Empowering people and institutions via innovative banking products

The country hosts a range of existing mobile money products and innovative experiments, making it one of the world’s key laboratories for financial inclusion. With government support – specifically, from the Central Bank of Kenya (CBK) – development agencies and private-sector entrepreneurs continue to push innovations and study implementation methods. As a result, while Safaricom’s M-Pesa mobile money transfer service was a pioneering development and is hugely effective in helping Kenyans access financial services, it is far from the only method for boosting financial inclusion in Kenya.

The last major measurement of financial inclusion came in 2013 through the Financial Access Partnership. This group of government entities, financial services providers, development agencies and think tanks together fund research and development projects aimed at better understanding how to bring low-income citizens into the formal banking system.

Economic Impact

While it may not yet be clear what direct economic impacts financial inclusion would have on the Kenyan economy, such as how effective basic financial services are at lifting people out of poverty, what is clear from the FinAccess National Survey is that Kenyans are using the products available. The percentage who use no formal financial services at all has dropped from 39.3% in 2006 to 25.4% in 2013. The share using formal sector services, meanwhile, jumped from 27.4% to 66.7%, an important measure based on financial inclusion’s core assumption that consumers’ money is safer with regulated entities than non-regulated ones.

One indication of increased trust and the level of demand in markets is the performance of informal savings groups. These are traditional arrangements in which people commit to regular contributions to a pool of money, which can then be deployed for various financial purposes. The most common is a rotating arrangement in which each member takes a turn as the recipient of the lump sum amassed. Such informal schemes, traditionally a popular option for people who lack access to credit, have become less so since 2006, the survey showed. The most common reason cited for not participating was an inability to contribute; the second-most was a distrust of this unregulated activity.

Mobile Money

While money transfers have taken the bulk of the headlines, the mobile money concept has expanded into e-payments and is pushing further from there. M-Pesa was the initial mobile-money programme in Kenya and is now its most widely used financial service. In the mobile money segment, M-Pesa has a 72% market share, according to the Communications Authority of Kenya (CAK), the telecommunications regulator. Commercial banks have partnered with mobile network operators to roll out various mobile banking services like M-Shwari, an online savings-and-loan programme, and M-Kesho, a bank account service allowing transfers to M-Pesa, among others. M-Shwari uses a credit-scoring method based on an account holder’s voice usage data, payment of phone bills and savings account history. Launched in 2012, the operator had $2.35m in deposit accounts as of February 2014, by which time it had extended a total of KSh7.8bn ($88.9m) in credit, averaging 30,000 loans made per day. Of that sum, more than 100,000 loans totalling KSh241m ($2.7m) were in default, a default rate of 2.77%.

Widening The Circle

While other operators like Bharti Airtel have launched mobile money programmes, the regulator sought to open up M-Pesa’s platform to competitors. This has been achieved by providing for non-exclusivity of mobile money transfer agents in the National Payment System Regulations 2014, which were gazetted in August 2014. Essar Group, which in Kenya operates the smaller rival yuTelecom, announced that its assets were for sale in early 2014. Safaricom emerged as a partial buyer for some of these, but the CAK said it would not approve the transaction unless Safaricom allowed competitors to use M-Pesa as a platform. This was resolved and Safaricom and Airtel Bharti were allowed to proceed with the transaction with Essar.

Equity Bank, which was once a microfinance firm and is now the bank with the largest number of branches and agents, is planning to become a mobile virtual network operator (MVNO) through its subsidiary Finserve Africa, meaning it will lease network capacity from existing providers and establish its own service. “The choice for the banks is either to apply for a telecom licence as a mobile virtual network, or work with Safaricom,” said Marcel MballaEkobena, head of equities research for the East Africa Region at Nairobi-based CFC Stanbic Bank. “A growing number of banks are choosing to partner with Safaricom, but the advantage for the banks is that, as a bank, you can own anything, but a non-financial entity can't own more than 25% of a bank.”

Market Evolution

Because mobile money kicked off in 2007, just after FinAccess first began to survey the Kenyan market, the new data is a useful tool in observing how behaviours have changed since then. The biggest difference of course is in the number of mobile money accounts – there were none available in 2006, but by 2013, some 61.6% of survey respondents had one. But the use of current accounts at banks also doubled in that period, from 8.6% to 17.2%, and the number with debit cards more than tripled, from 6% to 19.7%. The percentage of people using multiple financial products, be they formal or informal, has climbed from 16% to 29%, indicating increases in both demand and sophistication, even though for most customers the service is limited to simply sending money.

The survey results do not, however, show increases in savings or access to credit over time. Accounts at banks and at savings and credit cooperative societies (SACCOs) slipped, in both cases from about 13% in 2006 to about 10% in 2013, although this may be partly due to the timing of the survey, which in 2013 was conducted near the end of the year while the previous one was conducted during the middle of the year – a difference which could be affected by seasonality in sectors like agriculture.

Still, usage of rotating credit and savings associations, in which people contribute to a pool at regular intervals and take turns receiving the ensuing lump sum, also dropped, from 30.4% to 21.4%. Just 3.6% of respondents reported getting bank credit in 2013, against 1.8% in 2006. For microfinance, the percentage rose from 0.9% to 1.6%, and use of credit from SACCOs had fallen slightly.

More Options

In the microfinance segment in particular there is a need to diversify, so as not to be caught between mobile-money platforms like MPesa, which deal in very small transactions that meet the needs of Kenya’s majority, and larger banks, which cater to better-off segments and businesses. One of the big challenges facing Kenya’s microfinance institutions is that they aim to both graduate their clients and retain them, as many customers opt to move on to larger commercial banks, Albert Ruturi, managing director of K-Rep Bank, told OBG.

Ultimately, while increased take-up of financial services is not consistent across the board, usage of mobile money platforms is growing strongly. The CBK’s annual report for 2012/13 – the most recent fiscal year for which full statistics are available – shows increases in four basic measures. The amount of money transferred through mobile money transfer platforms rose 22.7% to KSh1.69bn ($19.3m); the number of transactions climbed 27% to 643m; registered customer accounts rose 20% to 23.75m; and the number of agents in the field available to settle transactions jumped 68% to 103,165.

Agency Banking

One reason that platforms like M-Pesa and M-Shwari have been so popular lies in Kenya’s economic history. Money market and financial activity of all types have long been concentrated in the capital Nairobi, isolating those outside cities from financial services. Kenya’s population remains heavily rural, and according to the 2013 FinAccess survey, 55% of those Kenyans live more than 30 minutes away from the nearest bank branch. For 36% of them, the cost of making the trip would be more than KSh100 ($1.14).

The combination of M-Pesa and its thousands of agents to settle transactions is replicated to an extent by agency banking – a model in which agents offer basic banking products independent of the mobile money platform. These agents can be either people or businesses, such as supermarkets or other well-frequented retail shops, and in many cases perform their services for M-Pesa and for a bank. The agency banking model, where third parties offer services on behalf of the lender, was introduced in 2010 and is the cheapest option for customers,” James Mwangi, group CEO and managing director of Equity Bank, told OBG. “Technology-driven channels are also more convenient, as they cut down on costs and the time spent at brick and mortar branches.”