Ideas & Debate

How digital lenders, banks help enhance inequalities

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Central Bank of Kenya. FILE PHOTO | NMG


  • Banks can be indicators of inequality of economic development, wealth and income.
  • It fits with monetary theory but invites focus on mobile money and digital lenders (Fintechs).
  • The segment is a growing hotbed of non-regulated lending in Kenya piggybacking on M-Pesa since 2007.

By Central Bank of Kenya data, Nairobi, Mombasa and Kiambu counties hog county shares of bank branches: 794 branches or 53percent of Kenya’s 1,502 branches or banking outlets. The Busines Daily’s July 6, 2021 piece, “Bank branches reveal wealthy, poor counties” links this to their contribution of 30.9 percent to Kenya’s GDP, with Nairobi accounting for 73 percent of Kenya’s billionaires.

Banks can be indicators of inequality of economic development, wealth and income. It fits with monetary theory but invites focus on mobile money and digital lenders (Fintechs). The segment is a growing hotbed of non-regulated lending in Kenya piggybacking on M-Pesa since 2007.

Kenya performs better than most emerging markets. The downside is our economic policy has played little catch-up to balance the benefits versus negatives of digital access.

Consumer protection, monetary and fiscal potentials, etc., are in question. In the recent Ipsos survey on credit uptake for example, loans are taken to start or expand business (35percent), buy food (25percent), pay school fees (24percent), etc. Yet traditional banking is in retreat.

The main lenders in Kenya today are: mobile money and digital lenders (57percent); banks (22percent); Saccos (17percent).

Traditionally, regulated commercial banks are pivotal for balanced development. They transfer surplus capital from developed regions to less developed ones, called financial intermediation.

If flows veer to predatory lenders such as fintechs it traps consumers and the poor in cycles of debt and inequality. It explains why a Trump-era “True Lender” rule in the US is being scrapped by President Joe Biden. It skirts interest rate caps via fintechs.

Enter Kenya’s money and digital lenders carving out a market share, praised for financial inclusion, funding SMEs, and finding by a stroke of luck that our capital account is open.

One hoped that their dominance through fintech and foreign incursions such as Tala and Branch, piggybacking on M-Pesa, would increase surplus flows attracted from international funding.

Not so much. Instead, Kenya’s top banks took the que, shifted customer deposits (in liabilities on commercial bank balance sheets) to asset holdings (loans) funding unregulated lending rather than regulated lending.

Far higher interest rates are charged but coded as ‘facilitation fees’; or Fuliza’s overdraft facility. This way, banks skirted the interest rate cap from 2016 and Kenya yielded. M-Shwari, for example, is a fully digital bank account operating over the rails of M-Pesa.

The backdoor to unregulated lending simulates the predatory and exploitative lending the US is scrapping. The Annual Percentage Rates (APR) reach over 500percent, even in Nairobi, Mombasa and Kiambu.

What have we disrupted? Fintechs sell convenience and access at the expense of policy regulation; they skip Kenya’s rate caps, yield a trickle in foreign funding, expatriate massive surpluses unimpeded but avert the objectives of traditional banks in consumer and data protection, partnership agreements and central bank capital requirements.

Seeing the same problematics for the poor as in microfinance entities, CBK should have been fleet-footed with rules to harness the segment, reclaiming equitable surplus flows, consumer protection, and even paving the way for National Treasury to tax the highly lucrative fintechs for revenue.

Questionable leakages of the surplus and anti-developmental uses proliferate. Fintechs impoverish borrowers; e.g., lending for gambling, gaming, betting and consumption with dubious productive results. Outflows even help funds English football clubs. Bank migration to digital lines also shed jobs to cut costs, and could increase poverty.

From the forays of unregulated lending into Kenya’s financial sector, our GDP growth, developed and less developed counties, borrowers and the exchequer could be the main losers.

Anti-developmental effects deflate huge fintech potentials in technological benefits. A path exists in Article 231, the Constitution, for CBK to reclaim balance rather than allowing usury and greed.

Yet, in a stunning demonstration of the resilience of Kenya under the autopilot in economic policies cited in the Business Daily article, economic struggles sometimes defy the hurdles and disincentives.

A World Bank study of Kenya and Rwanda (WPS7461-October 2015) focuses on counties’ performances. The GDP per capita of Kiambu in 2013 was $1,785, set in 2005 constant dollar.

It was the highest in Kenya ($694). It surpassed not just the central region counties under Central Region Economic Bloc (Cereb) but Nairobi ($1,081). Only three of the ten central region counties had a per capita GDP lower than Kenya’s figure.

A paradox prevails: Cereb is itself a repository of the inequalities. While it contributes a whopping 26 percent to Kenya’s GDP, data from Kenya National Bureau of Statistics (KNBS) Gross County Product Report (2019) shows how in the shares, Nakuru and Kiambu gallop ahead of Tharaka-Nithi, Laikipia, Embu and Kirinyaga.

Consequence analysts overlook on inequalities and the surplus is perpetration of disparities in growth and industrialisation, how they ruin future prospects for disadvantaged Counties.

Potentials of Kiambu highlighted in the World Bank study are illustrative. By virtue of an economic structure dominated by Secondary and Tertiary sectors, it revealed highly elevated industrialisation prospects.

The sectors drive raw materials processing, value addition, services, and light industry. They increase jobs, incomes, and propel savings. Kiambu’s sectors take up over 93 percent of economic activity compared to oft-touted agriculture (tea, coffee, eggs, livestock and dairy) that takes 7 percent.

Other KNBS evidence shows not just the notable economic clout of central Kenya counties, but of the lead powerhouses of Nairobi, Mombasa and Kiambu cited in the BD piece. The central region in early stages of its CEREB strategies had an economic size of over-US$20.54 billion (Ksh2.12Trillion) during 2013-2017.

While it would be a major beneficiary of better financial intermediation, its economic size in global comparisons is remarkable. If it were a state in 2018, its GDP would have been ranked in World Bank Global rankings at number 113 of 204 Countries/territories.

In Africa, it would rank No. 21 of 53 Countries/territories (with Rwanda ranked No. 34). It would be a larger economy than 31 African countries: Botswana, Mali, Gabon, Mozambique, Namibia, Mauritius, Burkina Faso, Madagascar, Equatorial Guinea, Chad, Congo Brazzaville, Benin, Rwanda, Niger, Malawi, Togo, Mauritania, Somalia, Eswatini, Sierra Leone, Liberia, Burundi, Djibouti, Lesotho, Central African Republic, Cape Verde, The Gambia, Seychelles, Guinea Bissau, Eritrea, and South Sudan.

What to make of Kenya’s responses to financial sector disruption the ensuing inequalities? All counties would be better off with escalated intermediation. Borrowers would enjoy lower rates and the exchequer would share in Fin Tech profits. County income and wealth inequalities would fall. Kenya’s GDP performance on the continent and globally would present a miracle.

Dr Wagacha is a Former Senior Economic Adviser, Executive Office of the President and former Ag. Chairman, CBK.