Why more African countries should consider Fintech: the case of M-Pesa in Kenya

Sub-Saharan Africa suffer from significant levels of financial exclusion, in particular concerning bank-based activity. Traditional banking have failed to comprehensively understand their customers’ needs and to assess financial risks, resulting in less accurate financial service provision. The positive outcome of the introduction of M-Pesa on the Kenyan economy and consumers, however, shows that other sub-Saharan African economies may want to consider introducing fintech.

M-Pesa, a mobile phone-based money transfer, financing and microfinancing service for those without a bank account, was first launched in 2007 in Kenya by Vodafone for Safaricom, the country’s largest mobile operating network. Apart from everyday money transfers, paying bills and receiving salaries, M-Pesa has expanded into insurance, supply chain finance and small loans. In an unprecedented manner, it has become the key to introducing credit scores for millions of locals. 40% of Kenyans now use this service, and, in 2019, M-Pesa facilitated a quarter of Kenya’s gross domestic product. By moving Kenya away from being a cash-based society, M-Pesa decreases the probability of petty crime whilst facilitating tax collection.

Traditional banks fail to provide sustainable models for rural African communities because of their incapacity to deliver modernised financial services. Not only are traditional banks urban-centric and unable to reach remote areas, but even if they were to, due to high levels of poverty and an acute lack of infrastructure, it would be unsustainable for traditional banking institutions to operate there. This market failure further marginalises the world’s poorest communities, plunging them deeper into poverty by preventing them from actively participating in the economy. The implementation of M-Pesa in Kenya, however, proves a reversal of this trend: customers register at authorised agents which are able to reach isolated areas, and deposit cash for electronic money. This has increased per capita consumption in Kenya and lifted 2% of Kenyan households (194,000 in total) out of poverty according to a report by the United Nations.

Since the introduction of M-Pesa in 2007, private credit bureau coverage has increased in Kenya from none to 36.4% (figure 1).  Lesotho corroborates the existence of a potential correlation between the implementation of M-Pesa and formal credit scoring: after instituting M-Pesa in 2013, private credit bureau coverage increased from 0 to 15.8% today. Uganda and the Republic of Congo have yet to benefit from M-Pesa, with only 6.9% of the Ugandan population having a formal credit score and an insignificant number in the Republic of Congo. The growth of formal credit scoring in Kenya has had a powerful impact, because it allows small businesses and start-ups access to loans that used to have prohibitive interest rates. Ranging from 31-36%, these interest rates inhibited the growth of young enterprises which otherwise could have generated more jobs.