Research by Bankable Frontiers Associates for FSD-Africa shows that retail credit has significant potential to help those Africans who are in the “cusp” segment (above poverty but below the middle class, $2-$5 per day, economically active) to move up and build assets. But there are obvious risks as well, including particularly debt stress and over-indebtedness, with these risks being more pronounced in countries that are experiencing or expecting macroeconomic shocks. Rather than the typical “Africa rising” narrative of a steadily growing middle class, there is a real threat of backsliding for many “cuspers.”

For CGAP, key take-aways include:

It is important for policy makers and regulators to be proactive in better understanding retail credit markets and how they are changing. There are many new entrants (e.g., digital credit providers that use non-traditional data to construct scoring models for those without traditional credit histories), some of these business models could scale very rapidly, we see evidence of widespread over-indebtedness in countries like South Africa, and we know that credit bubbles happen with some regularity. One good starting point would be to develop better data and analytics for regulators who want to get a more “whole market” picture of what credit is available to which consumer segments and offered by which providers, as the basis for monitoring the market and engaging with lenders.

We also need to deepen our work to understand the new business models, how weak/strong the incentives are to be transparent and responsible in their practices, and how consumers will respond (e.g., how their behavioral biases might shift when loans are available instantly and privately via SMS).

It will also be important to think through the politics of consumer and retail credit for different segments – e.g., will there be pressure to loosen restrictions on non-bank lenders, regulate pricing or other product features that are viewed (perhaps accurately) as abusive, forgive loans or wipe the slate clean if large numbers of lower- and middle-income people are blacklisted?