Financial Technology in East Africa

Introduction
In March 2007, Vodafone, on behalf of Safaricom and Vodacom, launched M-Pesa in Kenya, the first mobile financial service in Africa and the third in the world, second to two services already acting in the Philippines. When launched, M-Pesa provided a way for individuals to transfer cash to one another using just their mobile phone. An individual, once registered on M-Pesa, simply has to give cash to a registered agent, who will debit it on their virtual account, which is registered to the individual’s mobile phone. The money can then be transferred to any Kenyan registered on the service, using just their mobile phone number, and can be withdrawn through an agent located anywhere in the country, thereby bypassing commercial banks. At the time, formal financial inclusion stood at only 27% of the Kenyan population (Kenya FinScope 2006), and so the majority of the population did not have access to commercial bank services.
At the time of the launch, an individual could hold up to KES 50,000 (approximately US$500) on their virtual account and transfer between KES 100 (approximately US$1) and KES 35,000 (approximately US$350) in any single transaction. Up to KES 170 could be lost per transaction in agent’s commission, yet this was well below the charges borne through using a commercial bank.
M-Pesa was seen as a valuable tool for comparatively well-paid Kenyans in urban areas to remit money to less wealthy family members in rural areas, instantaneously and at low cost. 10,000 customers registered with M-Pesa in March 2007. Today, there are estimated to be 23 million mobile money users in Kenya, across a number of mobile financial platforms, of which 12.5 million are active (The Kenyan Journey to Digital Financial Inclusion).
The success of M-Pesa, the first mobile financial service in Africa, encouraged numerous competitors within Kenya and spread across East Africa. In 2008, Vodafone launched M-Pesa in Tanzania; whilst in 2009, MTN launched MTN mobile money in both Rwanda and Uganda. All of the East African countries now have numerous mobile financial platforms that offer much more than just cash transfers.

Benefits of financial technology: financial inclusion
The launch of mobile money across East Africa has been instrumental in driving formal financial inclusion, and thus poverty reduction, throughout the region.
National FinScope surveys from 2006 up to the most recently published demonstrate only a small gain in commercial bank penetration across the population, despite commercial banks being the second largest perpetrator of financial inclusion. The substantial growth in formal financial inclusion over the past decade has been driven by mobile financial services.
In Kenya, formal financial inclusion has increased from 29% in 2006 to 75% in 2016. Yet of the 75% that are engaged in the formal financial sector, only 38% of the population use commercial banks, compared to 71% of the population that use mobile financial services. Similar statistics ring true across East Africa. In Rwanda, formal financial inclusion has increased from 21% in 2006 to 68% in 2016, of which only 26% of the population use commercial banks, compared to 60% of the population that use mobile financial services. Similarly, in Tanzania, formal financial inclusion has increased from 11% in 2006 to 65% in 2017, of which only 17% of the population use commercial banks, compared to 60% of the population that use mobile financial services. Finally, in Uganda, formal financial inclusion has increased from 21% in 2006 to 58% in 2018, of which only 11% of the population use commercial banks, compared to 56% of the population that use mobile financial services.

Figure 1: Financial inclusion across East Africa

Source: FinScope Kenya 2006/2016, FinScope Rwanda 2006/2016, FinScope Tanzania 2006/2017, FinScope Uganda 2006/2018

Figure 2: Commercial bank penetration                                                                    Figure 3: Mobile financial service

The success of mobile financial services is driven by their ability to penetrate the population due to the prevalence of mobile phone users, improved mobile network coverage and the low cost of establishing mobile money agents (financial service providers), which enables a greater product outreach and a comparatively low operational cost structure.

