Riding on the success of mobile money platform M-Pesa, Kenya has become a hotbed for all things fintech. Tom Collins looks into what Africa can learn from the continent’s most diverse economy.
Positioned as one of Africa’s top- performing economies, growing at a predicted 6% this year according to the latest African Development Bank (AfDB) figures, Kenya has led the continent in financial inclusion for well over a decade.
According to the 2019 FinAccess household survey, put together in collaboration with the Central Bank of Kenya, Kenyan National Bureau of Statistics and FSD Kenya, 82.9% of the adult population has access to at least one financial product.
South Africa, Uganda, Rwanda and Nigeria follow close behind.
The Kenyan marketplace boasts approximately 150 fintech companies at any one time, with services ranging from digital credit entities to remittances and transfer platforms.
Financial inclusion, bringing the ‘unbanked’ into formal finance, is a key development goal in emerging markets.
The process involves finding innovative ways to provide financial products to traditionally risky segments like small and medium enterprises (SMEs).
However, as Kenya approaches almost total financial inclusion, the conversation changes from one of access to value: are the many financial products benefitting the population and is the sector well-regulated enough to ensure consumers are protected?
From a development perspective, financial inclusion is by no means the end goal.
The right environment
Kenya has been able to leapfrog in terms of financial inclusion due to its positive regulatory environment and attractive macroeconomics.
Wayne Hennessey-Barrett, CEO and founder of 4G Capital, a fintech mixing credit training with unsecured loans to achieve a 94% repayment rate, says Kenya’s “pro-business environment” has allowed financial innovation to flourish.
Compared to other African markets, Kenyan regulators made the policy framework necessary to breathe life into Safaricom’s fledgling M-Pesa in 2007. Thanks to its success, Safaricom is East Africa’s largest and most profitable telecommunications firm, contributing around 5% to Kenya’s GDP.
Innovating further still, Kenya is in the process of introducing a regulatory fintech sandbox which sets the conditions for early stage fintech regulation.
The Capital Markets Authority (CMA) will use the sandbox to “create a conducive environment to unlock the potential of the fintech space” and three fintechs have been admitted so far.
Along with the right enabling environment, financial products are easily adopted in Kenya’s near 60m population market due to a fast-growing middle class with a good level of financial literacy.
Rafe Mazer, an independent financial analyst, formerly at Financial Sector Deepening Kenya (FSD Kenya), says these basic metrics have turned Nairobi into a hub for start-ups and fintech companies looking to grow.
“The sector is huge and it grows bigger every day,” he says.
“You have clusters of talent in incubators like iHub and the Nairobi Garage, which have done a very good job of bringing talent and young entrepreneurs into the country.”
The next steps
Yet it could be argued that Kenya has been too successful.
The number of digital credit agencies in the marketplace grows daily yet the permissive nature of Kenya’s regulation often means that these firms are under very little scrutiny.
Some take advantage of those in need of fast cash.
Similarly, while the sheer number of credit agencies willing to lend has spurred the growth of small businesses, many users have come into debt distress in the absence of guidance from the government on how to borrow sustainably.
Kenya’s Credit Reference Bureau (CRB) has blacklisted 2.7m people for being unable to repay loans as little as two dollars.
This suggests that financial inclusion has downsides, if the products themselves are mercenary and unregulated.
Joshua Oigara, CEO of Kenya’s biggest lender by assets, Kenya Commercial Bank (KCB), boasting 17m customers across East Africa, tells New African that the products need to be “affordable, convenient and accessible” in order to serve the marketplace well.
The bank has embraced digital banking, collaborating with Safaricom to launch KCB M-Pesa in 2015, but maintains the trustworthy image associated with a brick and mortar bank.
“The most critical ingredient in banking is trust,” he says.
“This has cut through generations and will remain so even as we embrace more of technology in our efforts to more efficiently and more conveniently deliver to our customers.”
4G Capital, which has a presence in 92 markets across Kenya and is currently expanding into Uganda, says that “pure app” lenders who engage in very little due diligence before lending are creating problems for Kenyan consumers.
“The real problem isn’t just ‘inclusion’, it’s getting the right financial services to the point of greatest need in a way that benefits everyone,” says CEO Hennessey-Barrett.
“We make a point of not refinancing people already struggling to repay loans, and reject ‘blind lending’ or ‘lending to learn’, which creates credit bubbles among the vulnerable. This is not the way to go, and we hope to see wider industry behaviour improve.”
Along with the quality of the products available on the market, the breadth of diversity is also important; steering companies away from basic credit towards more sophisticated financial tools in areas ranging from insurance to credit to mortgages.
Ultimately, the responsibility lies with the government to create adequate consumer protection legislation while maintaining the enabling environment.
At the moment, there are practically no barriers to market entry for fintech companies which may do more harm than good.