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Mobile Banking: Kenya’s Development App

Safaricom has revolutionized the Kenyan banking system with M-Pesa, but growth still lies within the rural markets

The M-Pesa platform has revolutionized the mobile payments space in Kenya. The business concept has had far reaching effects in many other countries within and beyond Africa through copy-cat offerings. M-Pesa was started in 2007 by Kenya’s largest mobile network, Safaricom, and has grown to dominate the Kenyan market with early indicators of success in Tanzania. The service has shown significant adoption, as M-Pesa now boasts over 15 million users, conducting an average of 2 million transactions per day. Transactions fees have generated service revenue of $300 Million USD this year alone, up 22% from last year.

1_quote1The success of M-Pesa has spawned the introduction of new foreign competition in the Kenyan market, such as Airtel Money (India), Orange Money (France) and yuCash (India). As the industry grows and the competition increases their level of market penetration, the cost of cash transfer, currently $0.11- $3.71 USD per transactions, is becoming cheaper as rivals slash transfer rates and compete on cost . While beneficial for Kenyan consumers, this represents a disruption to the M-Pesa business. M-Pesa needs to consider extending its offering to maintain a high level of growth and engagement within the Kenyan market.

Reaching the People

M-Pesa’s innovative approach to cash remittances is what allowed the service to obtain such widespread adoption across the country. Originally based on a trend in neighboring African countries where people used cellular airtime as a proxy for money in financial transactions, M-Pesa allows registered users to transfer money via SMS. Money is loaded on an M-Pesa account by trading cash for M-Pesa’s virtual currency, called E-Float, with a registered agent, who are typically small local merchants.

M-Pesa has tens of thousands of authorized agents across the country to make transfers of E-Float for cash, and vice-versa. In comparison to the relatively lower amount of bank branches, M-Pesa has a much greater reach, including remote areas not serviced by traditional banking. Agents in turn get their own E-Float allowance by converting their own cash at authorized commercial banks. In this way, M-Pesa agents control the flow of cash between the various regions of Kenya, creating a vast network of middle-men that ensure cash flow across the country as needed. Once cash is deposited with an agent, it is held in trust. This means that Safaricom cannot use this cash to give loans out as banks and other depositary institutions do, which has essentially allowed M-Pesa to be approved by the Kenyan Central Bank (KCB). With this established ecosystem and its well engaged and large user-base, M-Pesa has the opportunity to expand its financial offerings and cement its position in the Kenyan market.

Banking on Kenya

With African lending institutions achieving some of the highest ROI’s in the world, Safaricom can use its position as a leading virtual currency provider to further its penetration into the Kenyan financial market. The banking sector in Kenya has far outpaced the growth of the general economy. While the Nairobi Stock Exchange (NSE) 20 share index grew 9.8% yearover- year, two of Kenya’s largest publicly traded banks, CFC Stanbic and Equity Bank, saw share price growth of 103% and 35.1% respectively over the same period.

Nonetheless, this growth may not be sustainable as the Kenyan banking system is showing signs of saturation. Specifically, this saturation is derived from the fact that the urban population is reaching its banking-need limit, and therefore further growth is expected to be slower. While this may seem to indicate reduced attractiveness of the banking industry for Safaricom, further analysis of the Kenyan economy reveals some key opportunities.


The Economic Divide

A majority of Kenyan GDP growth is derived from the prosperity of the urban areas of the country, primarily the capital, Nairobi. This is highlighted by a 2014 Ernst & Young report listing Nairobi as the 3rd most attractive city in sub- Saharan Africa to invest in. Rural centers in Kenya, however, have not received the same attention and still have significant potential for growth. For instance, Nairobi has only 6% of the population living below the poverty line. In contrast only 6% of the population lives above the poverty line in Turkana, a rural part of the country, leaving significant room for development.

The rural population has also been mostly ignored by the financial services sector. The fact that 77% of the Kenyan population remains unbanked, a large portion of which resides in rural areas. The major driver for growth in Kenya will come from the development needs of rural areas. Considering the state of the Kenyan financial services market, there is a disconnect between where the financial sector is focusing its efforts and the needs of rural economies. Safaricom could take advantage of its rural reach via its mobile platform to offer more financial services to this segment and reap the benefits of growth in rural Kenya by expanding into microfinancing options.


The Unbanked Opportunity

In rural areas, funds are transferred primarily by M-Pesa or a physical cash transfer. The individuals in these areas do not have access to credit or interest bearing deposits. Safaricom has previously identified the needs of rural M-Pesa customers and hopes to solve them with their newly launched M-Shwari services. M-Shwari, the result of a partnership between Safaricom and the Commercial Bank of Africa (CBA), is a savings account and short-term lending service for users of the M-Pesa system. M-Shwari allows users to make deposits into a bank account through M-Pesa, earn interest, and take out short-loans against their balance. The bank also reserves the right to freeze any deposit balance as collateral until the loan is repaid. Although M-Shwari provides an efficient method to earn some interest on deposits, it does not meet the needs for loans. These short-term, high fee loans are good for liquidity but do not provide sustainable financing to encourage economic development in these rural Kenya areas.


