The Kenyan financial sector regulator recently released a regulation on financial technology commonly known as fintech lending, which stipulates rules in the provision of lending services based on information technology.This fintech-based lending will not only play an important role in supporting the Kenya’s financial inclusion program that the government has recently promoted, but will also become an important alternative for unbankable individuals and micro, small and medium enterprises to access funds to start and develop their businesses.According to the data available, only a quarter of Kenyans have access to banking services and less than ten percent borrow from formal financial institutions. While there are almost 2 million micro, small and medium enterprises in Kenya, which provide over 10 million jobs in the country. Most of them cannot get the financing they need to expand.Conventional micro credit and the government-subsidized micro lending scheme micro credit program have not been able to boost up young entrepreneurs and micro, small and medium enterprises on a massive scale. Despite the Kenyan government’s guarantee, banks are still reluctant about lending to these potential borrowers, mainly due to administrative issues.Inexperienced aspiring entrepreneurs and micro-scale enterprises often have neither sufficient collateral to secure a bank loan nor the financial track records for lenders to evaluate. General constraints also remain a challenge that has hindered people in rural Kenya to get access to traditional bank services. Bank loans are provided by only a small number of banks, which rely on their limited branches, thus financial access remains pretty low in remote areas.Fintech lending could definitely address these issues. Through leveraging technology, fintech makes capital available to the underbanked and unleashes potential economic activity, creates job opportunities and generates growth in a more inclusive manner.Fintech-based lending can potentially fill Kenya’s existing financing gap. In addition, peer-to-peer lending and crowdfunding fintech particularly is tapping into the micro, small and medium enterprises, of which only 10 percent are currently bankable according to official data from Kenya financial regulators. Giving them access to initial or additional funding will definitely enable them to launch or to expand their business.With its less bureaucratic style, fintech also offers innovative methods to evaluate its prospective creditors. Some apps, for instance, comes up with an alternative for creditworthiness evaluation for traditionally unbankable population. No doubt the smartphone apps offering such services in Kenya evaluates daily mobile activities of potential borrowers, from simply making frequent calls to paying bills on time, to determine their reliability.Once a potential borrower is approved, the money will be delivered digitally in minutes. Smartphones are inevitably enabling capabilities in the lending industry. With Kenya’s rapid mobile penetration and growing online commerce, fintech lending increases financial accessibility to the unreachable and accelerates financial inclusion.
Interestingly, the early introduction of mobile banking has meant that much formal retail banking activity in Kenya has tended to be non-physical in nature. Before then, many large populations in Kenya were considered unbankable, and so did not have access to formal banking services at all.This situation has changed in recent years as the price of phones has decreased substantially, so enabling large numbers of the unbanked to buy them. For example, Kenya’s mobile phone population grew to 39 million in 2015 and this rapid growth has continued since this initial take-off. This growth in the use of mobile phone use has extended to some of the least developed areas in Kenya. For example, the mobile phone population in North Eastern Kenya expanded from 10,000 in 2005 to 1.9 million in 2014, according to a recent report.Many Kenyan banks began to use mobile phones to reach these large unbanked populations and one of the largest mobile banking markets now exist in Kenya.As a result, Kenya has pioneered several aspects of mobile banking that may, in some form, be copied by developed countries. The first is the use of agents. For example, in Kenya, banks use agents in rural areas, equipped with mobile phones and card readers. Customers can make small deposits, withdrawals and money transfers through these agents instead of visiting bank branches which has greatly expanded the size of the retail banking market. Non banks in Kenya have begun to enter the market to provide mobile money and compete with banks. Known as the e-money, issuers are often dynamic and innovative, capable of expanding their business practices to squeeze market control from banks. Banks in Kenya have already learned to reinvigorate their activities to compete with e-money issuers, and a couple of them like Kenya Commercial Bank and Commercial Bank of Africa have been successful. At this stage, many of the features of mobile banking in Kenya are different to developed countries like Finland or Denmark or Australia. Most obviously, in such countries, banks tend to dominate the mobile banking market rather than e-money issuers like with the case with Safaricom, the largest and most profitable mobile network in East and Central Africa. Kenya’s mobile banking market may start to encounter some of the regulatory issues faced in other countries. Several may be particularly relevant. The first is the limit to which electronic money should be permitted to operate. According to Kenya’s regulator, the definition of electronic money is defined as a form of credit to be exchanged between customers, and so is not money per se. However, a recent US state department report noted that it has become a virtual currency that operates outside of the regular banking system and can be easily used by criminals. The regulatory issue to which electronic money, as a currency, should be permitted to operate outside of the formal banking system remains a thorny topic for stakeholders in the country. It is clear that Kenya’s mobile banking will change the face of banking. As this form of banking develops, banks and regulators in the East African nation have a challenge of managing the risks involved with rise of mobile banking. The more sophisticated the platforms get, the harder the regulators work but providing guideposts on regulatory issues and how to deal with them is important going forward. Whether those in power retains it in the upcoming general election which is less than two weeks away, will be held on August 8th or those clamoring for it will change the existing regulations remains to be seen. What either of them can’t do is to stop the growth of mobile banking, its unstoppable.