Is fintech in Kenya too successful?

Kenya’s fintech revolution has helped the country achieve near total financial inclusion, but are consumers really benefiting and are they adequately protected? Tom Collins investigates.

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 as financial inclusion leaders on the continent. 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, has been a key development push in emerging markets as the process involves finding innovative ways to provide financial products to traditionally risky segments which will ultimately drive economic growth through well-financed small and medium enterprises (SMEs).

Feeding into the UN’s 2030 sustainable development goals (SDGs), financial inclusion is expected to act as an enabler for many of the objectives including eradicating poverty, ending hunger, achieving gender equality and the economic empowerment of women.

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 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 an 94% repayment rate, says Kenya’s “pro-business environment” has allowed financial innovation to flow. 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 easily find a home in Kenya’s near 60m market due to a fast-growing middle class with a good level of financial literacy who are able to make easy payments through mobile money.

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 startups and fintech companies looking to do business.

“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.”

Downsides of success

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, and some take advantage of those in need of fast money.

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 $2. This suggests that financial inclusion has some downsides, if the products themselves are mercenary and unregulated.

Trust is crucial

Joshua Oigara, CEO of Kenya’s largest bank, Kenya Commercial Bank (KCB), boasting 17m customers across East Africa, tells African Banker 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 bricks and mortar bank.

“The most critical ingredient in banking is trust,” Oigara 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 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 personal finance to education to agriculture.

No barriers to market entry

Ultimately, the responsibility lies with the government to create adequate consumer protection legislation while maintaining the enabling environment.

Independent analyst Mazer says there are practically no barriers to market entry, which could be problematic.

An expert on consumer protection and financial inclusion, Mazer suggests that consumer protection departments need to be established along with increasing the power and budget of the regulator to ensure that all companies entering the market are thoroughly checked.