Mobile Money Has Taken The Financial Services Sector By Storm

Kenyans are among the most avid users of mobile money services worldwide, with more than 80% of adults relying on mobile money services providers for money transfers. Mobile money services represent the largest financial services subsector in Kenya, with usage rates almost twice as high as those for banks. Mobile money services providers accelerated banks' efforts to increase digitization and gain market share, particularly in the payments space. For example, Kenyan banks partnered with mobile money services providers and other fintechs while developing their own capabilities and introducing products that are better suited to customer needs.

Innovation in Kenya also benefits from an open regulatory approach. While mobile money services do not require internet access, Kenya's patchy broadband infrastructure could impair the long-term penetration of data-intensive services.

Our TRIP Analysis Shows That Kenyan Banks Face High Disruption Risk

We base our views of disruption risk for Kenyan banks on our four-factor analysis of the banking system's technology, regulation, industry, and preferences (TRIP).

Industry: Disruption Risk | High

Mobile banking services provider M-Pesa revolutionized payment services in Kenya

Kenya's financial inclusion rate of 84% is the second-highest in Africa, just after South Africa with 85%. Mobile money services providers are key competitors of banks in Kenya, particularly in the payments space. According to the FinAccess Household Survey 2022, about 80% of the adult population used mobile money services providers for money transfers in 2022, compared with only 44.1% for banks (see chart 1).

Chart 1

Only 44% of adults in Kenya have a bank account.  Enter mobile money services providers, whose solutions are cheaper, more accessible, and more convenient than those of banks. Among them is Safaricom's mobile money service M-Pesa, which the company launched in 2007. M-Pesa transformed the payments space and accelerated financial inclusion in Kenya by enabling unbanked individuals to send, receive, deposit, and withdraw money with their mobile phones instead of relying on brick-and-mortar banks. M-Pesa transactions in Kenya amount to the equivalent of about $246 billion per year, compared with an average of about $65 billion for the top two Kenyan banks. We believe the successful inclusion of large parts of the unbanked population improved wealth and income distribution in Kenya in the past 20 years.

Chart 2

Mobile money services providers, which already dominate the domestic payments space, are making ground in the remittances subsegment because their cross-border money transfers are quicker and cheaper than those of banks.  Kenya's remittance inflows increased by 30.5% to approximately $4.06 billion over 2020-2022 and accounted for 3.6% of GDP in 2022. According to the Central Bank of Kenya's (CBK's) diaspora remittance survey from 2021, fintechs conducted 49% of total cash remittances via money transfer companies (25%) and mobile money operators (24%), while banks accounted for 24%.

In the lending space, fintechs mainly operate as digital credit providers (DCPs) by offering small digital loans to retail customers and small and midsize enterprises.  Accordingly, fintechs mostly compete with small- and micro-finance lenders instead of banks. Even though fintechs' footprint in retail lending is expanding, banks still have the highest market share.

Lending remains banks' turf, but the sector is overbanked and includes more than 50 banks.  Although their market share in the payments space lags that of fintechs, banks remain the leading provider of retail loans. For example, household lending accounted for an estimated 27.0% of the banking sector's loan book in 2023. Kenya's top nine banks are tier 1 and control 75% of sector assets (see chart 3). Foreign and regional banks hold about one-third of the banking sector's assets, not least due to recent acquisitions and licenses granted to foreign banks.

Chart 3

Banks adapted to the evolving landscape by developing their own mobile money services, agency banking, mobile banking applications, and digital payment solutions to better compete with fintechs and telcos.  Although Kenyan banks exhibit comparatively higher profitability metrics, their investments in IT infrastructure are in line with other markets in Africa. IT investments accounted for an average of 10% of Kenyan banks' operating expenditure at year-end 2023, in line with Nigerian and South African banks and below the 15% average of developed markets banks. Additionally, Kenyan banks increase their competitiveness by collaborating with fintech services, including M-Pesa, that enhance their digital products. For example, banks target M-Pesa users by offering customized bank accounts, which are integrated in existing payment systems and enable users to link their M-Pesa accounts with their bank accounts. We believe the adoption of an open banking framework will improve data sharing security protocols in application programming interfaces (APIs) and make personal data protection legislation more consistent. This will give banks and fintechs access to valuable customer data, enable them to personalize products, and potentially enhance their credit scores.

