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Lending has come a long way, evolving over millennia to meet the ever-changing needs of borrowers and lenders alike. In ancient Mesopotamia, circa 3000 BC, lending involved the borrowing of seeds with the promise of repaying through a future harvest, with collateral during this period taking on some unconventional forms. In fact, the government sometimes canceled all debts owed by people to maintain societal peace and stability.
In ancient Greece, lending became more commonplace, with interest being accepted as a reasonable return for the risk taken by lenders. Despite the economic benefits, philosophers like Plato and Aristotle expressed concerns about the ethical implications of lending, fearing potential social instability and exploitation of the less fortunate.
The 19th century witnessed the introduction of lending practices to America, exemplified by institutions like the Philadelphia Savings Fund Society, designed to assist working-class citizens in achieving stability through savings and homeownership.
Fast-forwarding to the 1900s, notable changes occurred, including the establishment of credit card companies such as Visa and Mastercard in the 1970s, expanding personal credit beyond geographical limitations. While credit evaluation attempts began in 1841 with the founding of a credit reporting agency by Lewis Tappan, the modern “credit score” as we know it today emerged in 1989 with the Fair Isaac Corporation (FICO).
Lending in the Modern Era
In modern times, advancements in technologies such as Artificial Intelligence and Machine Learning have presented financial institutions with an opportunity to automate their lending process. This automation spans from customer onboarding and loan application through credit scoring, all the way to servicing, with the goal of streamlining operations while effectively managing risks and security.
It’s no wonder that studies project an upward trajectory in the coming years for this alternative lending model. According to Research and Markets, the alternative lending market in the MENA region is expected to grow from USD 3.5 billion in 2022 to reach USD 12.2 billion by 2027, with a compound annual growth rate (CAGR) of 24.8%. Notably, KSA and UAE are anticipated to be among the leading markets. In this blog, we discuss what financial institutions and fintech investors need to know to build successful consumer lending solutions in MENA.
A Recipe for Implementing Smarter Lending Solutions
Lending Strategy
Effective implementation of smarter lending solutions hinges on a well-defined strategy. While it is technology that is fundamentally redefining how financial institutions deliver digital lending, it cannot replace the foundational importance of a clear strategic direction. Technology only serves as an enabler to augment a clear strategy.
Strategy outlines how the financial institution will leverage technology, data, and innovative approaches to enhance their lending processes and deliver more intelligent lending services. Central to this strategy is prioritizing customer experience. McKinsey’s global survey emphasizes that top-performing organizations differentiate themselves by emphasizing customer engagement and innovation.
Some of the key strategies lenders are adopting for smarter lending, include:
- Extending Accessibility to the Underserved
Implementing digital onboarding solutions tailored to customers in remote and underserved regions ensures that geographical barriers do not hinder access to financing. Simplifying account opening enables remote customers with access to the internet, which is widely available across the world, to easily access credit and better their lives.
- Moving from Reactive to Proactive Credit Risk Management
Real-time data analytics can transform credit risk management from a reactive process to a proactive one. By continuously monitoring borrowers’ job and salary changes, as well as analyzing their overall financial behaviors and backgrounds, and alternative data sources lenders can identify potential red flags. This empowers lenders to take timely actions, such as adjusting credit terms or offering financial counseling, reducing the possibilities of delinquency.
- Embracing Empathetic Lending
Understanding the reasons behind loan repayment failures is crucial. Keeping track of factors such as income fluctuations, poor financial planning, or ineffective communication enables lenders to adjust repayment schedules, offer financial education, and provide flexible payment options that align with borrowers’ circumstances. This approach fosters trust and encourages responsible borrowing.
- Psychometric Analysis for Risk Assessment
Leveraging psychometric analysis, which assesses borrowers’ personality traits and psychological characteristics, can offer a novel way to evaluate creditworthiness. By analyzing non-traditional data points, like social media activity and online behavior, lenders can gain insights into borrowers’ potential repayment behaviors.
- Smart Contract-backed Microloans
Implementing smart contracts on blockchain technology allows for the creation of microloans with automated and self-executing repayment terms. Borrowers can access small amounts of credit for short durations, enabling financial inclusion for underserved populations and fostering a culture of responsible borrowing.
