FINTECH REVOLUTION AND FINANCIAL INCLUSION IN KENYA

The financial system is being rewired, and fintech is the wire, – Jim Marous.

Technologies that deal with finances have been around for a long time. However, in recent years, one term that has become increasingly popular is “FinTech”. But what exactly is this concept? Fintech is the integration of technology into financial services to enhance and automate their delivery and use.

Fintech, is driving the financial sector into a new era of innovation and accessibility. It has affected banking, money transfer, payment, and consumer services. Fintech is reshaping how we manage finances while simultaneously empowering individuals and businesses with unparalleled efficiency.

In one way or the other, we are all interacting with fintech, whenever you pay for your Netflix subscription, buy goods on Jumia, pay your bus fare through Pochi la Biashara, opt to Fuliza when you have emergencies, check your bank balance through your mobile phone, dial USSD Codes to request for Hustler fund, that puts you among those interacting with the multi-billion  dollar industry called fintech.

Fintech offers more user-friendly solutions. Fintech services are tailored to individual customer needs through advanced data analytics and AI-driven insights, providing a more personalized user experience. 

The Fintech revolution in Kenya

Kenya’s fintech journey started in 2007 when Safaricom PLC, the biggest telecom services provider, launched M-Pesa, a mobile money transfer service that, changed how Kenyans send, receive, and keep money. Since its inception M-Pesa has grown exponentially, now serving over 60 million individuals across eight African nations.

The success of M-Pesa paved the way for a broader Fintech ecosystem in Kenya. With Airtel Money, T-Kash from Telcom Network and Equitel enhancing financial accessibility for many Kenyans. Today, the country boasts of a thriving fintech sector, with several businesses providing a wide range of services, including digital lending, savings platforms, insurance, and investment opportunities.

Fintech has also facilitated easier and cheaper remittance transfers from the Kenyan diaspora. This has increased the flow of remittances into the country, contributing to household incomes and economic stability not to mention the much needed foreign currency predominantly in USD.

The growth of fintech has led to the creation of numerous startups, generating employment opportunities in the tech and financial sectors. This comes in handy in an economy like the Kenyan one where the majority is the youthful population looking for opportunities in different spheres of the economy.

Financial Inclusion

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.”

The fintech revolution in Kenya has been a great driver of financial inclusion, bringing financial services to the unbanked and underbanked populations. According to the Central Bank of Kenya (CBK), the percentage of the adult population with access to formal financial services increased from 26.7% in 2006 to over 82.9% in 2021. This remarkable growth is largely attributed to the widespread adoption of mobile money services.

Mobile money platforms have made it possible for millions of Kenyans to participate in the formal economy. For instance, rural populations that previously had to rely on cash transactions can now send and receive money, pay bills, and even access credit through their mobile phones. This convenience has significantly reduced the costs and risks associated with financial transactions, fostering economic activity and improving the livelihoods of many. It therefore provides everyone with an equal opportunity to contribute economically within their respective local set ups.

Digital lending has emerged as a critical component of Kenya’s fintech landscape. Fintech companies have developed algorithms that assess creditworthiness using alternative data sources, such as mobile phone usage and social media activity. This approach has allowed them to extend credit to individuals and businesses that traditional banks would consider too risky.

The fintech revolution has extended to the insurance sector as well, with digital platforms providing microinsurance products tailored to the needs of low-income individuals. These platforms offer affordable and accessible insurance coverage for health, agriculture, and life, further promoting financial inclusion.

Advantages of implementing fintech solutions

Fintech offers a whole range of services that cater to the needs of individuals as well as businesses. It therefore provides wide range of advantages but we will highlight the salient ones as follows;

1.         Greater Reach: with increased globalization and reliance on digital infrastructure, fintech emerges as a natural progression, offering innovative solutions that transcend geographical boundaries. This accessibility expands the reach of financial services. Secondly, collaboration with banks also helps Fintech reach a broader customer base and hence provides a safe and sustainable environment.

