Kenya, Prioritizing Banking Over Banks

Kenya is a leading example of how technology complements developing the banking and finance sector. While mobile banking is a path to financial inclusion, it is important to retain monetary control in the economy.

M-Pesa is renowned as one of the foremost initiatives in mobile-based money transfer, financing and microfinancing. It was launched in 2007 by Safaricom, is jointly owned by Vodafone and the Kenyan government. Since its launch, it has expanded successfully to six other African markets including Tanzania, Egypt, and Ghana. M-Pesa has revolutionized financial inclusion in Kenya. It has become a staple for the financial sector – used to pay salaries, book bus tickets and settle invoices in most of its markets. In Kenya, it has expanded into more advanced financial services including small loans, supply chain finance, insurance and a growing number of in-store and eCommerce services.

How can M-Pesa develop banking and finance?

In response to the under-exploited potential of Kenya’s economy and M-Pesa’s grip over part of the financial services system, Safaricom is planning to transform M-Pesa into a bank for the unbanked. Safaricom’s strategy is to expand M-Pesa rapidly in the seven African countries where it already operates as well as in new markets, such as Ethiopia, where it doesn’t have any telecoms operations. While Safaricom can achieve a first-mover advantage, it also potentially opens the market for competitors, though its accrued experience will be hard for new players to replicate.

Adding savings services

Safaricom is testing a new mobile savings service called Mali that adds a new dimension to the M-Pesa offering. Potential customers tend to have uneven incomes with periods of relatively good income interspersed with other leaner periods. Having a trusted platform that can be used to securely manage short-term savings can help both individual savers and support smoother flow of finances within the wider economy; previously savings would likely remain as cash that is unavailable to the financial systems.

Revolutionizing lending

Lending is an important function to ensure a smooth supply of money in an economy. It helps bridge the gap between those with excess funds and those who need financing. Since, the first M-Pesa mobile loan was issued in 2012, lending has been a core service of the platform, though not as well publicised as payments.

New players are entering the market, Carbon, for example is a Nigerian fin-tech start-up that has announced its launch in Kenya. Carbon wants to become a pan-African bank.

Kenya, and many other emerging African markets, have young populations that are highly mobile-communications oriented and also have a high propensity towards consumption. As a consequence they will likely rapidly adopt new solutions if the benefits are clear.  However, mobile banking, which has the power to close the financial exclusion gap does not imply giving up on traditional methods of banking. As mobile banking gains power, central banks will need to be agile in accepting the advantages that new technology brings, while being mindful of potential downsides to the economy in terms of money supply and financial security.