Since 2016, we have seen rising levels of financial access and growth in the use of formal finance in Kenya, mainly driven by digital financial services. This includes expanding use of formal savings and loans and more frequent use of accounts.
At the same time, the use of formal finance to meet key financial needs, such as bridging liquidity needs, managing shocks and investing in the future is increasingly being met by informal and non-financial strategies such as borrowing from friends and family, working more, selling assets and cutting expenses.
However, the role of formal finance in solving these problem areas is at best, minimal, and in some segments, in decline.
What does this mismatch between growing usage of formal services and the relevance of formal finance in people’s lives imply for financial sector development?
To make more sense of this conundrum, we need to step back and look at the shifting context in which people’s financial lives and decisions take place. Data from the FinAccess 2021 survey shows declining levels of economic opportunity since 2016, with more people finding jobs from lower paid, unstable sources such as casual labour and/or becoming dependent on others; whilst fewer people are able to earn income from more lucrative sources such as employment and business.
The fact that people are not using formal financial services to manage the financial impact of this reality or to exploit economic opportunities suggests that Kenya’s financial sector, as a driver of growth and opportunity, is not well-aligned with the economic realities people face on the ground.
In this context, a key aspect of this story is the evolution of Kenya’s credit markets. Kenya’s low-value digital credit markets have seen aggressive levels of growth in volume as well as value over the past 10 years. Pioneers in this market were bank-based mobile lenders such as M-Shwari, KCB M-Pesa and MCo-op Cash, which are regulated banking products.
These were followed by the first non-bank digital app lenders including Tala and Branch which were, at the time, not subject to any form of regulation. About three years after this, there was an explosion of new entrants in the digital lending space operating outside the purview of formal regulation, some of whom pushed the envelope of what would be considered as acceptable practices – including debt shaming and publishing fraudulent apps.
Practices that adversely and unfairly impact consumers in credit markets continued to be the subject of concern in the more recent period. These included the use of credit bureaus as an exclusionary tool and the reporting of defaults on very low value loans that compromised the future access to credit for low-income users. This highlighted the extent to which the risks of debt were being borne by the poor as opposed to being responsibly managed by lenders.
In the last couple of years, we have seen a new credit product take the market by storm. Safaricom’s Fuliza, delivered in partnership with NCBA and KCB, is a mobile money overdraft product, which allows users access to instant credit to complete M-PESA transactions – somewhat akin to airtime credit.
The average ticket size for Fuliza overdrafts is KShs 345 (about $3). In the year to March 2022, the Fuliza product provided credit of over 500 billion KShs (over 4 billion USD). This value was more than 10 times that disbursed by KCB M-PESA and over 5 times greater than that disbursed through M-Shwari. In the same period, the number of customers increased by 16% to 7 million, this is equivalent to roughly 21% of the adult population.
Whilst this figure may be inflated by customers accessing credit through multiple SIMs, it still likely represents a large and increasing proportion of the population for whom this product is providing much needed liquidity. The success of Fuliza rests partly on the innovative nature of the product itself, partly on Safaricom’s reach in the mobile money market and dominance of low value digital payments, as well as its deployment of transactional data to quickly increase credit limits at the same time as managing and mitigating risk.
While Fuliza has rapidly expanded since 2020, we have seen a retraction of bank based and other digital credit products since the start of the Covid-19 pandemic. Uptake of digital app loans reduced from 8% to 2% since 2019, and the value of digital loans offered through KCB M-Pesa and M-Shwari went down by 60% and 33% respectively since April 2020. This has created a ‘missing middle’ for the higher value digital loans, which stimulate investment and support micro and small enterprises.
In this context, it is important to note that Fuliza’s success stems at least in part from Safaricom’s unparalleled access to information. Given the risks of lending into volatile and risk-prone markets, it is essential that lenders across the board have access to rich and granular information to assess risk and develop tailored solutions for hard-to-serve markets such as micro and small enterprises and women.
This shift is likely going to require aligning incentives and supporting stronger information systems through interoperable data systems, effective credit information systems and sharing of ‘data for development’, which the government is best placed to mandate. Interoperable, granular data sharing systems are an essential foundation for the development of a range of tailored solutions for different credit needs, providing an essential building block for growth.
At its root, what the Kenya story points to is not just the need for digital innovation to solve Kenya’s inclusive finance needs, but the critical nature of infrastructure, policy and public debate aligned to wider development goals which are both ‘responsible’ in terms of protecting consumers while also being ‘responsive’ to stimulating inclusive growth. Stronger positioning of financial sector policy in relation to inclusive growth will go a long way in reversing the trends we are seeing in Kenya’s declining income opportunities and financial health.
This blog was developed from a panel discussion on ‘The Widening Gap’ – Growing financial access, declining financial health’, led by Katherine McKee, with panelists Leora Klapper (World Bank), Amrik Heyer (FSD Kenya) and Pia Tayag (UNSGSA). The panel was part of the Responsible Finance Forum on June 30th 2022, convened around the question ‘Is innovation in financial services on a responsible path’? Click here to watch a recording of the panel discussion