Is Safaricom’s M-Pesa ready and able to go it alone?

The Central Bank of Kenya (CBK) has revived efforts to separate M-Pesa, the mobile money service, from Safaricom, the country’s telecom leader. The move seeks to bolster transparency, accountability, and regulatory oversight in the financial sector. However, previous attempts at separation, proposed over two years ago, encountered substantial delays and the jury is still out on whether this renewed push to spin off M-Pesa will be any different.

At the heart of the delays, says Kamau Thugge, the CBK governor, is a substantial tax liability. “One of the factors delaying the de-linkage of M-Pesa mobile money from the rest of Safaricom is the tax liability which is fairly significant in the order of at least Sh75bn ($550m),” he told reporters during the Post-Monetary Policy Committee briefing in early April.

Central bank push for total separation

The Communications Authority of Kenya regulates Safaricom’s telecommunication business, while the CBK currently regulates the mobile money business. The central bank is pushing for total separation to enhance oversight. This comes even as Safaricom’s financial statements show that gross transactions on the M-Pesa platform reached Sh35.9 trillion ($267bn) in the financial year 2023, up from Sh29.6 trillion ($220bn) in 2022, Sh22 trillion ($164bn) in 2021 and Sh14 trillion ($104bn) in 2020. This trend underlines its growing significance in Kenya’s financial system and broader economy – and illustrates why the CBK wants to bring it under its full purview.

Thugge noted that the apex bank remains steadfast in its insistence on the separation, and will work with different stakeholders, including the National Treasury and Safaricom’s board, to find a feasible solution. “We believe there needs to be a separation and we believe the Central Bank should oversee M-Pesa and therefore we will continue to engage Safaricom and also the treasury to see how quickly this separation can be done.”

Securing a tax waiver is key

According to Safaricom chief executive Peter Ndegwa, “current tax law almost treats internal reorganisation as if there were eternal disposals.” This makes it almost certain that the taxman will make a claim if the de-linking of M-Pesa and Safaricom is successful.

CBK-led negotiations with the treasury and Safaricom’s leadership will therefore likely focus on getting the government – which controls a 40% stake in the telco, which is listed on the Nairobi Securities Exchange – to waive the tax liability. The challenge, however, is that the government under President

William Ruto has whittled down tax waivers in a bid to boost domestic resource mobilisation and cut the budget deficit.

If Safaricom is unable to get a waiver, the tax liability will likely be insurmountable, given the Sh75bn tax hit is nearly 50% higher than the Sh52.48bn net profit it recorded in the fiscal year ending March 2023. This comes at a time when Safaricom’s earnings have come under pressure due to its recent entry into Ethiopia.

While Safaricom’s overall growth has slowed in recent years amid maturity in the voice and SMS segments of the business, M-Pesa has emerged as a key driver of revenue, along with data. The company’s financial statements show that revenues from M-Pesa came in at Sh117.2bn ($870m) in the financial year 2023, ahead of voice revenue of Sh81.1bn ($603m) and mobile data revenue of Sh53.9bn ($400m). M-Pesa accounted for 37.8% of Safaricom’s 2023 revenue of Sh310.9bn ($2.3bn), underscoring its significance to the telco – and demonstrating why securing a waiver against the potential Sh75bn tax liability will be key for it to retain shareholder value. Besides the government of Kenya, the other major shareholder in Safaricom is international telecoms giant Vodacom, which holds a 35% stake.

Although it remains uncertain whether the CBK will be able to hammer a tax waiver deal with the government and push through with the proposed M-Pesa spin-off, it is clear that M-Pesa is pursuing new growth opportunities.

In 2021 Sitoyo Lopokoiyit was appointed as the managing director of M-Pesa Africa. Lopokoiyit was tasked with overseeing the continental expansion of the service, which boasts over 40m users across Kenya, Tanzania, Lesotho, Democratic Republic of Congo, Ghana, Mozambique, and Egypt. M-Pesa’s current operating structure means that if the CBK is successful in its push to separate M-Pesa from Safaricom, there will be limited disruption to business operations and service delivery.

Mega-digital bank

Analysts argue that M-Pesa, if allowed to operate independently, could establish a mega-digital bank that would act as a formidable competitor to established commercial banks, which number 39 in Kenya according to the CBK.

Once M-Pesa is regulated by CBK, it will no longer have to partner with other banks to offer financial services as it does at present. M-Pesa currently partners with NCBA Bank and KCB Bank through the Fuliza and KCB M-Pesa mobile loan products. The two commercial banks have been deriving a significant source of their digital revenue from M-Pesa linked products.

Traditional banks’ stake in digital banking

For example in the financial year 2021 Fuliza became the major earner for NCBA, representing 85.54% of the bank’s digital loans in the first half of 2022. NCBA’s recent financial reports show that Fuliza’s contribution to the lender’s performance has remained dominant, underlining the revenue dilemma the bank may face if M-Pesa decides to cut it out of the equation and pursue customers directly. The same applies to KCB.

“The majority of our growth is driven by digital loans, mobile loans like KCB M-Pesa, where lending is exclusively done using technology without human intervention,” Dennis Volemi, the chief technology

officer of KCB Bank Group, told African Business recently.

If M-Pesa were to operate as a mega-digital bank, this would open a new battlefront with commercial banks. M-Pesa, which is already a significant competitor to similar services under the jurisdiction of the Communications Authority of Kenya, would have free reign to go after banks’ customers if it operated independently.

While banks may stand to lose, fintechs could benefit from an independently-run M-Pesa. Some experts have long argued that an independent M-Pesa will enable fintechs to collaborate more effectively and offer a broader range of financial services. This includes seamless money transfers, savings accounts, and instant loans.

Opposing voices

But not everyone is sold on separating M-Pesa from Safaricom. Charles Nguna, MP for Mwingi West, believes the proposal should be shelved. “As a consumer of M-Pesa, as a shareholder of Safaricom and as a legislator I do not support de-linkage of M-Pesa from the rest of Safaricom,” he tells African Business.

The government under President Ruto has been supportive of the split, even during the campaign period when it touted the idea in its manifesto and in campaign rallies. “Effective immediately after forming the government, the administration will seek the break-up of Safaricom Limited into two distinct and separate entities with a mobile telecommunications institution under the direct jurisdiction of the Communication Authority and the financial institution under the jurisdiction of the Central Bank of Kenya,” reads its manifesto.

This plan appears to be materialising, but challenges still remain. From the risk of a crippling tax burden to possible legal obstacles and political opposition, the path to an independent M-Pesa is anything but straightforward. But if successful it could unlock benefits from M-Pesa in terms of its continental expansion and ability to offer more banking and financial products to Kenyans.