Kenya 9 in 10 Kenyans are financially included largely thanks to M Pesa

Kenya’s population is increasing at a rate of around a million additional people a year, with a total population standing at 45 million in 2013. Although significantly more ‘banked’ than its neighbours, only 74.7% of its population has a bank account. This is compelling when comparing it to the 93% of Kenya’s population who are registered with a M-Pesa account, a mobile phone-based money transfer, financing and microfinancing service, as of 2013. It’s proof of high levels of financial inclusion in Kenya.

M-Pesa is a service created by Safaricoms, the leading mobile network operator in Keny which is 40% owned by Vodafone. A M-Pesa account allows consumers to make transactions to other individuals or businesses, pay bills, borrow, save with their mobile device. It does not require the internet or a bank account. Deposits can be made through a bank account or with cash at a M-Pesa terminal.

The service is well-used, all who registered for a M-Pesa account, 60% are actively using the service. Moreover, M-Pesa accounts for 70% of all electronic transactions in Kenya; however, in value terms it equates to a mere 2.3% of the total. One explanation of this may be due to the service being hugely popular with the unbanked population with a total 75% of them using an M-Pesa account by 2011. Currently, this figure is likely to be even higher as many Kenyans do not earn enough to warrant opening a bank account. Hence, this mobile payment service is the perfect alternative to financially engage this segment of the population.

With such large uptake and little competition, Visa announced that it will try to penetrate the market with its own version of a mobile payment service called mVisa. Unlike M-Pesa, it will offer free withdrawals of funds, charge free payments to merchants and cheaper overseas usage costs. Eric Musau, an analyst with Standard Investment Bank, described mVisa as “a very good proposition” that could mount a challenge to M-Pesa. “It’s the first workable solution to challenge M-Pesa and it’s up and running,” he said. “They’re not going to be a threat overnight but I expect them to give Safaricom a run for their money.”

This innovation is partnered with a growing economy in Kenya at an estimated rate of 5.9% this year, up from 5% in 2016, and one of the fastest in the sub-Saharan region of Africa.

Kenya has managed to stay afloat economically despite the fall in oil prices which accounts for around 12% of its exports. Kenya makes up for the fall in price of oil with higher prices in other commodities that it exports such as tea, coffee and other horticultural products. Nigeria however, the wealthiest African economy, has around 90% of its exports account to its rich oil reserves and hence, is feeling the hit of decreasing prices more strongly resulting in a contracting GDP.

The banking offer, in comparison to M-Pesa, is not that consumer focused. In September 2016, Kenya’s central bank decreased its benchmark interest rate a second time this year by a further 50bpt to 10% from 11.5% set in July 2015. It comes in an effort to ease monetary policy to overcome a slowdown in private sector credit and to support further growth in the country. In addition, the Kenyan President Uhuru Kenyatta has decided in August that interest rates charged to consumers by the banks need to be capped. This policy is against the ideas of the central bank and finance industry but is said to be in favour of the consumer. The cap prevents banks from charging more than 4% above the base rate for loans. Furthermore, banks must pay an interest on any deposits equal to 70% of the set base rate. The President said “Despite having one of the most efficient and effective financial markets, Kenya has one of the highest returns-on-equity for banks in the African continent. Banks need to do more to reduce the cost of credit and ensure that the benefits of the vibrant financial sector are also felt by their customers.” The banks opposed the policy due to non-performing loans (NPL) creeping back up to previously disastrous levels. Back in 2003, NPL stood at 34.9% of all loans which gradually declined to around 5% in 2011 but it has been increasing since, up to a current level of 8.4% in June, which is still high comparing to the UK’s NPL, at 1.4%.

M-Pesa: The game changer

In summary, Kenya has one of the largest banked populations on the African continent while those unbanked can benefit from M-Pesa to gain access to a range of financial services. This compares favourably to larger economies, such as Nigeria that struggle when it comes to financial services, with just 44% of the population being banked and only 4.6% of its population using a mobile device to make payments compared to Kenya’s 93%. Fees for transactions, however, for small payments on M-Pesa are relatively high in Kenya at around 10%. So, if mVisa can compete on fees for lower value payments, it stands a strong chance of gaining traction in the market. Hence, Kenya is likely to witness a vibrant competition and a potential further increase in the financial inclusion of its population.