- Alternative Data Integration for Credit Scoring
Incorporating unconventional data sources, such as utility bill payments, rent history, and even academic achievements, can create more inclusive credit scoring models. This opens up lending opportunities for individuals without extensive credit histories and enhances risk assessment accuracy.
- Behavioral Biometrics for Fraud Prevention
Incorporating behavioral biometrics, such as keystroke dynamics and touch patterns, into lending solutions can enhance security by continuously monitoring user behavior for signs of fraud. This innovative approach provides an additional layer of protection against identity theft and unauthorized access.
Lending Technology
Once you have a strategic blueprint, the next essential pillar is leveraging the right technology. Technologies such as AI, ML, RPA, Big Data, and Cloud computing offer numerous possibilities, when harnessed effectively. These technologies empower lenders to intelligently automate the entire credit lifecycle, from the moment a customer applies, through processing, underwriting, approval, documentation, disbursement, repayment, monitoring of the borrower’s credit profile, to renewal/extension options and full payment.
Research indicates that adopting such an approach throughout their lending process can save lenders approximately 30% of the costs incurred versus a traditional lending approach. Additionally, customers have a stronger preference for digital lending solutions because of the efficiency and personalization in their borrowing journeys. In fact, statistics indicate that digital lending is 71.2% more efficient than traditional lending. Below, we discuss these technologies independently and their contribution to smarter lending:
- Artificial Intelligence (AI): AI enhances lending with accurate risk assessment models and fraud detection algorithms and provides personalized customer experiences through chatbots and virtual assistants. A 2022 survey on how lenders utilize AI in credit risk management shows that artificial intelligence can help in prioritizing early warning detection signals (47.5%) and risk profiling (15.8%) along other use cases as shown below.
- Machine Learning (ML): ML algorithms analyze vast amounts of historical data to fine-tune credit scoring models, resulting in more accurate risk evaluations and personalized lending decisions. Personalization is particularly important, as statistics show that 90% of customers have a high preference for personalized experiences, yet 94% of financial institutions are yet to deliver the such experiences.
- Big Data Analytics: Enables lenders to gain deeper insights into borrowers’ financial behavior and patterns, leading to more informed credit assessments and tailored lending solutions. By understanding customer behavior, lenders can identify customer needs and preferences, personalize their experiences, and foresee trends or behavior changes. This approach enhances customer loyalty, satisfaction, and drives business growth and profitability.
- Cloud Computing: Cloud computing empowers lenders to create adaptable systems that swiftly adjust to market dynamics and customer demands. In contrast to on-premises solutions, cloud-based systems also provide enhanced scalability, enabling lenders to expand their operations more efficiently and cost-effectively. Statistics indicate that financial institutions leveraging cloud technology can reduce costs by 30% to 50%, making it one of the key reasons 43% of banking leaders globally are considering cloud adoption.
- Blockchain: Among the many benefits, blockchain ensures ease of compliance in digital lending by providing a secure and transparent ledger of all transactions. This allows lenders to track and verify loan agreements, ensuring that they comply with regulatory requirements. Additionally, blockchain enables the automation of compliance processes, reducing the risk of human error and ensuring that all transactions are recorded accurately. According to research by Zipdo, utilizing blockchain can save digital lenders about 50% on compliance costs.
- Cybersecurity: A cybersecurity report by Boston Consulting Group highlights that banking and financial institutes face a significantly higher risk of cyberattacks, being 300 times more likely to be targeted than other companies. Given that digital lending relies heavily on data exchange, robust cybersecurity measures are crucial to protect sensitive borrower information, prevent data breaches, and ensure compliance with regulatory standards.
Engaging Partners
Today, partnerships are fundamental in building successful next-gen lending solutions and are an essential factor that contribute to mutual growth. These collaborations are not only beneficial for the lender in the present but also integral in shaping the future of lending, as innovation is dynamic. Building partnership ecosystems has shown to be a particularly beneficial strategy for profitable neobanks, and a similar strategy can yield big benefits in the lending industry.
