Technological disruptions have greatly affected the Kenyan financial services industry in recent years. Mobile money is by far the most significant, as underlined by data from the Central Bank of Kenya (CBK), which indicates that the value of mobile transactions has grown at a CAGR of 66.3% since inception in 2007 from Sh14.8b of transaction volume, to Sh4.0t of transaction volume in 2017.
Online banking has also gained traction and majority of banks are now aligning their business models towards online channels as opposed to the traditional brick and mortar.
The most recent innovation to shake up the industry is digital lending, which has been, to some part, a response to the slow growth in private sector credit following the capping of interest rates on loans offered by banks.
Globally, decentralization of currency has been a topic of interest, pegging the question on whether these emerging digital currencies have a place in the industry.
What are the technological innovations that will define the trajectory, in long term, of financial services? To help us unpack this, we shall look at Recent significant technological adoptions in the Kenyan financial services industry; Emerging technological trends in the industry and their expected impact and; Outlook on the extent to which technology will shape the future of the industry
Recent significant technological adoptions
Local financial services sector has undergone the following major technologically driven transformations:
Mobile money is an elect ronic wallet service that allows users to store, send, and receive money using their mobile phone. Mobile money was introduced in 2007 through Safaricom’s M-pesa platform. Since then, the service has managed countrywide adoption. According to September 2018 data from the Communications Authority of Kenya, Kenya’s mobile penetration rate (total number of active sim cards to total population) stood at 100.1% with the number of active mobile money subscribers being 64.5% of the population. By transaction value, the Central Bank of Kenya (CBK) reported a total of Sh4.0t exchanged through mobile money in the year 2018, equivalent to 45.3% of the country’s GDP.
Online/internet banking is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the institution’s website or Smartphone application. The online banking revolution has caused a restructuring of the traditional banking model, as highlighted below:
Among the top three banks by market share, on average, mobile and internet banking is the most active transaction channel at 54.0% of the total number of transactions. This has resulted to low branch activity, which averages 8.5% of the total number of transactions. Banks view technological innovation as means of improving efficiency and reducing costs. The downside of this however has been the negative impact on employment, following branch closures and mass retrenchments. According to the CBK, the banking sector’s efficiency, measured by the number of deposit accounts per employee, has increased by 100.5% from 770 in 2014 to 1,544 in 2017, driven by a decline in the number of staff in the banking sector by 16.3 % from 36,923 in 2014 to 30,903 in 2017, against an increase of 67.8% in deposit accounts. The charts below highlight the trends in the efficiency score and the number of staff in the banking sector.
The digital lending space has grown at an accelerating pace in recent years. Since the launch of the M-Shwari platform in 2012, a vast number of platforms offering these services have emerged. Most recently, Safaricom launched Fuliza, an overdraft facility that enables M-Pesa customers to send or complete mobile payment transactions even if their M-Pesa balance is below the required amount. In the first week of its launch, more than one million customers signed up and borrowed Sh1.0b, and after one month of operation had borrowed Sh6.2b. This growth in digital lending can be in part, attributed to the following;
Implementation of the Interest Rate Cap: The interest rate cap came into effect on September 14th, 2016, limiting the borrowing rates to 4.0% points above the Central Bank Rate, currently at 9.0%. It was implemented following concerns raised by the public regarding the high cost of credit in Kenya, which was viewed as a hindrance to credit access by a large segment of the population. Implementation of the law, was therefore, expected to lower the cost of credit and increase access to credit. The result however, has been a substantial decline in credit growth, as indicated by a declining private sector credit growth, which has declined to 2.4% in December 2018 compared to a 5-year average of 11.8%, and prior to the rate cap legislation, the 3-year average was 11.8%. Majority of individuals and SME’s have been locked out from accessing credit, as banks have preferred to lend to the government as opposed to the public they perceive as high risk.
High Mobile Penetration Rate: According to the Communications Authority report for September 2018, Kenya’s mobile penetration stands at 100.1%. Data from the Jumia Mobile report estimates Smartphone penetration to be approximately 45.5% of mobile users.
The above factors result in: (i) a gap in credit supply, and (ii) a channel to deliver the required services to the target market. Digital lending addresses this issue by providing instant unsecured loans through mobile platforms. The entire process beginning from customer registration, loan application, underwriting, disbursements and repayment can be fully automated. As such, various start-ups are now betting on this approach to disrupt traditional models of lending.