2.         Ability to Innovate: Fintech operates in an environment conducive to experimentation, and this agility enables it to develop new solutions to meet evolving customer needs. By constantly pushing the boundaries of what is possible, Fintech firms drive industry-wide innovation, setting new standards and reshaping consumer expectations.

3.         Enhanced efficiency: Fintech’s prowess stems from its adept utilization of emerging technologies. For instance, AI-powered chatbots streamline customer service, Blockchain ensures transparent and secure transactions, while big data analytics uncovers valuable insights for informed decision-making. These dramatically improves the speed at which information is processed and hence enhancing efficiency in financial transactions.

4.         Customer-Centricity: Fintech companies enable users to manage their finances quickly and conveniently through intuitive digital platforms and mobile applications. This direct interaction enhances customer satisfaction and allows Fintech firms to gather real-time feedback, iterate rapidly, and tailor offerings to evolving preferences. Fintech firms cultivate trust and loyalty by prioritizing customer engagement and transparency, laying the foundation for long-term relationships. 

5.         Cost Effectiveness: Technology enables Fintech to offer fast and cost-effective transactions. At the same time, automation significantly reduces operational costs, often gaining an advantage over traditional institutions. 

Challenges and opportunities

The Regulatory challenge

The rapid growth of fintech companies and the emergence of new technologies challenge the regulators’ ability to respond to the change in a timely fashion. Besides registration requirements, Fintech Companies are generally required to obtain the following licences and/or approvals:

1.         Central Bank of Kenya Licence;

2.         Capital Markets Authority Licence;

3.         Communication Authority of Kenya Licence;

4.         Data Protection Licence; and

5.         Work permits for foreign employees.

Further, Fintech Companies must also comply with the regulatory requirements such as the Companies Act, Banking Act, Data Protection Act, Insurance Act, Electronic Transactions Act, Consumer Protection Act, Proceeds of Crime and Anti-Money Laundering Act, National Payment Systems Act, etc. It remains to be seen whether the regulators will eventually develop a pro-active approach to fintech. The dominant position of M-Pesa in Kenya is an example of a situation when regulation significantly lags behind the development of technology. At the launch of M-Pesa in 2007, the Central Bank of Kenya only issued a ‘Letter of No Objection’ to Safaricom, while the dedicated payment systems regulations were rolled out much later starting with the adoption of the National Payment System Act in 2011 and the National Payment System Regulations in 2014

The Cybersecurity challenge

The fintech evolution has introduced a myriad cybersecurity risks that challenge the integrity and security of financial systems. Cybersecurity risks such as phishing attacks and data breaches have increased with the increase in online financial transactions. Fintech companies should therefore innovate and invest in robust cybersecurity measures to protect user data and prevent fraud.

The Digital divide; a challenge and an opportunity

While mobile penetration in Kenya is at an all time high, there are still regions, particularly in rural areas, where access to mobile phones and the internet is limited. This gap presents an opportunity for fintech companies to innovate and develop solutions that cater to the needs of these underserved populations. With innovations and emergence of satellite powered solutions (like the Space X – Starlink Satellite Internet), the fintech have a great chance to leverage and deliver services to the rural areas traditionally disregarded by most players and hence creating new opportunities.

Conclusion

Fintech is a game changer and the only thing constant about it is change. It continues to provide opportunities for economic growth and financial inclusion in this era of globalisation. It also provides a great opportunity to our young population to participate in nation building through access to finance and the ability to transact with ease hence, providing the much needed support for most start up businesses.

Fintech Companies require legal experts to guide them through the complex regulatory requirements to ensure compliance. MMC Asafo offers top notch legal services to Fintech Companies seeking to set up and/or expand their business in Kenya to help them achieve their goals.

For legal advise advice and support, kindly contact:

I. Mungai Kamau [email protected] ;

Joy Murugi Omulele – [email protected]