for a discrete list of hard goods, the company is able to garner significant data on borrowers and repayment habits. It sounds like from your article that M-Kope is leveraging this data when making follow-on lending decisions. However, do you know whether there is any push for M-Kopa to offer more traditional banking products (e.g., savings account) or even to expand the array of reasons consumers may borrow money? Hopefully M-Kopa will prove to be a step toward a more robust financial market in developing countries and will push further banking penetration.
So the savings product is provided by M-Pesa, but I wonder the same question with respect to micro insurance products. They are looking at other reasons to lend to customers, but I can understand their slow approach to this in the early stages – I think they have a lot more growth in their core vertical before looking further afield.
Interesting post. I really appreciated how you clearly laid out the context and the transferable lessons. In terms of the challenges they will have outside of Kenya, I think it is still a very worthwhile endeavor to continue executing to where you reach critical mass in Kenya – and then reassess how to make it work elsewhere.
In terms of the solar kits, who does M-Kopa work with to provide them? Are the kits all produced internally? It would be interesting to see if advancements in solar technology can enable M-Kopa to offer more power generation capabilities and thus transfer this up the “wealth pyramid without absorbing overwhelming costs.” I am admittedly uninformed on solar technology and whether this is even plausible.
Agreed on both counts Rob. They procure the equipment and the assemble their proprietary ‘sim-card enabling switch’.