Digital Financial Inclusion – Kenya and Nigeria Case Studies

Digital banking

August 1, 2020//-Digital financial services are both broadening and speeding up financial inclusion in many African countries – a key factor in accelerating  economic growth.

In this study, Rafiq Raji looks at their development in Kenya and Nigeria and notes the differences in their impact

Financial inclusion, access to financial services or the process of ensuring the ease of access to and usage of financial services by all, is being brought about faster and quicker in Africa through digital financial services (DFS).

Digital financial inclusion varies by region and country on the continent – with East Africa, especially Kenya, in the lead. Other regions on the continent are playing catch-up.

In West Africa, Nigeria recently approved guidelines for payment service banks (PSBs) for the provision of mobile money-type services, albeit they would not be able to provide loans.

In East Africa, Kenya specifically, where digital mobile lending has already become advanced, there are now concerns about predatory lending practices.

According to the World Bank, “Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.”

In this regard, the World Bank is championing the Universal Financial Access by 2020 (UFA2020) initiative, which aims for all adults – a third of whom do not have a basic transaction account – to have “access to a transaction account or an electronic instrument to store money, send payments and receive deposits as a basic building block to manage their financial lives” by 2020.

As they address identified challenges to financial inclusion, such as access, cost and complexity, it is believed mobile financial services (MFS) – the provision and usage of financial services via mobile phones, which are now ubiquitous, relatively cheap and easy to use – would bring about greater financial inclusion.

However, as much of the academic literature is focused on payments and remittances and early stages of the MFS value chain, like readiness, rather than for example savings & loans and later value chain stages and impacts, the jury is still out on that conclusion.

Digital banking

In this article, we take a critical look at the key regional economies of Nigeria and Kenya, the former where a new policy on payments was recently enacted and the latter where there are matters arising in digital credit extension.

Predatory digital lending in Kenya

In Kenya, 83% % of the population are now engaged in the formal financial system, up from 27% in 2006. Mobile money, financial innovation and supportive government policies have been acclaimed for this remarkable success.

The development of Kenya’s pioneering M-Pesa mobile money service, launched in 2007 and a huge factor in this remarkable feat, illustrates the point. For instance, it enjoyed a carte blanche telecoms-led regulatory regime at the outset.

In addition, just a year after launch, Kenya’s 2008 electoral violence made the service the only channel for payments to rural areas and elsewhere. An adaptable customer-centric business model and emotive marketing have also been central to its success.

The value of Kenya’s digital payment system has been underscored during the current Covid-19 lockdown and social distancing. Payments of salaries, utility and shopping bills, including from street hawkers, have been easily accomplished without the need to break distancing regulations.

Unsurprisingly, pre-Covid, Kenya was also enjoying a boom in digital mobile lending, the ideal next stage after the more than average coverage of payment needs.

According to the 2019 FinAccess household survey, about 14% of Kenyan adults have taken a digital loan, via mobile banking or an app, at one point or another.

There have been some downsides, however. With loans easily accessed at the press of a button, what should ordinarily be good news on financial inclusion, is increasingly becoming a source of concern.

Digital loan defaults are on the rise – almost 30% of total defaults, according to the recent FinAccess survey. When asked why, 26% of mobile phone banking loan defaulters gave a lack of understanding of the terms as a reason, with another 28% saying they failed to meet their obligations because interest or repayment rates had gone up. For digital app loan defaulters, 7% and 12% gave these reasons respectively as well.

Accordingly, the Central Bank of Kenya (CBK) has raised concerns about the seemingly predatory practices of digital lenders, as mostly poor customers, who are charged exorbitant interest rates, increasingly find the debt burden beyond their capacity.

Digital loans are the most used type of loans in Kenya, with 8 loans per borrower on average; significantly higher than the 1.2 loans per borrower for commercial banks. Digital borrowers attribute convenience as being the reason for their patronage. That is despite their trust for digital banking being no greater than that for traditional banks; which is very little.

The demographics of Kenyan digital borrowers are distinctive: male (60%), urban (67%) and young, aged below 35 (62%). Digital borrowers reportedly borrow more, and sell assets, or cut expenditure on crucial needs to repay loans at significantly higher levels than traditional borrowers.

However, even as financial inclusion has been increasing, to much acclaim, the financial health of Kenyans has been decreasing, with only about a fifth of adults believed to be in good financial health.

Additionally, regulatory authorities find mobile lenders are increasingly used as conduits for money laundering. To address such concerns, the Central Bank and Finance Ministry have been planning a law to sanitise the system.

But is there not a risk that in taking such an approach, the elements that have made the Kenyan financial inclusion revolution remarkable may be hamstrung, perhaps causing a reversal of fortunes of some sort?

For Kenya, the supply constraint on financial inclusion through digital credit services relates to predatory practices of digital lenders. While banks also provide digital loans and follow the same rules as they would with ordinary loans, non-bank digital lenders do not have similar but clearly positive constraints.

Kenya’s low domestic savings are more than offset by its relatively easy access to international finance in both its public and private sectors. Its financial markets are quite efficient and relatively advanced for the continent. And it has no controls on the flow of capital in and out of the country, having abandoned its restrictive foreign exchange laws since 1993.

The predatory practices of digital lenders suggest there is no fear of punishment on the part of the perpetrators. It is abundantly clear such negative behaviour would likely change in the face of stricter regulations. Thus, our analysis does support the need for the robust rules the Kenyan financial authorities are looking to put in place.

The evidence also suggests a limited choice for consumers or probably, cartel behaviour. There is certainly abundant room for more competition.

