Albert Nsengu M

In the city of Nairobi, the tallest building stands noticed, so is the Financial Gap.

Financial Inclusion in the Digital Era

The Role of Mobile Money in Enabling Digital Loans post 2020

           Mobile phone technology has been successful and has spread fast in Africa. This technology has enabled sub-Saharan African countries such as Kenya to experience tremendous social and economic change. Cashless modes of transactions and payments are common in Kenya. In Kenya M-PESA, a Safaricom (owned by VODAFONE) product, is the leading mobile pay system. Other digital transactions and payments include Airtel Money, T-Kash, Timiza, Tala, Equitel, Branch, Lion Cash, and Coop Cash amongst others. Through these digital platforms, Kenyans are able to save, borrow, and transfer money in addition to paying for goods and services.

           Before 2007, Kenyan citizens used a mixture of informal and formal channels in transferring money and few had access to banks and other financial services (Burns, 2015). There was no robust, trusted and well-established network to complete financial transactions. At the time, 83% of Kenyans aged 15 years and above had access to mobile phone technology (Gwer et al, 2019). The pioneer of digital payments and transactions in Kenya is M-PESA. The M-PESA program was introduced in March 2007 to assist in increasing financial access by most Kenyans without bank accounts. As of December 2019, M-PESA had over 37 million active customers (Vodafone, 2020). Depending on monthly M-PESA transactions, subscribers are subject to M-SHWARI, FULIZA, and KCB MPESA loans that are directly deposited to their Safaricom network sim-cards.

           M-PESA and other digital platforms have resulted in remarkable access to financial services in the country. Access to formal financial services rose from 67% in 2016 to 83% in 2019 (Gwer et al, 2019). Financial access gives a prized inference on the value that financial products and services contribute to the economic lives of users. The average number of transactions per customer is relatively low in the Kenyan banks. Traditional bank accounts usage dropped to 30% in 2019 from 32% in 2016 (Gwer et al, 2019). A visible constraint to access and usage of the traditional accounts is cost. Digital payments facilitate Kenyans to reduce the cost of access and usage of the traditional banking system. Most Kenyans receive digital loans on their mobile money providers especially M-PESA. While a few banks such as Equity have a network provider, Equitel, through which Kenyan citizens can access digital loans, most lenders including Kenya Commercial Banks, Tala, Branch. iKash, Okoloea, Zenka, Kashway, OPesa, Timiza owned by Barclays Bank, send their loans to qualified Kenyans on M-PESA.

Development of Digital Loans in Kenya and its Role in the Economy

           According to the World Bank’s Financial Index (2014), financial inclusion in Kenya was high compared to countries with similar governance, mean age of women at marriage, education and per capita income levels. The expansion of traditional banking channels for local banks is a contributor to the rapid financial inclusion. After the 2007 introduction of M-PESA operations, subscriptions to mobile transfer services and mobile cellular phone subscriptions and subsequent partnership with companies such as Western Union, transfer value grew to Ksh. 1,465 billion or about 20.8% of GDP in 2016 from Ksh. 388 billion or about 12.2% of GDP in 2010 (International Monetary Fund, 2018).

           Cross-border remittances, banking and mobile commerce after Safaricom partnered with supermarkets in 2012, I&M Bank in 2011 allowing transactions between Visa Pre-Paid Card and M-PESA accounts and the most significant for this study is the Commercial Bank of Africa partnership that launched M-Shwari. Through M-Shwari, Kenyans could now open and operate M-Shwari bank accounts through M-PESA without filling out any form or visiting banks, save money and earn interest, and be eligible for loans of a minimum of US1.00 or KSh. 100 anytime (International Monetary Fund, 2018). MCo-op Cash and KCB M-PESA mobile bank accounts partnering with Co-operative Bank of Kenya and KCB Bank respectively were introduced in 2015. While real time gross settlements remain the main method of payments in terms of value, mobile payments have grown rapidly dominating payments volume. By 2016, mobile services’ total value for the industry was at 47% of the GDP which translates to Ksh. 3.3 trillion (International Monetary Fund, 2018).

Digital Access to Loans impacts on Poverty Reduction, Mobilized Savings and Smooth Consumption

           Cook and Mckay (2015) found that M-Shwari users who are disproportionately poor and living in urban settings use the platform as a line of credit to increases access of loans in the future while they save for short-term needs. During the study, the it was noted that within the past 90 days, 79% of active depositors had borrowed money to cater for short-term cash flow needs. Ouma et al (2017) and Gurbuz (2017) found that the digital financial services have a massive impact on saving likelihood and the saving amount.

           Over a 3-year household survey data collection in Kenya, Jack & Suri (2014) found that mobile money non-users’ household consumption reduced by 7% due to economic shocks while mobile money users’ consumption was not affected. Mobile users (richer households mostly unaffected) were bettered by access to a greater credit and remittances sources and the remittances and credit they received. Through the digital access to remittances and credit, household-risk sharing was increased in Kenya because, in the face of shock, mobile money user households are likely to receive a larger total value of credit or remittances and a larger number of credit or remittance transactions (Jack & Suri, 2016).

           Greater access to finance and credit has the potential to increase higher growth as costs of corporate finance reduce. Lower interest rate spreads, lower collateral and lower costs of entry can increase corporate sector output and credit availability (International Monetary Fund, 2018). Dabla-Norris et al (2015) studied small and medium-sized enterprises (SMEs) and concluded that asymmetric information (the costs incurred by banks in determining a borrower’s creditworthiness), limited commitment, and participation costs (fixed costs of credit) are the three economy’s structural features that determine financial inclusion in a general equilibrium model. In Kenya, participation cost reduction impacts the highest on GDP at 0.67% (Dabla-Norris et al, 2015). In two studies Morales and Yang (2006 and 2013) find that most inclusion policies introduced by Kenyan authorities and private lenders to lower the cost of participation, encouraging banks to penetrate the SME through wider branch networks, agency banking and digital platforms had a positive impact on financial inclusion growth and increased credit access.