Benefits of financial technology: rural financial inclusion
Indeed, because of the ability of mobile financial services to better penetrate the population and because of the lower cost structures involved, the gains in mobile financial services are particularly pronounced in rural areas.
Before mobile money, rural areas suffered particularly acute financial exclusion due to lower levels of financial literacy, but also because of the high cost involved in providing formal financial services in areas where there would typically be smaller transactions and lesser investment opportunities. Commercial banks and micro finance institutions (MFIs) lacked the incentives, information and capacity to mitigate the risks of operating beyond urban markets or with low-income clients. However, through simplifying and increasing access to business transactions, mobile financial services are helping to develop long overlooked rural areas in East Africa.
Consequently, since the birth of mobile financial services, formal financial inclusion in rural areas has grown substantially, to encroach upon the level of financial inclusion in urban areas.
The World Bank targets universal financial access by 2020, and at present, fintech appears the most likely path to achieve this goal.

Figure 4: Rural financial inclusion

Source: FinScope Kenya 2006/2016, FinScope Rwanda 2006/2016, FinScope Tanzania 2006/2017, FinScope Uganda 2006/2018

Other benefits of financial technology
Increased financial inclusion is not the only potential benefit from the growing dominance of mobile financial services and financial technology. Financial technology offers a plethora of instruments that may drive financial sector deepening in developing economies, where again East Africa is fronting the innovations. Mobile financial services in East Africa have already surpassed simple financial transactions and are currently able to offer a range of financial instruments, such as savings, insurance, loans and investments. Continuous innovations in financial technology continue to increase the range of options available over mobile financial services.

Other benefits of financial technology: healthcare
Innovations in financial technology have also spread to benefit other sectors, both in the public and private sector. The healthcare, education and retail sectors have all benefited from advances in financial technology, whilst innovations have also contributed towards capital market development across East Africa.
FinScope surveys across East Africa all state that one of individuals most pressing financial needs is to pay for medical bills. Not only does mobile money allow comparatively more wealthy relatives to pay instantaneously for medical bills for less wealthy relatives, often in remote areas, it allows the relatives to directly pay the doctors (to prevent any possible diversion of remittances) and has contributed towards growth in medical insurance.
Recent increases in the provision of insurance services, driven by the growth of mobile financial services, have been heavily biased towards medical insurance, reducing the burden of unexpected medical expenses for many East African citizens.
Although, the uptake of formal financial services remains low, ranging from 1% in Uganda to 23% in Kenya, there has been a definite growth in the provision of insurance services and governments are beginning to intervene to further promote insurance, particularly in the healthcare sector.

Figure 5: Provision of formal insurance services

Source: FinScope Kenya 2006/2016, FinScope Rwanda 2006/2016, FinScope Tanzania 2006/2017, FinScope Uganda 2006/2018

For example, in May this year, Financial Sector Deepening Trust Tanzania and the Bank of Tanzania rolled out a nationwide scheme that will provide rural farmers with greater opportunity for financial inclusion, combined with opportunities for accessing healthcare and savings and investment schemes. Under the scheme, financial service providers have been tasked to partner with the National Health Insurance Fund (NHIF) and Government Employees Provident Fund (GEPF) to provide farmers with health insurance and savings and investment options through their mobile money accounts.
The healthcare sector may also benefit in the near future from advances in blockchain technology. Blockchain technology offers the opportunity for institutions to share and protect large datasets and may be a catalyst in helping African governments to improve health records, allowing for faster patient diagnosis and repeat payments to be simplified. Blockchain technology would allow for patients encrypted health information to be instantaneously shared with multiple health providers, without risking breaches in patient confidentiality.

Figure 6: Blockchain technology

                                  