Currently as much as 60% of Kenya’s GDP passes through M-Pesa as E-Float. This is a significant amount of idle capital that is being tied up in Safaricom’s mobile payment system and held in trust. As such, the regular cycle of deposits is not being reinvested back in the economy with more standard banking models. This large, unused source of capital, mixed with the low supply of available credit accessible to rural Kenya, makes E-Float a great opportunity to be used in microfinance. Safaricom would be able to achieve an additional source of profit, while providing Kenyan society as a whole to increase capital investment and GDP output.

Floating the Capital

The biggest barrier to this is the legality of freeing up the capital in the system. As mentioned, currently all deposits are held in trust by the commercial banks. This was a requirement of the KCB for the initial implementation of M-Pesa. Safaricom has no claim or ownership to the capital currently held in trust so therefore it is inaccessible for use. Therefore, Safaricom would have to shift the structure of their transfers to be allowed to use current and future generated E-Float. Ultimately, this would require approval from the KCB to restructure the program.


The Kenyan government has in recent years relaxed many of its financial regulations to allow for increased financial accessibility for rural citizens. Through the country’s development program entitled Vision 2030, the country plans to increase banked Kenyans to 70%. Safaricom’s M-Shwari benefitted from these initiatives, as the Finance Act of 2009 was amended to allow banks to use third party entities to act as agents to offer depository services without being directly licensed as a depository institution. With this service, M-Shwari is able to accept deposits and use them to issue loans as an agent of the CBA. This is very similar to the desired use of the restructured M-Pesa, and its approval signals a positive precedent for the approval of M-Pesa’s restructuring.

Secondly, the use of the capital has a strong social benefit to Kenya, and aligns well with KCB’s initiative to increase the access of finances and banking services to Kenyans in rural areas. The benefit of investing a portion of this idle capital as micro-finance in the impoverished rural regions will have a major impact on the increasing economic development and lowering income disparity in Kenya.

Regardless, this potential restructuring is contingent on the approval of KCB. First Safaricom can shift M-Pesa to a model similar to M-Shwari, with users depositing E-Float rather than cash. This will allow them to act as an agent of the CBA or another commercial bank. This will have no operational effects to the consumer, as they will still be able to transfer their M-Pesa currency identically from a deposit than if held in trust. The problem is that this would require approval from the CBA and may forfeit too much control over their operations. The second option would be to create or purchase a small registered depository subsidiary that M-Pesa can facilitate or act as an agent on behalf of. This is a similar strategy taken by a Russian company called Qiwi. Qiwi is a similar service to M-Pesa launched in Russia in 2007 that offered money transfer services to individuals through kiosks and a mobile platform, but similarly did not deploy any of its capital. To increase their profitability and services to users, Qiwi incorporated a bank subsidiary in 2010, which vastly increased their profitability and accelerated their growth. Safaricom should follow in Qiwi’s footsteps to have the opportunity to offer microfinancing options.


Making Bank


Safaricom has all of the necessary components to successfully reach the unbanked rural Kenya: it has a strong distribution channel capable of reaching remote areas (developed through M-Pesa), brand value, an engaged user-base, and an imminent ability to unlock a significant amount of idle virtual currency deposits. With all these assets, Safaricom still needs to determine the best practice for deploying microfinancing options and how to deal with collateral. Safaricom should replicate the business model implemented by the Bangladeshi microfinance institution Grameen Bank to deliver financial services to rural Kenyans.

The Grameen Bank business model provides small loans to the impoverished without requiring a form of collateral. Instead, it builds a peer-to-peer lending system that takes a group-based credit approach and uses peer-pressure within a group to ensure borrowers repay their debts. This peer-to-peer lending model has been tried and failed in developed, capitalist markets. However, the social culture in Kenya is ideal for this business model due to existing collectivistic social ideals of placing the group over the individual. The proactive mindset of the people enforces selfgovernance and debts are repaid to avoid social consequences, thus ensuring low default rates as seen in Bangladesh.


Given that Safaricom has the largest number of cell towers in the country and the strongest coverage, they have immediate access to close to 90% of the country’s population. Segmenting this group into discrete communities allows Safaricom to effectively implement the peer-to-peer lending model. With funds allocated on a community basis, the overarching social forces will work to ensure a high rate of repayment, and will create a diversified loan portfolio with a manageable risk profile.

Safaricom already has established connections to their customers through their highly successful mobile products, creating substancial brand value and customer loyalty. By expanding its M-Pesa offering to better serve the rural market through peerto- peer microfiance loans, Safaricom can continue to improve its position in Kenya. They stand to create considerable value for Kenya’s empovrished rural population, while expanding their own revenue base and capturing significant growth potential in rural financial services.