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Drive to deepen financial inclusion reaches defining moment

Kenya has made tremen- dous gains in deepen- ing financial inclusion over the past decade, particularly   through

mobile money platform M-PeSA. this notwithstanding, it is clear that financial inclusion for many has pre- maturely stopped at accessing basic savings and loan services. More still needs to be done, but not before there is a clear understanding of how recent developments in banking will affect the push to deepen financial inclusion. the capping of interest rates and parliament’s decision to shoot down proposals to increase banks’ core capital to Sh5 billion by 2018 will strongly define the pace at which financial inclusion deepens.

the number of Kenyans formal- ly included by the financial system has grown by 50 per cent in the last ten years. Financial exclusion, which is now down to 17.4 per cent, has more than halved since 2006. this is according to the 2016 FinAccess Survey by Financial Sector Deepening (FSD) Kenya. over three-quarters (75.3 per cent) of Kenyans are now formally includ- ed, up from 66.8 per cent in 2013, the report adds.

the outlook for the future of financial inclusion in Kenya is bull- ish. “It no longer seems fanciful to imagine that within less than a decade anyone who wants financial services will be able to have them,” said FSD Kenya Director, David Ferrand.

Much as financial  inclusion has deepened, there are still a lot of areas that need considerable improvement. SMes, for instance, still  find  it  challenging accessing long-term loans. Interest rates are also still prohibitive, and this is demonstrated by the rising number of bad loans. the recent cap on interest rates may reverse this situ- ation, but this will be considered in greater detail later on in the article. At this point, the primary con- cern is to first acknowledge that financial inclusion does not stop at getting people into the formal financial system. It is about pro- viding value and responding to their unique needs by   providing market driven solutions.

“We need to start shifting our approach. there are clear indications that the battle for basic access is being won. the important question now is how we can create greater value for people through financial inclusion,” said Mr. Ferrand.

Finding ways of creating more value for Kenyans in the formal financial sector means understand- ing the factors driving financial inclusion, those impeding it, and what can be done to maximize   on

these opportunities and mitigate the threats.



the key driver for financial inclusion in Kenya has been the success of mobile money platform M-Pesa. the platform, owned by telecoms firm, Safaricom, has leveraged on the deep mobile penetration in Kenya to rope in Kenyans in far-flung areas into the financial system.

Many banks have integrated their systems with M-Pesa in order to allow customers in areas where they lack physical branches to access services such as deposits and savings over the mobile money platform. the net effect is that millions who were previously excluded can now access basic financial services.

the impact of mobile money on financial inclusion in Kenya has not escaped the notice of policy makers and businessmen, including none other than Mark Zuckerberg, the founder of leading social media giant Facebook.

Zuckerberg, in his maiden trip to Kenya in September, observed that: “the reason why I specifically want- ed to come to Nairobi is because Kenya is a world leader in mobile money.” Mark Zuckerberg said that he was in Kenya to “learn about mobile money,” underscoring the role that mobile money has played in giving Kenya global visibility.

the use of mobile phones for the distribution of financial services did not come without a fight. Initially, lawmakers were viciously opposed to M-PeSA when it made its debut into the market in 2008. For obvi- ous reasons, banks also opposed the platform.

It was only the  central  bank  of Kenya (cbK) that stuck its   neck out to support the platform. the dividends of the cbK’s consistent support for M-PeSA are now being seen. Had   the   cbK   railed   against

M-PeSA, as the banks and law- makers had, the tremendous strides made in deepening financial inclu- sion over the past decade could not have been realized.

this underscores the importance of accommodative regulations. At the same time, it provides the per- fect stage to present and analyze some of the recent developments in Kenya’s financial sector. there have been a lot of shifts in the regulatory landscape in recent times, and all of them, to a greater or lesser degree, will inform the pace at which finan- cial inclusion deepens in Kenya.

No increase in minimum capital treasury had recently introduced provisions in the Finance bill 2016 that proposed the fivefold increase in banks’ minimum capital from sh1 billion to Sh5 billion over the  next

three years.

Parliamentarians, however, shot down the proposal, just as they did the last time similar proposals were brought to the House. the bid to amend the law and raise Kenyan banks’ statutory minimum capital was first brought up for discussion in 2013 by the National treasury, and has now been rejected for the second year in a row.

the proposal to raise minimum capital is premised on the notion that larger cash buffers will ward off future crises in the banking sector, following the failure of three banks (Dubai, Imperial bank and chase bank) last year.

Had this proposal sailed through, small banks would be all but wiped out. this is because  80 per cent of the liquidity in Kenya is held by 7 banks. this essentially means that increasing the minimum capital would leave the  remaining

35 licensed banks out in   the

cold. these smaller banks serve

niche customers, especially SMes.

For instance, Spire bank, which recently rebranded from equatorial commercial bank (ecb), has a very deliberate focus on SMes. over the next two years, it plans to increase the share of its lending portfolio dedicated towards SMes from 45 per cent to 65 per cent, according to media statements from the ceo, tim Gitonga.

cbK governor, Dr. Patrick Njoroge, has previously observed that small banks serve a niche, argu- ing that increasing minimum capital would leave a lot of niche markets unserved. this could reverse some of the gains made in deepening finan- cial inclusion, particularly from the perspective of increasing value and options for customers.

