The debit and credit sides of fintech's African bank statement

A $200,000 fraud at a Ugandan microfinance outfit is a telling parable of the risks that financial technology companies face in seeking to deliver the benefits that its supporters have long claimed for the industry

  • By Olivier Holmey
  • 03 Oct 2016
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It happened four years ago but the memory of the fraud hangs heavy on Rupert Scofield, co-founder and president of the Foundation for International Community Assistance (Finca).

“He worked for us for 10 years; we thought we could trust him,” Scofield recalls of the accountant at Finca’s Ugandan outfit, whom he says embezzled $200,000 from the group.

The story is one of collusion and poor supervision. The accountant gained access to more of Finca’s accounts than he ever should have been able to, Scofield says. The accountant, says Scofield, was colluding with employees at a third-party telecoms provider, South Africa’s MTN — an allegation it vehemently denies.

Finca has always faced fraud because of the places in which it operates — countries where corruption is as endemic as poverty. Last year, some of Finca’s own lawyers defrauded the bank’s operation in the Democratic Republic of Congo, pocketing $180,000. A few years earlier in Kosovo, Finca lost $800,000 to criminals who appropriated the loans of hundreds of customers.

Because the average loan size is only a little over $800 and because its declared goal is “leveraging every available dollar to maximise impact” on the prospects of the needy the sums lost were, to the group, substantial.

While the cases indicate a concerning vulnerability to embezzlement, neither was enabled by new digital processes but were rather traditional forms of fraud.

Now the risks of embezzlement are even greater, Scofield says, because the introduction of new technology has given fraudsters additional means of accessing Finca’s funds. He says the Ugandan case was made possible by new risks brought about by Finca’s hazardous transition to mobile banking in Africa.

To Scofield, there are more reasons to be fearful now than ever before. In an interview published in the September issue of Euromoney, Scofield speaks of the new dangers brought about by adopting new technology and partnering with third-party tech players.

“This is something I warned my people about early,” Scofield says. “If we’re going to move to a new business model, especially one that is digital and involves the use of the internet, being ready for the hackers, being ready for the crooked employees, this is something that we’ve got to do a whole risk analysis of before we get involved. Even though we did that, obviously we didn’t do it thoroughly enough in the case of Uganda.”


SOCIAL AND FINANCIAL COMMITMENT

Finca was founded as a microfinance non-profit in 1984 and focused on what it called “village banking”, delivering small, uncollateralised loans to groups in Latin America through a collective guarantee. Each debtor is responsible for every other, making repaying one’s loan as much a social commitment as a financial one.

Finca was firmly rooted in paper money and face-to-face interaction with its clients. At first Finca lent primarily to women because women, it found, were less likely to be banked, more likely to be responsible with their money and disproportionately affected by poverty.

Now Finca is one of the world’s largest microfinance institutions and serves nearly 2 million clients. It has operations in 23 countries across Latin America, the Caribbean, the former USSR, Africa, the Middle East and South Asia. It operates as a normal bank, insofar as it delivers financial services — deposits, loans, transfers — and its revenues overwhelmingly derive from the return it generates on its services, rather than from charitable donations.

The firm has about 700,000 customers on the African continent, across six countries. In each one of those countries — Uganda, the DRC, Malawi, Nigeria, Zambia and Tanzania — Finca has a banking licence. “The vision for Africa is to be the number one financial service provider for low income individuals,” Finca vice-president and regional director for Africa, Mike Gama-Lobo, says.

Sometimes referred to as the World Bank for the poor, Finca has received the support of financial institutions. Credit Suisse, GE Money and MasterCard have been partners with Finca on various projects. The firm has more than 80 lending partners, among them Citi, Deutsche Bank and the World Bank.

Despite all this goodwill, Finca knows banking is changing and that it has to stay on top of developments if it is to survive. To keep delivering on its promise of financial inclusion — bringing the unbanked poor into the financial fold — it has to adopt new tools to reach an ever-larger pool of potential customers, as well as deliver better services to its existing clients.

Finca has been slow to embrace these changes and when it has, their adoption has been fraught with challenges. The Ugandan fraud is a case in point.


