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Financial inclusion in Kenya

Brief Country Profile
Kenya is a sovereign state in east Africa.The country has a warm and humid climate along its Indian Ocean coastline, with wildlife-rich savannah grasslands inland towards the capital Nairobi. The capital, Nairobi, is a regional commercial hub. The economy of Kenya is the largest by GDP in East and Central Africa.  Agriculture is a major employer and the country traditionally exports tea and coffee, and more recently fresh flowers to Europe. The service industry is a major economic driver.
Although Kenya is the biggest and most advanced economy in east and central Africa and a minority of the wealthy urban population often leaves a misleading impression of affluence, Kenya is still a poor developing country with aHuman Development Index (HDI) of 0.519, putting the country at position 145 out of 186 – one of the lowest in the world and about 38% of Kenyans live in absolutepoverty. The important agricultural sector is one of the least developed and largely inefficient, employing 75 percent of the workforce compared to less than 3 percent in the food secure developed countries.The economy has seen much expansion, seen by strong performance in tourism, higher education and telecommunications and also acceptable post-drought results in agriculture, especially the vital tea sector.







GDP growth






Source: World Bank Database on Kenya
Kenyan economy has posted tremendous growth in the service sector, boosted by rapid expansion in telecommunication and financial activity over the last decade, and now contributes 62 percent ofGDP. Unfortunately, a massive 22 percent of GDP still comes from the unreliable agricultural sector which employs 75 percent of the labor force (a consistent characteristic of under-developed economies that have not attainedfood security which isan important catalyst of economic growth) and a significant portion of the population regularly starves and is heavily dependent on food aid. Industry and manufacturing is the smallest sector that accounts for 16 percent of the GDP.


% of GDP



Industry and Manufacturing




Source: International Monetary Fund
Kenya's services sector, which contributes about 61 percent of GDP, is dominated by tourism. The tourism sector has exhibited steady growth in most years since independence and by the late 1980s had become the country's principal source of foreign exchange. Tourists, the largest number from Germany and the United Kingdom, are attracted mainly to the coastal beaches and the game reserves.Other key sectors in service industry are manufacturing, construction, transport and communications and other social sector services.
Kenya’s economy is market based with a few state-owned infrastructure enterprises, and maintains a liberalized external trade system. Last few years, economic prospects are positive with 4-5% GDP growth, largely because of expansions in tourism, telecommunications, transport, construction and a recovery in agriculture. These improvements are supported by a large pool of English speaking professional workers. There is a high level of computer literacy, especially among the youth. The government is investment friendly and has enacted several regulatory reforms to simplify both foreign and local investment. An increasingly significant portion of Kenya's foreign inflows is from remittances[1] byNon- Resident Kenyans who work in the US, Middle East, Europe and Asia. Compared to its neighbors, Kenya has a well-developed social and physical infrastructure. It is considered the main alternative location toSouth Africa for major corporations seeking entry into the African continent.
The economy’s heavy dependence on rain-fed agriculture and the tourism sector leaves it vulnerable to cycles of boom and bust.The agricultural sector employs nearly 75 percent of the country’s 38 million people. Half of the sector’s output remainssubsistence production.
Contour of Institutional credit Market
Kenya has a well developed financial system comprising of a wide variety of institutions, markets, instruments and services. The financial sector plays an important catalytic role of facilitating the growth of all other sectors of the economy. Kenya is East and Central Africa's hub for financial services. The Nairobi Stock Exchange (NSE) is ranked 4th in Africa in terms of Market capitalization. Though the degree of financial intermediation is high, weaknesses exist at levels of access to financial services, efficiency of service provision and stability of financial institutions. The key players in Kenya's financial sector include commercial banks, Non-Bank financial institutions and the capital markets that provide various financial instruments for debt and equity financing.
The Kenya banking system is supervised by theCentral Bank of Kenya (CBK). The Bank is active in promoting financial inclusionpolicy and is a leading member of the Alliance for Financial Inclusion. It is also one of the original 17 regulatory institutions to make specific national commitments to financial inclusion under the Maya Declaration[2] during the 2011 Global Policy Forum in Mexico.The institutions under CBK supervision forms major chunk of institutional credit structure and they are shown below


There are 43 licensed commercial banks and 1 mortgage finance company. Commercial Banks and Mortgage Finance Institutions are licensed and regulated pursuant to the provisions of the Banking Act and the Regulations and Prudential Guidelines issued there under. They are the dominant players in the Kenyan Banking system and closer attention is paid to them while conducting off-site and on-site surveillance to ensure that they are in compliance with the laws and regulations. Out of the 44 institutions, 31 are locally owned and 13 are foreign owned. The locally owned financial institutions comprise 3 banks with significant shareholding by the Government and State Corporations, 27 commercial banks and 1mortgage finance institution. In addition to these there are also micro finance institutions, forex bureau and credit reference bureaus. There are licenses for NBFI and building societies but there are nonexistent at present.
Statistical Status of Financial Inclusion
Financial Inclusion Committee defined financial inclusion as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost[3]

