Technology can keep loan transaction costs low

It is problems that create the necessity to innovate. Nowhere is this truer than in the financial sector. The many problems experienced by the banking sector have become a great mining field for new innovations that are leveraged on new technologies.

Now that the interest rates have been capped, transaction costs are likely to become the greatest headache for the consumer. Fortunately, this is an area where recent technologies have come up with tamper proof solutions that tend to lower costs of loans considerably.

What remains is the regulator’s approval of some of the emerging innovations and Kenya again will be at the cutting edge of technology.

The mobile money disruption, for example, which dealt with many problems at the time, could not have occurred without regulatory approval. Kenyan regulators took our advice and simply took a leap of faith.

Now, Kenya is a leader in the mobile money sector and the demand for the service has gone beyond Kenyan borders. The diaspora in their recent demands to the government want negotiated transaction costs for remittances.


This is unnecessary at the time when new disruptive technologies are emerging.

In the next one year or so, regulator permitting, new disruptions will be in the market to deal with the problem of high transaction cost and enable a completely interoperable, low-cost, mobile money solution that further drives use of mobile money.

The advent of blockchain technology and the so-called “Cryptofinance,” has given rise to technology that can replace expensive platforms today and enable a more inclusive financial ecosystem.

Regulators across the world are agonising over whether to embrace emerging technologies or to take the risk and reap the benefits of the first mover advantage.

Central banks across the world are studying this emerging technology to understand how it would impact their economies.

The benefits of central banks issuing legal tender in a completely digital medium is such that it would greatly lower barriers to financial inclusion and transaction costs, while allowing central banks to have complete oversight in a country and take full control of monetary policy.

Additionally, central banks can again take on a role they once had: uniting all financial services providers under a single unit of account- the national currency.

Today, we see various mobile money providers create issues of interoperability because national currencies aren’t traded.

Instead, private currencies issued by mobile money providers on top of national currencies add complexity, cost, and inconvenience to the user. With a Central Bank Digital Currency (CBDC), users can transact exclusively in the national currency, regardless of whether they are using a wallet provided by a bank or that of mobile network.

With low transaction cost, Kenya’s Harambee (resource mobilisation) and co-operative movement would be enhanced greatly since any amount, even Sh1 can be transacted affordably.

It will also give rise to other financial inclusion innovations. Additionally, central banks can reduce systemic risk as users hold digital cash directly and don’t have the need to entrust it to a third party as required in today’s financial system.

The success of Kenya as a technology hub was because we were able to take risk and encourage innovation. The time has come to take another risk and enable new technologies that are likely to catapult innovativeness in Kenya to new levels.

The advantage of Kenya becoming a first mover is that it would attract huge Foreign Direct Investments (FDI) and boost economic growth. Companies such as enable entirely new possibilities that are not possible with the mobile money today.

Imagine being able to transact just like you communicate on WhatsApp today.

With the ability to send or receive Sh1 to anyone on earth, on any mobile network, for nearly no cost, barriers to financial services are greatly reduced and more value is able to flow into the pocket of who it is intended for.

Money can stay digital for longer, and won’t require users to run to their nearby agent to immediately cash out. Indeed these emerging technologies pose no challenge to mobile money in the near term.

There is additional room for improvement considering the fact that more than 90 per cent of transactions in Kenya are still cash based.

Although transaction costs for Central Bank Issued Digital Currency may be lower, widespread use of the technology will gain traction as users realise the true benefits: affordable transactions below Sh100, interoperability across mobile networks and borders, and access to full financial instruments that encourage users to stay digital for longer.

These new technologies are unique because of the ability to complete micro-transfers agnostic to mobile network operators and national borders, for negligible cost.

This limits the need for a user to exit and withdraw physical cash, in-turn keeping them digital and extending the customer relationship as they transact digitally more often.

This is the first technology that allows governments to move forward on “cash lite” policy. And as the Finance ministry of India has stated, physical cash cost emerging markets between 5 - 7 per cent of a country’s GDP per year.

These new technologies offer a bright future that lowers barriers to financial services even lower and have the ability to encourage healthy competition that keeps the industry moving in a direction that ultimately benefits the average citizen.

The writer is an associate professor at the University of Nairobi’s School of Business.