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Kenya’s disruptive financial technology sector

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In mid-July, Kenya held the first financial technology (fintech) festival in the continent to acknowledge the importance that the sector plays. It comes against the backdrop of the challenges and the opportunities that are currently present in the sector.

The financial sector includes players such as commercial and microfinance banks, insurance companies and Savings and Credit Co-operative Societies (Saccos). But infusing this sector with technology has become one of the trends that has caught on. Not to be left behind are aspiring entrepreneurs in this field have flocked to university and entrepreneurial innovation labs such as Strathmore University’s iBiz and Nailab, respectively, to further develop their fintech skills so that they could address the gap of those who financially excluded.

“ One of the areas that recorded the highest amount of financial exclusion in Kenya three years ago was the North Eastern region at 52.2 percent. In 2019, only five percent of the people in the same area were excluded. During the same period, an area like Nairobi saw financial exclusion reduced from 4.2 percent to two percent,” explains the 2019 FinAccess Household Survey Report.

The report further observes that there are factors that have led to the growth of fintech in Kenya. These are the high uptake of mobile money services among the Kenyan population used to either conduct financial transactions or obtain credit, as well as the advances made by the government towards the Information Communication and Technology sector (ICT), states the report, which is jointly published by the Central Bank of Kenya, Financial Deepening Sector and Central Bank of Kenya. 

It such a positive stride in a short time that has seen Kenya be among the few countries in Africa whose majority of the population has access to formal financial services, at 82.9 percent according to the FinAccess report. But from a continental perspective, Kenya accounts for more inclusion. Its closest competitor is South Africa, which has a 90 percent formal inclusion rate. 

The Communications Authority of Kenya (CAK) further notes that the value of mobile money transactions conducted in the third quarter of 2018- 2019 financial period was Kshs 2, 121, 502,805, 332. Out of this figure, Kshs 1.6 trillion was from M-Pesa, the mobile money service that is owned by Safaricom.

There has also been a 2.5 percent rise in the number of internet subscriptions in the country, which have risen from 45.7 million in the third quarter of 2018, to 46.9 million in the first quarter of this year, notes the CAK report. A major contributor to this penetration is the infrastructure which consists of the fibre optic broadband connection that has been laid out by the government, such as 4G. The ICT sector was worth Kshs 390. 2 billion in 2018, reports the Economic Survey, up from Kshs 345.6 billion in 2017.

With such an infrastructure there is bound to be a ripple effect in the financial sector with the  the use of artificial intelligence (AI) being applied to the distributed ledger system, blockchain, further states the Ministry of Information, Communication and Technologies in its “Emerging Digital” report that was published this year.

A nascent sector, the government has also come in recently to enforce intellectual property rights by introducing the Regulatory Sandbox to protect fintech creative ideas in the country.

While M-Pesa is the undisputable trendsetter, it has encouraged other fintech innovations, such as crowd-funding platforms as well as data analytics, observes the Digital Economic blueprint.

To get a further insight into these factors that are encouraging the drive of fintech in the country, the East African Business Times talked with two experts: Dr Martina Mutheu, a lecturer from the University of Nairobi’s School of Journalism and Mass Communication, and, Dr Robert Odunga, a Senior Lecturer of Accounting and Finance from Moi University. 

In an interview held on August 2 2019, Dr Matina Mutheu says that she studied the field of M-Pesa when she was undertaking her Master’s degree between 2007 and 2009. She explains how the innovative mobile money service offered by the largest telecommunication provider having a market share of 62 percent in terms of mobile subscriptions, has been able to drive the trend in the fintech sector in Kenya. 

Telcom companies in Kenya have reaped big in this sector as they have also incorporated people who were financially excluded. The Communications Authority of Kenya (CAK) notes that are 32,062,254 million people who are actively able to transact through mobile money services in the third quarter of the 2018/19 financial period. Out of this figure, 29,066,448 million people are subscribed to M-Pesa services.

Dr Mutheu says that a mobile money wallet is where you virtually keep your money, such as M-Pesa. It is not in paper form.

She defines financial exclusion as the process of assuring access of timely and adequate credit needed by vulnerable groups. These groups include those that are either marginalised or those in low-income groups who earn less than $ 200 a day, depending on the level of poverty groups.

“ There is a minimal requirement that bank customers are required to open their accounts with, as well as have in the accounts. But for people, who even live in cities, such as Nairobi, but who cannot be able to meet such stringent conditions, they can take the option of banking on their mobile phones,” she says.

Dr Mutheu says says that exclusion may occur because the level of income of certain people may not allow them to make them to maintain a bank account as it would not allow them to bank their money regularly. Dr Mutheu says that these are people who income is “meagre and little” and that they may not be able to save the amount that is required on a monthly basis. 

There are also factors that make conventional commercial banking intimidating to such a demographic, says Dr Mutheu, such as slippery floors.

Another example is how mobile money banking, for instance, gives people the option for interacting with people who are able to speak the same language as customers, which is known as intermediation.

In such a case, if a customer fails to understand, an M-Pesa agent will be able to explain to a customer how it works to the point, and be able to assist them as well as on how to finalise their transaction. Mobile money is also accomodative and user-friendly, Dr Mutheu further adds.