Source: World Bank Global findex database Kenya Country Dash board
            We can see from the statistics that the formal financial institution penetration in Kenya is better than India. But when we go back to 2006, the statistics were not so attractive. There was only 40 percent of formal banking penetration in the Kenyan economy. Others were either unbanked or had access to only private lenders. The 2006 FinAccess survey estimated that the formal financial system was serving just over a quarter (26.4 percent) of Kenya’s adult population. Savings and Credit Cooperatives (SACCOs) and commercial banks had comparable customer bases at 13 percent and 12 percent of the adult population respectively. The Post Office Savings Bank (Postbank) emerged as the single most significant institution, with 5.6 percent of the adult population having accounts there. Microfinance institutions were the least significant with only 1.7 percent using them. In terms of contribution to access, banks (including the Postbank) contributed to 18.5 percentage points (70 percent of the access), while the non-bank institutions (SACCOs and MFIs) add 7.8 percentage points (30 percent of the access).
Comparision of Different Regions on Formal Financial Institutions

Strategies Followed
In April 2007, Safaricom, Kenya’s dominant mobile phone provider launched Kenya’s first mobile phone account,M-PESA. By making some effective strategies and enabling legislations that suit the culture and nature of Kenyans, CBK could promote financial inclusion and in the process Safaricom could manage to grab 60 percent of the total transaction value as of April 2013.
ü  It made international money transfer more easier.
ü  Customers could access M-PESA services at all PostBank branches.
ü  Safaricom partnered with Kenya Power (KPLC) to allow customers to use M-PESA to pay their electricity bills.
ü  Kilimo Salama (“Safe Agriculture”) insurance allowed Kenyan farmers to insure farm inputs against drought and excess rain using M-PESA.
ü  CBK adopts Guidelines on Agent Banking (2009) following amendments to the Banking Act that permitted third parties to provide services on behalf of banks.
ü  SMEP, a Kenyan micro-financier, allowed clients to make their loan repayments and savings contributions through M-PESA.
ü  Different market players entered mobile account markets and competition reduced the charges, Yu Mobile (Essar Telecom) launched Yu Cash, airtel money was launched, Orange launched Iko Pesa.
ü  Grundfos LIFELINK, allowed rural residents to pay for safe water through M-PESA.
ü  M-KESHO, a Equity Bank account that could be easily managed via mobile phone M-PESA
ü  Landmark National Payment System Bill grants CBK power of oversight over the payments systems.
ü  M-PESA started Lipa Karo service, allowing learning institutions to receive school fees via M-PESA
ü  Airtel Money users could receive short term loans from Faulu Microfinance immediately on their phones through "Kopa Chapaa"
Gender Comparision of Different countries on accounts at formal financial institutions

ü  Co-op Bank Mobile Money Subscribers could deposit and withdraw money directly from their phones using their Airtel lines
ü  M-KOPA began to offer solar-powered lighting and mobile charging to rural Kenyans on a pay-as-you-go basis, with payment via M-PESA
ü  Innovations that have led to bridge the gaps in financial inclusion are
·         Portable Bank:  To cater the financial needs to the smallest to the smallest entrepreneurs in the remote areas portable bank system was introduced. Through portable bank, serviceslike savings, loans, and other such financial services are regularly circulated within walking distance of clients’ farms or small businesses& entrepreneurs.
·         Portable credit: The Entrepreneurial Finance Lab (EFL) application is helping banks, Micro-Finance Institutions (MFI’s), and other partners improve operations with portable technology. It enables to complete credit applications electronically on a mobile phone or tablet, as well as to collect photos and the precise location of their clients with the use of mobile GPS. With near-real-time scoring of the EFL Tool, improves the efficiency of automated data collection and credit assessment decreases service turnaround time and increases credit access.
In this way many of the daily activities and day to day use of cash was connected to the mobile money accounts. Also since the mobile penetration was high and people were able to adapt to the change. Over a period of time all the major areas where usage of money was covered has been covered by use of mobile money and through various competitors. CBK was also helpful in regulatory oversight to promote healthy competition in the market. Charges for using the technology was zero or vey nominal, so everyone was tempted to use the service.
In this period of growth of mobile money accounts, commercial banks and MFI’s also recorded impressive growth. Branch network has expanded considerably and ATM network increased fourfold but there was loss of customers to SACCO’s and Post banks. This can be directly related to the use of M-PESA as it is quite easier to use, reliable, safe and it has gained the trust of the people. Today there are 23 million customers and 100,000 agents for M-PESA showcasing its robustness.

Lessons for India
            When we compare Kenya and India with the statistics of Global Findex, we get an interesting aspect. Even when India and Kenya have relatively equal amounts of formal bank accounts the way people use it entirely different in both the countries. If we see the mode of withdrawl of cash in Kenya it is more technological oriented and from ATM machines. Also if we see the usage of mobile for transferring and receiving money into bank accounts M-PESA has played a vital role in making mobile the main tool for financial inclusion.