COMPETITION IN TANZANIA

Although only its third largest African operation with 100,000 customers, Tanzania represents the forefront of its push to innovate, Finca says. Its hopes for successful change lie here.

At first glance, the Tanzanian outfit does not look much like a modern, digital operation. It nestles between a busy six lane road that runs through miles of central Dar and an open dirt patch.

Overlooking central Dar’s only golf course, National Microfinance Bank (NMB), perhaps Finca’s most advanced rival in Tanzania, boasts new headquarters , where hundreds of bankers manage the bank’s operations around the country.

Ineke Bussemaker, who has been NMB’s chief executive since May last year, is aware of the need to constantly update the bank’s practices. She says of digital and mobile banking: “That is, to me, where the growth is — where you can actually reach millions of people, where systems are scalable and you can do it at low cost.”

NMB has the advantage of being part-owned by Dutch lender Rabobank, which has provided it with the kind of training and technical support available to few microfinance institutions in Africa.

Though microfinance is in the bank’s name, NMB has diversified its activities: only about a quarter of its loan book can now be categorised as microfinance and SME lending.

Taking on advanced businesses like NMB is a challenge for Finca. Benoni Katende, based in Kampala, Uganda, is Finca’s head of alternative channel delivery for Africa, meaning he is in charge of the provision of services through mobile phones, the internet and physical agencies.

In Tanzania, Finca has 650 full time workers for a balance sheet of $40m. Of those employees, 240 are loan officers. Their number and role has changed little in recent years. And while they provide valuable face-to-face interaction with customers — a personal touch many at Finca view as essential to what the bank does — they also represent what some would consider an antiquated form of banking: loan officers spend hours travelling to customers in remote areas rather than serving them through mobile phones or via the internet.

The number of loan officers and the slow pace at which they work drive up operational costs, in turn driving up the interest rates on loans. Finca’s outfits in the rest of Africa operate on a similar model.

It didn’t have to be that way. Scofield speaks sadly of an early partnership idea with Grameen to create a mobile phone aimed at providing customers in Uganda with easy access to microfinance. The project, the first of its kind, went ahead as the Grameenphone (GP) in 1997 — but in Bangladesh and without Finca.

Not only did Finca miss the opportunity to be the first in mobile banking, but the most impressive financial inn-ovation story of rec-ent years, certainly in Africa and perhaps even worldwide, also passed it by: the huge expansion in Kenya of mobile powered financial services, owing largely to the impressive rise of M-Pesa, Vodafone’s mobile phone based money transfer and microfinance service. Launched in 2007, M-Pesa has 23m active clients in Kenya — about the size of the country’s adult population.


COMPLETE UPHEAVAL

If one man can turn things around for Finca and make it a real force in this challenging new digital environment, it may be Olaf Becker. Becker moved to Dar last year to become Finca’s chief operations officer for Tanzania, tasked with dragging the bank’s legacy operations there into the 21st century.

Because Tanzania is now where Kenya was a few years ago — huge mobile phone penetration coupled with a large, unbanked population — the bank believes the country is the perfect place to try new things out. If it works, Finca hopes to deploy the tools Becker will have introduced in Tanzania to its other outfits in Africa and eventually around the world.

A young, hard-working German, Becker speaks enthusiastically about his work but he is also keenly aware of the danger Finca faces. “If we do not get into tech,” he says, “we are out of business in the next five years.”

He is working on three projects that he thinks could revolutionise the way Finca works: digital field automation (DFA), credit scoring and mobile savings.

Under the DFA plan, perhaps the project Becker speaks of with the most enthusiasm, Finca intends to equip all of its loan officers with 3G-connected tablets. On these tablets, the officers will be able to open accounts and deliver loans via electronic forms using fingerprint registration rather than reams and reams of paperwork.

Officers will still be required to travel the country but at least it will make the process of signing up customers less cumbersome, Becker says. “Every loan officer is going to be a small mobile bank,” he adds.

On credit scoring, Finca has partnered up with First Access, a US data analytics firm. First Access runs through basic personal information about prospective customers —age, gender, number of dependents, house ownership — to score creditworthiness. It also runs through the individual’s repayment history with mobile network operators.

