April 5th, 2022

Kenya’s progress on inclusive financial sector development over the past five years places Kenya at the front of the curve relative to its peers. But beneath its headline success story, falling financial health and growing disparities in financial usage point to underlying challenges that compromise the ability of financial inclusion to deliver on its promise for inclusive and sustainable growth.

Kenya’s financial inclusion success story has spurred by the unprecedented speed of mobile money uptake, which enabled millions of unbanked Kenyans to enter the formal financial market and catalysed a thriving tech scene that came to be known as the Silicon Savannah.

FinAccess 2021 estimated that 84% of the Kenyan population had access to at least basic financial services thanks to the near-pervasiveness of mobile money, a remarkable feat that is now considered a replicable fintech model by many other developing nations. The gains in financial inclusion over the years have helped Kenyans bridge short-term liquidity needs and reduced gender gap in access to formal finance, mainly driven by women’s uptake of mobile money for remittances and small business activities. However, while use of digital solutions has increased, cash still accounts for 80% of daily expenses in 2021, showing that there is still a long way to go.

Despite substantial progress on financial access, the data still shows a significant disconnect between access and its outcomes for financial health —defined as the capacity of individuals and households to manage day-to-day, cope with unanticipated shocks, and invest in future goals. For example, in 2021, despite 84% of the population having financial access, the financial health index finds that only 21.8% have the ability to simultaneously manage their finances to secure basic daily needs, be resilient to unexpected shocks and invest in their livelihoods and the future with only 0.4% of those who experienced a shock turning to insurance as their main coping device. This suggests that the supply side is still not meeting the needs of households and firms.

Improving incomes and quality of life for households and firms requires us to look beyond financial inclusion, and turn our attention as well to the role of finance in the wider economy. This involves the role of finance in catalysing inclusive growth and access to services at a sectoral and market wide level within and across value chains; as well as enabling macro-level reservoirs of capital and flows of spending to be more effectively directed towards inclusive development goals.

Much of this can be facilitated by an enabling policy and regulatory framework and an open and efficient financial market infrastructure. Various elements of what constitutes Kenya’s financial sector policy and regulatory framework has evolving slowly over time, reasonably developed in some areas while lacking in others. A series of key sector-wide transformational policy initiatives have the basis for far reaching change in recent years. Notably, the Government’s policy decision to leverage Kenya’s leadership in mobile money has provided the impetus for Kenya’s aspirations towards a digital economy. This has opened the opportunity for rapid transformational impact and an opportunity to accomplish a second leap forward.

On the flipside, Kenya’s sectoral approach to financial regulation has to a degree contributed to institutional gaps and overlaps in some areas including on regulatory coverage, market conduct, and innovation. As the scale of innovation and financial interconnectedness gathers pace, blurring the lines of regulatory jurisdictions, a cross-sector approach and close coordination in policy formulation and regulatory enforcement will be vital going forward.

Many of the building blocks that underpin Kenya’s financial market infrastructure, notably in payments and credit market, are already in place. However, frictions in their deployment, access and usage are holding back better and more efficient outcomes. Differential access to infrastructure such as the credit information system mechanism is thought to be impeding competition, disadvantaging small players and placing high entry barriers on innovators. In payments, acquiring infrastructure is still perceived as a source of competitive advantage even in the face of changing economics. To a significant extent, the status quo reflects the failure of policy to shift incentives in ways required to achieve better and more efficient outcomes. This calls for policy processes to be more strongly coordinated and to leverage the gains from collective efficiency through coordination within the right commercial context if the breakthrough required is to be achieved.

Macroeconomically, Kenya has made key economic gains over the past 5 years in that GDP growth and poverty reduction benefitted rural areas (pre-COVID); digital innovation and readiness remained high; Kenya attracted green, sustainable, start-up and patient investment; and diaspora remittances were remarkably robust and resilient. However, the period in review also saw a considerable weakening in public finances; deteriorating financial health among Kenyans; and weakening export performance. Economic gains were also disrupted by the interest rate cap; a prolonged election period in 2017; and COVID-19 reversed key economic gains especially in poverty reduction. Further, key structural economic weaknesses remain. The main ones being sluggish growth defined by economic dualism; import dependence; and macroeconomic reliance on an erratic agricultural sector which is increasingly affected and vulnerable to climate change shocks, which have become more pronounced.

Additionally, inequality remains a key economic reality with regards to income, access to quality social services (health, education and housing) and the persistent marginalisation of women and girls. While digital possibilities are strong in Kenya this space is defined by digital inequality and market concentration especially in the mobile money sector. Finally, despite GDP growth, there is growing informality in the labour force which presents job creation challenges for a growing population dominated by young people.

The COVID-19 pandemic has had diverse effects across the economy and while Kenya’s economy has demonstrated resilience compared to peers, the pandemic has hit some sectors very hard and highlighted the limits of Kenya’s growth model. The lack of formal social security has left vulnerable populations to rely on increasingly depleted savings and assets and leverage social capital to survive. The costs of the pandemic have fallen especially strongly on women, informal enterprises and children, and the World Bank predicts that 2 million Kenyans have pushed into poverty due to COVID-19. Thus, although economic growth has consistent, the somewhat underwhelming ‘elasticity’ of poverty with respect to GDP growth as well as findings from in-depth qualitative studies (such as the Kenya Financial Diaries) suggest that the benefits of this growth have concentrated.

The COVID-19 disruption marks a watershed moment for inclusive finance. In the effort to rebuild the financial markets and the economy more broadly, it will be imperative to rigorously harness as many lessons learnt as possible from the effects of the pandemic, as well as to identify underlying economic dynamics, opportunities, market gaps and prospective constraints to the future development of the country’s financial sector. This calls for concerted effort— a synergy across the entire financial sector—in building back better for a financial sector that delivers value for all Kenyans.

Download the Inclusive Finance for Sustainable Economic Development in Kenya PDF

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