Regulation: Disruption Risk | High

The regulator's open attitude toward innovation contributed to financial inclusion

National policy initiatives to improve financial inclusion influenced the regulator's view on innovation and fintechs. In our view, regulators in Kenya embrace innovation and are creating a regulatory landscape that is conducive to change. The CBK's decision to license telcos in 2007 was a milestone in Kenya's journey to financial inclusion, as was the launch of mobile money services the same year (see chart 4).

Chart 4

The CBK is the primary regulatory authority in Kenya's financial services sector, providing licensing and regulatory oversight to banks and fintechs that offer banking and electronic payment services.  Other authorities overseeing fintech services and products in Kenya include the Capital Markets Authority (CMA), the Insurance Regulatory Authority, the Communications Authority of Kenya, and the Competition Authority. Fintech regulations are less strict than banking regulations, which contributed to the expansion of the fintech ecosystem, particularly mobile money services. While the CBK aims to encourage financial market development through innovation, it also puts increased emphasis on market discipline and appropriate risk mitigation. Mobile payment services come with anti-money laundering (AML) features, such as suspicious transaction monitoring and electronic audit trails. In 2022, the CBK broadened its regulatory scope to include DCPs, following DCPs' continued growth in retail lending and concerns about consumer protection, data protection, and financial integrity.

The CMA created a regulatory sandbox in 2019 to test innovative capital market-related products.  The sandbox aims to provide a platform for fintechs and capital market intermediaries to test the product concepts they intend to launch in the market. Since the launch of the sandbox, five companies have completed their product testing and exited the sandbox. As a result, solutions based on robo-advice, a mobile-based collective investment scheme, and an internet crowdfunding platform have been rolled out in the mass market. Seven additional companies are currently using the regulatory testing environment provided by the sandbox to test their blockchain-based platforms. These include regulatory reporting services, collective investment schemes, retail investments, and financial planning services.

Despite the increasing use of cryptocurrencies, Kenya has yet to implement a regulatory framework to govern its burgeoning crypto market.  In February 2024, the Financial Action Task Force added Kenya to its grey list, not least because of the country's deficiencies in mitigating risks associated with crypto assets. Although cryptocurrencies are not considered a legal tender nor an asset under the law in Kenya, over 4 million Kenyans (7.4% of the population) owned cryptocurrencies in 2022, according to digital currency payment company Triple-A. However, regulators are increasingly willing to introduce a legal framework for the licensing and supervision of virtual asset service providers (VASPs), and to engage with blockchain ledger technology and its implications on the financial system.

With the expansion of digital money and banking, cyber security risks have increased for users and services providers alike.  The CBK issued guidance notes on the matter to banks and payment services providers in 2017 and 2019. The notes addressed cyber security risks and, among others, outlined risk management and reporting requirements to the central bank. Data protection in Kenya is regulated by the Data Protection Act of 2019 and the Data Protection (General) Regulations from 2021. The Act provides a legal framework for the collection, use, and processing of personal data and is broadly in line with similar laws in the EU. Artificial intelligence (AI) is currently not regulated in Kenya, although discussions about a bill on robotics and AI are ongoing. Wider efforts include the African Union Development Agency's plans to develop an AI strategy for its members.

Technology: Disruption Risk | Low

Banks are leveraging their technological capabilities to stay competitive, despite the infrastructure gaps in Kenya

Kenyan banks continue to invest in improving their IT capabilities to meet changing customer preferences. However, customers' use of advanced technologies remains constrained by the infrastructure gap, but the country is committed to develop its network and communication infrastructure.

Kenyan banks improved their agility to meet customer preferences by leveraging their technology capabilities.  Despite the absence of an open banking framework, banks have used APIs to share data with fintechs, such as Safaricom. APIs also ensure easy money transfers between mobile money and bank accounts, and enable M-Pesa customers to open bank accounts and apply for bank loans. As a result, banks gained access to a large portion of M-Pesa customers. Nearly half of Kenyan financial institutions have already started migrating to cloud computing, which, once completed, will improve banks' ability to scale banking products and compete with fintechs, particularly in the payments space.