Lastly, changes to Finca’s mobile offering will enable clients to get what the bank calls “nano loans” — credit between $5 and $50 — without the need to travel to any branch or meet a loan officer. As the credit scoring develops, Finca plans to increase mobile loan amounts continuously to support business investment.

Becker says these changes represent a complete upheaval of how Finca operates: “We’re changing everything around this.” But he is realistic about the pace at which they will fall into place. “This is a lot of work and it’s not going to work from day one.”

TECHNOLOGICAL ADVANTAGES

But Becker knows, as Scofield does, that risks exist when going digital. One big challenge comes from the increasing reliance on third parties. To offer mobile banking services, Finca has to partner with mobile network operators across Africa. That exposes the bank to any weaknesses in those operators.

Mobile network operators are not the only businesses Finca cannot do without anymore. Aggregators, firms such as Selcom and MaxMalipo in Tanzania, have carved themselves a central role in the African market for mobile financial services. By forming partnerships with both the payment instrument providers — for instance, the mobile operators — and the groups that want to transfer money, be they businesses needing to pay salaries or utility companies needing to receive payments, aggregators have become key middle men that banks need to cosy up to.

Hacking, too, has been a concern. Though Scofield says there have been no big breaches yet, Finca has been assailed by online attacks trying to access the bank’s customer data. “In our bank in Georgia, in our IT room, we have this big screen which shows all the hackers trying to attack the firewalls around the world,” Scofield says. “A lot of them are coming out of Russia, some of them are coming out of Nigeria. It’s a new world.”

That new world also has its advantages. For example, the introduction of national identity numbers in Tanzania will make it easier for Finca to know its customers — a key part of fighting money laundering and other forms of fraud. By collecting those numbers from prospective clients, Finca will be able to access key information about them from the government database. That information will then feed into First Access’s credit scores. Registering clients’ fingerprints should also prevent fraudsters from gaining access to the accounts of others.

The use of automated systems via tablets in the field, meanwhile, should enable Finca to keep its many loan officers in check. “The clients used to see the loan officer as Finca, and the loan officer could threaten them and say: ‘You know what, if you don’t do this and this and this, I’m not going to serve you guys anymore.’ He had this huge amount of power and we’ve taken that power away from the loan officer now.”

Becker is convinced default rates will fall as a result. Default rates are already low: only 6% of debtors do not repay on the day their loans mature and that falls to 4% after 30 days. Annual loan write-offs total just 2.5% to 3%. Becker thinks write-offs could fall to 2% or less, thanks to the new credit scoring introduced.


FRAUD AND CHANGE

All banks face these challenges and all are fighting for a place in this shifting market. “Competition has soared,” Becker says. “There are a lot more microfinance institutions. Banks are downscaling to microfinance significantly. The mobile network operators are also entering the microfinance sphere with micro-loans, micro-savings.”

In Becker’s view, the only way to stand out is to cut operational costs and listen to what clients want. “We need to offer something that our customers really want now. We have to start taking our customers seriously.”

Finca is nowhere near giving up the fight. On fingerprint technology and credit scoring, for example, the bank appears to be ahead of many of its competitors. Of all the firms that rely on agency banking in Tanzania, Finca is the only one to have provided fingerprint payment terminals to its agents. Its partnership with First Access, meanwhile, represents one of the largest collaborations between microfinance and financial technology to date. And Finca is far from being the only bank in Africa still to rely on a large contingent of travelling loan officers.

Gama-Lobo does not claim Finca is immune to further losses. To him, fraud and change go hand in hand. “The reality in this business is if you don’t have fraud you also don’t evolve because no risk manager or person sitting down in a room is going to figure out everything. These guys [fraudsters] figure it out much quicker.”

As Finca seeks to leverage technological innovation to reach an ever larger number of the world’s poor, to what extent can it mitigate the risks of a Ugandan repeat? And, crucially, how much more will it lose before it gets it right? It’s a question facing all banks operating not just in Africa’s poorer regions but also those in developing markets around the world.

  • By Olivier Holmey
  • 03 Oct 2016

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