Success story of M-Pesa in Kenya, in-turn led to the launch of Interbank Mobile System (IMPS) in India in 2010.However, rigid policies and tough regulatory environment did not permit customers to carry out transactions without any connection with their bank accounts unlike kenya. This indeed a big failure in adopting the mobile technology in regular bank transactions. Mobile money is at its nascent stage and so is the awareness of mobile money. It is being accepted in urban cities, but may still be a matter of concern for mini metros and rural areas. Several people are hesitant about payments made via other modes not involving cards or cash.
All the market led factors which helped Kenya in its success for financial inclusion are also equally applicable to India. India has also nearly same amounts of rural population dependent on agriculture and now both the economies are driven by services sector. India is also having high growth rate for demanding innovative financial services. Supportive regulation, new business models and enabling policy environment is what is required for India to adapt to what Kenya could do in the past few years.
One more advantage for mobile money in India though is the fact that SIM registration is already mandatory. Users must provide personal details and ID before they are issued with a mobile number. This information can be used for mobile money to achieve limited KYC for the base category of services as permitted by RBI, reducing the barrier to experience mobile money. Mobile Infrastructure in India is also high and it has fastest growing young population who are also the main drivers of mobile banking in Kenya.
Airtel, loop mobile and Vodafone have started mobile money accounts in India with a idea of gaining first mover advantage in India. They are attracting customers through various offers but still it remains an urban phenomena. Another reason for this non penetration is that these acciounts are linked to bank accounts for money rather than depending on the operator led model. But majorly all the mobile companies in India still need to know the potential of this business model. The reasons could be complex, but fundamentally it might be due to the failure of mobile money operators in understanding the market and building the agent network.
Though the banking correspondent’s model has been the India’s grand plan to take the financial services to the masses, it failed to show the transaction volumes in these accounts opened in unbanked rural sector, posing a challenge to the programme. The survey in 2012 conducted along with the RBI college of Agricultural Banking found that 58% of banking correspondents were earning less than 3000 per month. The poor earnings seem to be affected the quality of work of banking correspondents. Extrapolating these findings, there is a need to make qualitative improvements in India’s Banking Correspondents Model. So mobile money accounts becomes an attractive alternative option for the policy makers.
 The following factors can contribute building a strong business service model.
Ø  Building a strong distribution network and Wide coverage of retailers accepting mobile payments.
Ø  Interoperability in terms of network will increase adoption of services
Ø  Gamut of utilities offering mobile payment options
Ø  Practical regulation and intervention
The ability to replace cash with digital money transferred via mobile phone has been one of the biggest revolutions for over a decade now. Mobile money will play a transformational role in accelerating mobile based commerce in India. This will potentially change the way India transacts, especially as it provides unmatched reach and convenience. Mobile money is now further extending the availability to deeper pockets of the country, to make a significant impact on the lives of millions. e.g. customers will be able to easily repay loans, contribute to pension plans, save money, send money and transact conveniently without leaving their villages. Besides, innovative cash management systems will also be available for the industry, further increasing their efficiency and effectiveness.
Operator-led model is best suited for Mobile Money services in an emerging country like India leveraging high mobile penetration, massive distribution & the ability to create a viable business from small value transactions to provide primary banking access to un-banked. Customer awareness, here is of utmost importance, as many people still don’t know what mobile money is or have information that is limited to merely knowing that it is a mode to transact money via mobile or check one's banking statuses via mobile. There have to be initiatives by more banking and non-banking segments to offer and encourage such services for users in India. 
Agency, Central Intelligence. (2012, March 22). The World Factbook — Kenya. Retrieved September 2013, from Central Intelligence Agency:
Beck, Thorsten. (2011, July). FinAccess 2009: Trends, Analysis, and Policy Conclusions. Retrieved September 2013, from Financial Inclusion in Kenya:
Capital Markets Authority, e. a. (2011, October). Financial Sector Stability Report. Retrieved September 2013, from Central Bank of Kenya:
Central Bank of Kenya. (2012). 2011-2012 Annual Report. Retrieved September 2013, from Central Bank of Kenya:
Financial Sector Deepening, Central Bank of Kenya (2011, July). Financial Inclusion in Kenya: Survey Results and Analysis from FinAccess2009. Retrieved September 2013, from
Jack, William and Suri, Tavneet. (2011, January). Mobile Money: The Economics of M-PESA. Retrieved September 2013, from Georgetown University & MIT Sloan:
Safaricom. (2009). Annual Report and Accounts 2009. Retrieved September 2013, from Safaricom:
Measuring Financial Inclusion: The Global Findex Database, World Bank;
Buku, Mercy and Meredith, Michael, safaricom and m-pesa in kenya: financial inclusion and financial integrity, Washington Journal of law, technology & arts volume 8, issue 3mobile money symposium 2013

[1]30 percent of the Kenyans live on remittances as per Kenyan government official statistics, 2012.

[2]The Maya Declaration is a statement of common principles regarding the development of financial inclusion policy made by a group of developing nation regulatory institutions focusing on: creating the right environment; implementing the correct framework; ensuring consumer protection measures are taken and using data to inform and track financial inclusion efforts.

                        [3]Financial Inclusion Committee in India