East Africa accounts for the bulk of Africa’s mobile money transactions followed by West Africa. The GSMA report shows that the value of transactions in West Africa had the highest growth after increasing by 46 percentage points to $178billion (the second highest value after East Africa’s).

Fundamentally, mobile money enables users to send and receive money, as well as to pay utility bills — but in advanced situations like it is across Africa, the wallet turns subscribers’ phone numbers into a sort of proxy for bank accounts.

As it grows, mobile money has come to be a launchpad for digital lenders, who use customers’ mobile money transaction history to determine the amount of instant credit to extend to borrowers — monies that are then directly deposited into customers’ mobile money wallets.

MTN Uganda’s mobile overdraft credit

Innovative products grounded on mobile money include the newly-launched MoMoAdvance, an overdraft loan by MTN Uganda, the country’s biggest telco, and a subsidiary of the MTN Group — whose other affiliated companies have operations in southern, west and central regions of Africa.

MoMoAdvance was launched following a pilot program that started late 2020, and it allows MTN’s customers to overdraw on its MoMo (mobile money) wallet. Users will be charged an access fee of 2.75% of the amount borrowed, and a daily interest of 0.5% on the outstanding balance for a maximum of 45 days.

“MTN MoMoAdvance will offer the MTN MoMo customers the convenience of transacting beyond their MoMo wallet balance and pay back later… we believe that it will give them the convenience to transact seamlessly beyond their wallet balances during times of need then pay back later,” said MTN Mobile Financial Services, general manager, Stephen Mutana.

MoMoAdvance borrows heavily from a similar overdraft product, Fuliza, by Kenya’s biggest telco, Safaricom, which was launched in January 2019, and allows subscribers to complete transactions even when they have insufficient funds in their M-Pesa mobile wallets.

The overdraft services are based on a borrowing limit that is defined by a customer’s transaction history, while the overdrawn amount and accrued interest are deducted from the customers’ wallets anytime they are topped up. Fuliza has grown in popularity over the last three years among M-Pesa users, with Safaricom now giving out about $12 million worth of overdraft loans every day.

Fuliza is offered in partnership with KCB and NCBA, both of which are Kenyan banks with a regional presence. MTN Uganda also partnered with NCBA for its MoMoAdvance credit, and it is now likely that the bank will establish such partnerships in other East African countries Rwanda and Tanzania, where it already has operations.

The mobile-money overdraft products are providing a competitive edge to telcos as lending apps continue to enter African markets. The apps have stepped up competition for telco-owned mobile lending services like MoKash by MTN Uganda and M-Shwari by Safaricom – which allow customers to borrow short-term loans and pay back within 30 days.

Such innovative and easily accessible digital lending services have made credit accessible to a majority of people in Africa, who were previously cut out by formal financial institutions for lack of a banking history. However, most of the emerging digital lenders charge predatory interests, often attributed to the high-risk environment that they work in. This is as the regulatory environment gradually adapts to formalize the sector, eventually leading to better pricing for users while shielding the service providers from losses.