MPs decision to reject the provi- sions of the Finance bill 2016 that call for higher minimum capital will therefore give impetus to the drive to deepen financial inclusion. Moreover, it provides room for a risk-based approach to regulation, which will keep small banks in the game but instill stability by limiting the level of risks banks can assume to their capital base. this (risk-based) is the approach that has been embraced in the insurance sector.


Cap could go both ways

the recent cap on interest rates  at no more than 4 per cent of the cbK base lending rate (for lending) and at least 70 per cent of the cbK base lending (for deposits) could have varied effects on financial inclusion.

on one hand, it will increase the market’s demand for both loans and savings. this means that more people will be brought under the formal financial system or, for those already in it, become more engaged. businesses will be able to get capital at a cheaper rate than before, allow- ing them to fund expansion drives without having to cut back on   key

areas such as labor.

on the other, however, banks may hit the brakes on pursuing new business in order to adjust to chang- es in profitability. this is because the lion’s share of banks’ income comes from lending activity. cbK data put the income from interest on loans for banks in 2015 at Sh272.11 billion, accounting for 60 percent of the total Sh448.03 billion income made by the lenders during the year. A decline in rates means that banks will take a significant hit, leading to a decline in margins running into the billions. With the certain prospect that income will reduce substantially over the next year, banks will be forced to readjust—as any business in a sim- ilar position would. the most likely outcome is that banks will retreat from seeking new business and focus on the Pareto principle. that is, the 20 per cent of customers who bring in   80   per   cent   of   business.  this

20 per cent is in most cases large businesses, government and high net worth individuals. this means that, increasingly,  banks  may  side step


smaller customers such as SMes and


the loan caps may therefore swing either way as far as financial inclusion goes. the  argument  that it may deepen financial inclusion by mobilizing deposits and encour- aging loan uptake is underpinned by a lot of valid pointers. Similarly, the argument that it may impede financial inclusion is supported by its own compelling set of evidence. the best thing for now is a wait and see approach. What is certain is that the law will in the long-term have an impact—either positive or nega- tive—on financial inclusion.

thinking outside the box

even as regulation continues to shape the conversation on financial inclusion, it is important to think outside the box. technology has in the past provided out to the box solutions, and it can do so yet again. there are a growing number of micro-lenders who are leveraging on mobile platforms to give unsecured loans to those who would other- wise not qualify for a bank loan. Platforms such as branch and Saida have come out. Similarly, M-Shwari and  Kcb-MPeSA  are  also   taking

the market by storm.

For the vast majority of Kenyans struggling to make ends meet, these microloans are what take them from day to day. For instance, a small trader may run two concurrent loans. He may have an existing Sh2000 loan on M-Shwari and bor- row Sh3000 from Kcb-MPeSA to service the M-Shwari loan and sur- vive on the balance of sh1000. When his Sh3000 Kcb-MPeSA loan is due, he will borrow Sh4000 from M-Shwari, service the Kcb-MPeSA loan and survive on the Sh1000 bal- ance. He may live on this cycle indef- initely, all along increasing his loan limit for both platforms. this path may not be ideal, but it moves him from point A to b, and this is what often matters for the vast majority of

Kenyans who do not have stable jobs

and business.

the only problem with micro- loans is that they are short-term, usually due within a month or on the higher end three months. they therefore discourage long-term thinking and proper financial plan- ning. Similarly, scaling these micro- loans up presents somewhat of a challenge considering the annualized rate for the interest on these loans is flagrantly usurious. the annual rate for these microloans can be anything between 60 and 100 per cent, which is unsustainable.

It remains to be seen what the new regulations on capping interest rates will mean for these micro- loans. “the law does not speak about microfinance institutions. At the moment our mobile lending  is


currently a micro-business products

in the industry,” Kenya commercial bank (Kcb) Group ceo Joshua oigara said.

Meanwhile, the broader finan- cial services sector will need to pull together and adopt a broad outlook in order to get new solutions to financial inclusion. one increasingly viable route is including nonfinan- cial services such as counsel and consumer education in the suite of services offered to customers.

Nonfinancial services can include hard copy publications, web- site content, dedicated web based portals, as well as business clubs and other SMe focused events and competitions.

According to FSD, business clubs are a popular format through which to offer nonfinancial services to SMe


clients, where business owners can

gain access to business development advice and knowledge through sem- inars and networking events and meet other people in similar lines of business. In many cases these busi- ness clubs are open to all businesses and not dedicated to SMes per se.

training SMes to better man- age and develop their businesses is another form of nonfinancial service that deepens financial inclusion. In some cases, this training can com- prise more substantive and engaging training programs which address several aspects of developing a busi- ness.

Alternatively, they may comprise a series of shorter seminars that focus on specific business topics aimed at particular groups of busi- ness owners, says FSD.