FinTechs
The global Financial Technology market has been expanding exponentially in recent years, with the Middle East and North Africa witnessing their fair share of growth. In 2022, the sector secured a whopping $1.1 billion in funding, representing around 33% of the total funding for budding companies in the region.
Amid the debate, “coopetition” emerges, where cooperation meets competition. Rather than regarding Fintech’s solely as competitors, a symbiotic relationship can be forged. Fintech’s bring extensive innovation and technology to the financial landscape that traditional lenders, who hold customer bases, regulatory experience, and financial resources, can use to augment their offerings.
In the MENA context, fostering a sense of coopetition between lenders and Fintech’s stands as a crucial foundation for building smarter lending solutions. Collaborations harnessing Fintech’s’ agility and innovation alongside lenders’ established reputation and resources could pioneer groundbreaking advancements.
Telcos
Data collected by telcos can be instrumental in building smarter lending solutions. Details about calls, text messages, internet usage, location, and prepaid top-up information collectively create a strong impression of the customer’s spending habits and credibility during the underwriting process.
The tenure of the customer’s mobile number and activation date can help lenders identify frequent changes and possibilities of fraud. In addition, information such as the accounts linked to the phone number, for instance, eCommerce platforms, banking apps, insurance apps, messaging and social media apps, etc., help in identifying whether the number is used as a primary or secondary number.
Non-Financial Players
Partnerships with non-financial entities, such as e-commerce platforms or gig economy platforms, open doors to fresh opportunities for data-driven lending. Gaining access to transaction histories and behavioral patterns of borrowers from these platforms enhances credit scoring models and risk assessments.
Moreover, such collaborations enable lenders to tap into untapped market segments and extend their reach to underserved customers. This mutually beneficial partnership creates a win-win situation for all parties involved.
Regulators
Balancing the need for consumer protection and market stability with healthy competition and innovation is a universally recognized challenge in digital finance. While regulatory frameworks are essential to ensure fair practices, they should not impede the emergence of novel solutions that adhere to the required standards.
The solution lies in addressing this regulatory dilemma through collaboration. By bringing together financial institutions, regulatory bodies, and fintech innovators, we can bridge the gap and establish an environment where digital lending can flourish responsibly. Such collaborative efforts can facilitate the development of innovative products and services that not only meet regulatory requirements but also push the boundaries of lending practices.
This partnership-driven approach aims to strike a harmonious balance that safeguards consumers, fosters competition, and fuels innovation in the credit industry.
Building Smarter Consumer Lending Solutions with Codebase Technologies
As we have discussed, the trajectory of success in digital lending is founded on strategy, technology, and partnerships. At Codebase Technologies, we understand these aspects and have heavily invested in them to develop truly smart lending solutions.
Starting with strategy, our team of savvy business analysts works closely with your financial institution to understand market intricacies, your objectives, and your roadmap. We believe that a well-defined strategy is the compass that guides us toward innovation and excellence, and this sets the stage for success.
Coupled with strategy is our technological prowess. Our Digibanc platform serves as the foundation of our innovative solutions. An integral component of our platform is Digibanc SmartRules, which enables instant credit decisioning, empowering financial institutions to reduce their processing time by up to 95%.
But it doesn’t end there. Our technology stack comprises a range of sophisticated modules, such as digital onboarding, regulatory reporting, omnichannel experiences, data analytics, and mobile wallets, delivering exciting lending experiences to customers.
Whether you are an established financial institution, challenger, start up or lender seeking transformation, Codebase Technologies empowers you to confidently navigate the landscape of smarter lending.
Our integrated approach, supported by a comprehensive technology stack, ensures that your solutions are not only innovative but also adaptable to the ever-evolving financial landscape. Let’s chart a course toward lending solutions that are more inclusive, future-ready, and aligned with your vision of progress.
Tagged:
- AI, mena
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Tamer Al Mauge, Managing Director MENA
A highly qualified Business Management Professional in the Financial Technology field with over 18 years of experience within the financial technology banking, retail and IT Industries, Outsourcing Sectors including exposure to Global Markets. Having worked for a world leading organization “NCR Corporation” for more than 12 years Middle East and Africa.
