4G Capital Group, a technology financial inclusion company, has partnered with the Consultative Group to Assist the Poor (CGAP) on developing a new tool. The tool will identifies financial stress and helps protect low-income consumers against over-indebtedness.

The two will also work with Social Performance Solutions to co-create a pilot scheme that researched and tested a client financial stress Early Warning System. By incorporating financial stress monitoring into risk management processes, EWS enables an early assessment of and response to borrowers experiencing financial stress to help reduce the risk of over-indebtedness. The pilot aims to establish a market monitoring tool that can be shared with regulators and digital lenders across Kenya.

In the pilot project, the effectiveness of specific indicators identified that correlate to financial stress. This was done through client interviews, using 15 key questions via the 4G Capital call centre before a broader survey of five questions via SMS to existing 4G Capital borrowers. 4G Capital staff also conducted field surveys during the course of regular loan officer visits.

4G Capital and CGAP have seconded the implementation of this tool, noting that it can be applied across the microfinance industry internationally once it has been tested on different business models. As the tool allows filtering of data by customer segments, sectors, products, and regions, it can be leveraged by portfolio management at individual institutions and for tracking consumer issues at a market level.

“Through our partnership with 4G Capital and SPS on this pilot scheme, we hope to make it possible to estimate financial stress before borrowers, lenders, and the overall financial sector is harmed. While the indicators used to test this tool are specific to Kenya, many jurisdictions collect sufficient data on financial stress and coping strategies to develop similar early warning tools that can help lenders and supervisors pre-emptively deal with over-indebtedness,” said Juan Carlos Izaguirre, who is leading the pilot scheme at CGAP.

Over the coming few weeks, 4G Capital and CGAP will share findings from the pilot testing about the extent to which existing stress levels predict future customer behaviour. Furthermore, CGAP will host a roundtable discussion for digital lenders, regulators, and supervisors in Kenya to engage in a larger discussion about how to take this tool forward to affect positive change across the sector as a whole.