Exam scores are being used to build student loan credit reports in Kenya

“Pay attention, it might lower your loan payments.”
“Pay attention, it might lower your loan payments.”
Image: Reuters/Thomas Mukoya
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Just 4.4 % of Kenya’s 45 million citizens have a personal bank loan, compared to the almost 80% of Americans with some form of credit facility, a situation that has developed from the sheer infeasibility of collecting adequate data on much of the population.

In Kenya—and Africa in general, where 80% of people lack access to formal financial services such as loans—traditional credit rating methods are often impractical. But alternative data may have the answer.

Alternative data typically means any non-financial information (such as loan history and credit card records) which  a bank or other financial institution can use to assess the lending risk of an individual. In the United States and other advanced economies alternative data typically means documents like utility bills and records of your rental payments for example.

But in countries where large portions of the economy are informal even so called ‘alternative’ data in the west may be just as difficult to come across as traditional financial data.

To this end companies across the continent are finding genuinely alternative and orginal ways of assessing people’s creditworthiness. Jumo is tracking mobile money usage to offer loans and insurance in East Africa. Nigeria’s Social Lender can offer loans based on a user’s social media footprint. Meanwhile, Uber has partnered Sidian Bank to help its drivers access loans once they have completed a certain number of trips and secured a high enough average rating.

Alternative data is also being applied to student finance, which remains undeveloped in Kenya and the rest of the developing world. Banks do not provide commercial student loans, and Kenya’s Higher Education Loans Board (HELB) excludes two-thirds of applicants. While enrolments in Kenyan universities have grown exponentially, eligible candidates still locked out. The actual number of eligible students joining universities is actually in decline.

A local company—Student Finance Africa—is attempting to address this issue. The startup collects data from educational partners through its mobile app and students through its online loan application.

This is not the traditional information collected by the HELB and banks, but rather varied data including academic performance, attendance record and mobile money payment history. Student Finance Africa is using this data to over time build out a proprietary credit algorithm that will decide which students are worthy of funding.

“We are taking a fintech credit model, adding a few options for different payback periods to meet the needs of our borrowers, and adding financial training to the mix. For this market, its innovative,” says chief executive officer Jennifer White.

It also requires borrowers to make small interest payments over the course of their studies, meaning their payment history informs the credit scoring model. As it builds out its algorithm, the startup has formalized partnerships with two universities and one vocational school.

“By leveraging the power of alternative data analytics and partnering directly with higher learning institutions, SFA is able to offer student loans that are more affordable and financially inclusive,” White says.

This is something that has never been tried in Africa, though there are a number of similar services in the United States and Europe. “In fact, there are only three other private institutions that are focused on the student loan market across the entire continent,” says White. “The rest are government run and owned.”

This gap has caused quite a problem. Only eight per cent of Africans have a higher education degree, largely due to the lack of available financial resources. Banks and MFIs devote less than one per cent of their portfolios to student loans. Student Finance Africa is seeking alternative way of bringing this gap.

White says the loan products currently available in countries like Kenya have prohibitive terms, such as short repayment periods, that mean even students that do make it to university often have to drop out. This also impacts universities, who cannot treat tuition fees as reliable income.

“We are solving a number of these challenges, with the greatest being getting more people into higher education programmes through providing affordable, tailored loans for students and their parents,” she says.

“The gap in student financing across Africa is a huge problem for all stakeholders involved. It is clear that until a financing solution is built, growth at all levels is stunted.”