Competitive advantage

A digital lender which abides by the type of strict rules banks are subjected to, would clearly have a competitive advantage in the current no-holds-barred regulatory environment.

Because, even when the new rules are in place, firms which hold themselves to a higher standard are likely to be rewarded via customer loyalty and perhaps even by having a great influence with the authorities.

Otherwise, Kenya’s digital infrastructure is above-average by the continent’s standards, the spread of internet coverage is wide and data subscription costs are relatively low.

Institutional quality and governance are average but about the best in East Africa. Tax policies and the like are no more distortionary than would be the case for peer African countries.

There is clearly ample demand for digital credit services in Kenya, especially among male and young urbanites. But it is quite clear that the high cost of credit acquisition is a major drawback.

Still, even though prohibitive digital lending rates of more than 40% a month in some cases should be a huge disincentive, there is still buoyant demand although default rates have naturally been rising.

There is clearly a need for greater financial and digital literacy. Still, even if digital borrowers understand the often obscure fine print, they probably have little choice in the matter. Having stricter regulations makes sense.

In sum, with more robust rules and lower costs, greater financial deepening in Kenya via digital credit services, as has been recorded with digital payments, would likely be achieved. It is also clear there is a potentially lucrative gap for more responsible firms to take advantage of.

With every Kenyan expected to have a digital identification number and related biometric data in the not-too-distant future, due diligence and Know-Your-Customer (KYC) issues should hardly be significant constraints thereafter.

Nigeria: Will payment services banks fill the gap?

In 2012, Nigeria set out to bank over 80% of its adult (15 years or older) population by 2020. However, despite myriad initiatives in this regard – like microfinance banking, agent banking, tiered Know-Your-Customer (KYC) requirements and mobile money operations, only about 60% have been financially included.

In furtherance of its 2020 objective, the Nigerian Central Bank announced guidelines for so-called payment service banks in October 2018, whereby telecoms companies and other non-bank firms would be allowed to provide financial services along set parameters, with licences issued from about a year later.

PSBs would be able to provide almost the entire range of financial services except giving out loans, trading foreign exchange outside of payments and remittances and underwriting insurance.

The major policy shift, however, is that non-bank or non-financial institutions can be PSBs. There are currently three approved PSBs (at the time of writing), with many more likely in the near future, as mobile phone firms have already signalled intent.

Much of the excitement around PSBs revolves around mobile telecom firms, which have as much as 184m active subscribers, about 92% of the country’s estimated 200m population.

This is why there is much enthusiasm now about the possibility of the remainder of Nigeria’s still significantly unbanked adult population being finally formalised into the financial system much more quickly and easily.

But would that really be the case? After all, previous initiatives proved to be disappointing. Besides, bank-led regulatory models, which Nigeria and many other African economies have adopted, have not been found as successful as telecoms-led ones.

Also, since the Kenyan case shows that digital lending is fraught with myriad risks, would the financial inclusion objective not be constrained if PSBs are not able to give out loans? Let us explore these questions. 

Close analysis suggests PSBs may not necessarily be offering anything that banks do not already provide via the same channels. Besides, DFS users tend to already have a bank account or formal relationship with a financial institution, and with the rules more favourable to banks, PSBs might find it hard to compete.

Still, while Nigeria has a highly concentrated banking industry, with seven banks controlling more than half the industry’s assets, its Herfindahl-Hirschman Index of less than 800 suggests the industry is competitive.

The country’s digital infrastructure is also above average, with internet spread and costs quite robust. Digital identification numbers are not yet in place, but the banking industry already employs a system called ‘bank verification numbers’ (BVNs) for its own use.

KYC requirements have since been relaxed for greater financial inclusion; albeit the evidence suggests this has not spurred the increased activity as hoped for, or at least, not at the desired speed.

With more than half of the Nigerian population living below the national poverty line, low income is clearly a binding constraint on greater financial inclusion. Financial and digital literacy levels are relatively low as well.

There is also the issue of low trust in the providers of financial services in general. High fraud incidents across all payment channels have been evidenced, for instance.

In light of these identified binding constraints, the key question is then whether PSBs are the solution? While mobile telecom firms also have their biometric database, with more registrants than in the banking system, if they are not offering something significantly different from banks (and with potential customers already likely to have a bank account), they are not likely to help achieve the authorities’ financial inclusion objectives.

PSBs would have a better value proposition if they were allowed to make loans, however. Thus, already licensed PSBs should probably press the authorities to be allowed to offer a broader bouquet of services. Firms looking to venture into the sector should probably wait till the regulations allow for greater value-addition.


Digital financial services are engendering greater financial inclusion in Africa. But for certain binding constraints, the pace could be faster. Still, some countries are succeeding more than others. Kenya is a stand-out example, making significant progress in payments and now doing similarly in credit services.

Unsavoury practices by Kenyan digital lenders are stalling progress – however, the authorities’ recent move to regulate digital lending more strictly is justified. Our analysis also suggests there are opportunities for more responsible digital lenders in Kenya.

For Nigeria, we find PSBs might not be sufficiently different to advance financial inclusion under the current regulatory regime. In the first instance, low income is a major binding constraint. An unlevelled playing field, with banks having almost all the cards, is another. PSBs should be allowed as much leeway as banks. Thus, firms interested in the sector might best off waiting till then.

A version of this article was published by the NTU-SBF Centre for African Studies at the Nanyang Business School, Singapore.

Digital financial inclusion – Kenya and Nigeria case studies

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