Mobile devices are widespread, but the internet infrastructure is still developing.  According to the Communications Authority of Kenya, the penetration rate is over 100% for mobile devices and 66.4% for smartphones. That said, access to broadband internet in Kenya remains low by global standards and compared with African peers. 44% of adults in Kenya have access to the internet, compared with 75% in South Africa (see chart 5). But even though costs and developing infrastructure limit the access to broadband, internet connectivity continues to improve. 4G coverage reached 97% of Kenya's population and is the most used network, at 82% of total mobile data volumes. 5G usage, on the other hand, remains at a low 0.3%.

Chart 5

Costs constrain internet access in a low-income country, such as Kenya.  Low income levels and high inflation are constraining factors in a country where the annual average income was $2,000 in 2023. The average cost for one gigabyte of mobile data in Kenya was $0.59 in 2023, while average inflation was 6.3% in the past decade. Additionally, affordability and availability of internet services vary between urban and rural areas. Urban populations benefit from better connectivity, while the adoption of fintech services in remote areas is limited to services with low data requirements. Unlike Nigeria, Kenya increased its access to the power grid to 75% of households in 2022, from only one-third a decade earlier. This underpins the stability of the country's telecommunication infrastructure.

Even though the usage and reach of 5G, which was rolled out in 2022, remains low, we expect access to broadband internet will improve.  According to the Global Enabling Sustainability Initiative's Digital Access Index, Kenya ranks 116 among the 157 countries in terms of access and use of new information and communication technology (see chart 6). Yet Kenya is making progress in developing its network infrastructure and systems as the government and the private sector continue to invest in IT infrastructure. Expanding the capacity of information and communication technology is among the government's key objectives under the Kenya Vision 2030 plan.

Chart 6

AI adoption has only just begun.  We think the emergence of rule-based chatbots, which enhanced customer experiences, marked the beginning of a widespread AI adoption in the banking sector, even though AI is not yet regulated in Kenya. Machine learning could accelerate and streamline the loan application process by automating document verification and credit scoring, detecting and preventing fraudulent transactions, and improving AML and compliance processes. Fintechs that operate in the digital lending space already use machine learning algorithms to assess loan applicants' creditworthiness and provide loans to underserved individuals.

Preference: Disruption Risk | High

Kenya's young and growing middle class drives the adoption of new and advanced technologies

Approximately 68% of Kenya's population are younger than 30 (see chart 7), while literacy levels are high, at about 83% in 2022. We believe Kenya's demographics accelerate the adoption of new technologies, particularly for payments.

Chart 7

Digital payments have become increasingly common in Kenya.  Since the country's young, urban, and growing middle class prefers digitally advanced services, banks now provide their services online and through mobile applications, while also offering mobile money services. The adoption rate in absolute terms and relative to peers is high as 76% of Kenya's adult population used digital payments over 2017-2021 (see chart 8). Kenya's cryptocurrency adoption rate is also among the highest in Africa and among the top 25 globally, according to analysis company Chainalysis. 7.4% of Kenya's population own digital currencies, mainly for investment and remittance purposes.

Chart 8

Kenya's rural population and informal sector have adopted simple mobile services.  According to the Kenya National Bureau of Statistics, 83.8% of the country's employed population in 2022 worked in the informal sector and indirectly contributed 20%-40% to Kenya's GDP. About 70% of Kenyans live in rural areas. We believe the informal sector and people living in rural areas require less data-intensive products because their access to broadband internet is somewhat limited. The high adoption of mobile money services is testament to this phenomenon as mobile money services do not require internet access, are easily accessible to the majority of the population, and cheaper to use, compared with banking services. Equally important, mobile money services increased the number of cashless transactions in the informal sector. Additionally, mobile payments are the preferred payment option in Kenya and most adults use mobile money services providers and money transfer companies to send and receive remittances from abroad.

Increasing digitization fuels cyber risk concerns, which can impair the adoption of new products.  Data theft and fraud will continue to rise with the expansion of digital services. The National Kenya Computer Incident Response Team – Coordination Centre (National KE-CIRT/CC) detected more than 187.8 million cyber security threats in 2022, up from 143 million in 2021. Bank fraud cases also increased, with losses incurred amounting to $5.7 million, a 90% rise from 2021 (see chart 9).

Chart 9