Note on Digital Lending from Dar Es Salaam and Maputo

Ryan Floyd

June 06, 2015

A Letter from Dar Es Salaam, Tanzania

I thought I would reach out with some thoughts from my trip through Mozambique and Tanzania. Forgive some typos. I’m sending it from my hotel room.

The banks in these markets can’t stop talking about mobile money, phone-based lending, and mobile wallets. I think that the retail lending industry in developing countries is going to go through a major shake up in the next ten years if not earlier. You have probably read that phone-to- phone money transfers and now phone-based-retail-payments are very big in Kenya. And they are growing in Mozambique and Tanzania. Just like African countries bypassed the era of fixed-line telephony, I think they will bypass large-scale branch banking and potentially even retail shopping. They are on the leading edge in terms of mobile money.

Banks in Mozambique and Tanzania appear to be trying to figure out what the model will look like. Will cell phone companies end up being lenders? They are the gate-keepers and have all of the transactional data that can be used to conduct credit scoring. But they aren’t allowed to charge interest on deposits. Maybe that doesn’t matter. Will banks all end up offering loans online? Maybe, but they complain of KYC barriers. I think one thing is certain: the giant spreads earned on most retail loans will narrow in the future. I could imagine a global platform company like Uber emerging in the next decade, with a virtual office in each country offering loans through the phone with a beautiful interface that is easy to understand. And even if that doesn’t happen, the very threat of it could lower lending rates and ultimately help promote financial inclusivity. Lower margins mean lower profits and lower multiples unless the company is forward-thinking. I kind of consider many of the big banks of today to be like Tower Records 15-20 years ago.

One bank is trying to create a mobile wallet and the ability to lend online through each mobile provider. Another is trying to “marry” exclusively with another mobile provider to provide loans online. Another seems to be ready to partner with a technology company to get the IT infrastructure and then have an App for lending. It’s easy to imagine that lending moves to the phone and then it is exposed for the commodity that it is. This isn’t so much of a “trade” in Africa as a word of caution to investors in banks in developing countries, or almost anywhere from my seat. E. Africa seems to be leading the way.

As an aside, I was intrigued to read in the WSJ just now that consumer goods companies like Nestle and Unilever are feeling the pinch in China because sales are moving online away from physical retail shops. It’s fascinating to see where the world is moving. I could imagine retail in Africa could almost bypass bricks and mortar big box retail entirely in the same way as changes in phones and banking. A company could have warehouses, with bicyclists delivering goods to people who bought products from their phones. A few big private companies are doing this in Nigeria. I could imagine Instacart could show up here with guys on bikes after expanding in the US.

As I re-read this, it all sounds like Conan O’Brien’s “In the Year 2000” sketches in which a guy sings “In the year 2000” and Conan makes jokes about crazy things that may or not happen. (I was looking for good clips online to put here but none of them seemed “appropriate” to send out. They are pretty funny). And maybe none of it will happen. I guess the world is just moving pretty quickly, and investors could get hit pretty hard by a lot of this. I would say that very little “business model uncertainty” is currently priced into retail lenders in most of the world. But maybe I am off.

A final comment about culture. I like to ask people when I travel about changes in the culture, and “technology” keeps coming up. One can imagine that just a generation ago in many countries, the older generation has most of the access to information, maybe like the United States before the 1960s. Younger folks had to look up to their elders. Husbands could just tell their wives the way things were. Now, the youth are more…uppity. Women wear pants, literally, in Dar Es Salaam, whereas this was generally looked down upon just ten years ago. Children can challenge their parents and grand parents to ask why something is done this or that way.

Most people smile when talking about this and think “aww shucks” to themselves, that 22-year-olds throughout the world can get information extremely quickly just through their fingertips on their phones. And this is generally a wonderful thing for the world, other than people having neck cramps from having their noses stuck in their phones. But the Edmund Burke (still) in me sees the good thing but can notice how it will cause tension in the future. A manager of a company I met with today told me that these generational and gender tensions are alright as long as the economy is going well and people can put food on the table. I’m not even talking about a revolt against a government. Instead, I could imagine a major cultural revolt throughout the world, but particularly in developing countries that have changed so rapidly. So on the one hand, economic growth will bring higher incomes and probably better health outcomes. On the other side, technological change empowers the people who can find an answer most quickly, which can be very destabilizing at companies, in families, and in governments when those people are 21 years old.

My trip won’t change any of my investment decisions. It confirms how much that business model will change over the next decade.