She says that financial providers look at how much money they are supposed to make in a month. Dr Mutheu says that if someone is in the informal sector, say selling tomatoes, they will be able to pay everything and save money using mobile money banking.

Furthermore, it allows customers to bank at their convenience, which is unlike financial providers like Saccos, which require depositers to bank in a certain amount of money per month.

In mobile banking, a startup is allowed to save what it can get. With a phone, Dr Mulwa explains, the startup can be able to undertake their transactions: save, borrow, get guarantees and check balances. She explains that with a mobile phone, one can be able to provide end-to-end mobile based service for entrepreneurs. With it, one can register themselves and borrow using an M-Pesa app, remove their money and even get a guarantor.

In terms of ICT, Dr Mutheu says that one of the most important infrastructures that addresses financial inclusion is the mobile phone. The mobile phone is the tool for financial technology tool, that has the power to reach the unreached. It also works anywhere, says Dr Mutheu. It is also able to be accessible to people who are not able to access a lot of coverage.

On the issue of collateral, Dr Mutheu says that those people who are excluded from commercial banking may also lack collateral tools such as a formal title deed that banks may require as security. But, they may turn to their social networks, such as friends.

Dr Mutheu further says that reason that fintech in Kenya thrives is because of the convenience it offers entrepreneurs.

“Also for the bottom-of-the-pyramid entrepreneurs who work for more hours than conventional banking hours, they may not find time to bank their money, hence they turn to mobile banking as an option,” explains Dr Mutheu.

She says that exclusion also includes the convenience that commercial banks do not offer. Commercial banks ask their depositors to deposit Kshs 100 with them. But Ms Mutheu says that for mobile banking the lowest denomination can be as low as Kshs 50.

“M-Pesa is prevalent because of the subscription base and infrastructure. Safaricom’s infrastructure has extensive coverage based on the number of its outlets  and is almost in every single shopping center in the country. And the shops offer reliability, such that if a customer is not served well in one outlet, they can always go elsewhere,” she says.

Dr Mutheu says that she became a Safaricom dealer in 2008 because she had observed how it could be useful for entrepreneurs.

“ I figured out that Mama Mboga does not have the traditional security that is required, but only through her customers and friends. With their salaries, they can be able to bank on their M-Pesa function on their phones,” she says.

Dr Mutheu explains how the dealership relationship works with Safaricom. She says that the telecommunications provider signs contracts with agents or dealers. Safaricom then gives an agent or dealer an outlet, who in turn may give the former to their networks after conducting due diligence, in exchange for a 20 percent profit.

In an interview with Dr Robert Odunga, a Senior Lecturer of Accounting and Finance from Moi University on August 2nd 2019, fintech has come in to create financial inclusion for people who were otherwise locked out of the financial system because they have been locked out of conventional commercial banking as well as lack information and formal employment opportunities. 

“There are people who are excluded from  information about how the minimum requirement that they are supposed to bank with. But M-Pesa tapped into this population that was ignored by banks because it allowed to store their money using their Safaricom SIM cards. It created the prototype for other fintech companies,” he says.

Established banks such as Kenya Commercial Bank have caught on to this trend, allowing their customers to store money on their mobile money wallets, such as KCB M-Pesa. Mobile banking has also allowed more people to take up more credit, with 9.5 percent of the people who prefer this mode as opposed to 5.1 percent and 4.3 percent who prefer loans from Saccos and banks, respectively, states the 2019 FinAccess report.

But even as the use of mobile money credit remains low, the increase of non-performing loans has led investors to express concerns that this is one of the factors that could adversely affect liquidity in the country, states the Kenya Faces Rising But Manageable Rising Liquidity Pressures report by global ratings agency, Moody’s. Non-performing loans have risen from slightly over Kshs 4 billion nine years ago to stand at Kshs 12 billion in 2018.

“From a financial point of view, technology has been able to crucial in terms of managing finances, sourcing and spending, as well as managing risks in terms of handling cash, as well as finishing a faster way of transacting financial business,” Dr Odunga.

He says that technology has also enabled transactions through mobile banking to be done easily, in a faster way as well as be able to reduce the geographical distance. Dr Odunga adds that technology creates efficiency, saves time of doing transactions despite geographical disparities and also enhances surety.

“ The blockchain technology system known as Integrated Financial Management System and Information System (IFMIS) has been able to address the prevalence of fraud by ensuring that transactions that are electronically paid for are done do so against the budget. This leads to efficiency because only specific people who have access to the system can make changes to it,” he says.

Dr Odunga says that IFMIS is used by government agencies such as Kenya Revenue Authority (KRA), through its iTax platform.

He says that the fintech has further been enhanced by financial payment services that utilise technology such as M-Pesa services, Visa and Master cards. The government is encouraging fintech Technical and Vocational Education Training (TVET) so as to empower themselves so as to create employment and encourage entrepreneurs so as to encourage entrepreneurs to borrow and start their business.

Dr Odunga says that the government should be able to put mechanisms to ensure that all businesses in the fintech sector are captured in the taxation bracket.

 

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