Source: PWC

Other benefits of financial technology: education
In addition to healthcare, education is another public good that looks set to benefit from advances in financial technology. Across East Africa, most schools are fee paying and consequently the payment and collection of school fees is frequently a problematic for parents (to raise one termly lump sum), for teachers (to monitor which students have fully or partially paid) and for banks (whose school loans are often dependent upon school fees).
At EADB, we have also experienced rare circumstances of fraud where teachers pocket school fees, causing the school to forfeit on a loan. Although fraud is very rare, there is little that the parents or bank officers can do to prove that their money has not been used for its intended purpose.
However, a recent fintech innovation in Uganda looks to remodel how school fees are paid. SchoolPay provides an online secure tool that manages school fees. Parents may pay their school fees through a wide range of mobile money platforms (including MTN mobile money, Airtel money, M-sente, Cente mobile, Micropay and Stanbic Bank EBanking) or in person at a bank (including Stanbic Bank, Postbank, DFCU, Bank of Africa and Centenary Bank). The payment is then registered on a central system that may be accessed by parents, students, teachers, banks etc. All students have a unique identification code on the central system and schools and parents have different portals to access their relevant data. The system also allows for payments to be made in installments and monitored accurately, reducing the risk of error and the cost of transport and numerous bank transactions.
At present 8,543 schools are registered on SchoolPay, presenting its potential to revolutionise the way school fees are paid in Uganda and the efficiency with which schools and parents may manage their finances.

Figure 7: SchoolPay

Source: www.schoolpay.co.ug

Other benefits of financial technology: retail
The retail sector is perhaps one of the biggest winners from recent advancements in financial technology. Across the world, including in East Africa, an individual may now pay for a store transaction via cash, card or a mobile financial service. Many shops have an option to pay for your basket via mobile money.
However, advances in fintech are revolutionizing the way that customers shop not just in store, but also online. As in the rest of the world, retail platforms have established in East Africa that only exist online. Throughout East Africa, Jumia is perhaps the most successful example of an online retail merchant. Jumia is an online portal that offers shopping, travel, groceries and take-away, all delivered to your home and paid for either by mobile money, credit card or cash on arrival.
In Rwanda, an online retail platform named Mergims now allows individuals outside of the country to pay bills (such as electricity, water, TV, airtime) for those living in Rwanda. Given that the largest source of Foreign Direct Investment into Rwanda remains remittances, this is a very valuable tool for the diaspora to still cater for relatives living in country, at lesser cost and with no time delay.

Other benefits of financial technology: capital markets
Financial technology also contributes towards financial market deepening in East Africa, including the development of capital markets. Across East Africa, it is now possible to invest in the stock market, crypto currencies and treasury bills via mobile financial service platforms.
In March 2017, Kenya launched the worlds first mobile-only government bond: the M-Akiba bond. The bond has a maturity of 3-years and has been marketed as a retail infrastructure bond. Unlike previous bonds, the M-Akiba bond will be available to individuals to invest as little as KES 3,000 (approximately US$30), compared to the prior minimum of KES 50,000 (US$500). The price is issued at par, interest earned is tax-free and the maximum daily investment is set at KES 140,000 (US$140).
The bond is available to investors across a range of mobile financial service providers in Kenya, who have provided a platform where bonds may be bought and sold from a mobile money account on the Nairobi Stock Exchange, with the benefits accruing immediately to the individuals mobile money account.

Figure 8: M-Akiba

Source: National Treasury of Kenya

In a country where the average GDP per capita is only US$1,246, the lower minimum investment will go a long way to promote savings and investment amongst the general population. However, the M-Akiba bond also helps to increase the availability of affordable government financing, given the Government of Kenya’s growing fiscal deficit and enormous investments in infrastructure.
To date there have been two M-Akiba auctions. The first, in March 2017, attracted over 100,000 registrations and was oversubscribed; over 5,000 individuals invested in the bond to raise KES 150 million (US$1.5 million) in just 13 days. Further, over 65% of investors subscribed less than KES 10,000 (US$100), demonstrating the success of the bond to reach the target market of lower income earners, including many from the informal sector.
The second auction, in September 2017, attracted three times as many registrations and almost 6,000 individuals invested in the bond to raise KES 248 million (US$2.5m). As before, over 65% of investors subscribed less than KES 10,000 (US$100).

Other benefits of financial technology: data collection
Finally, mobile financial services, through their inherent digitalization, provide easy access to large datasets surrounding the use of financial services across the population. Such datasets promise an enlightened insight into individual’s financial behaviour and thus may help banks to design new instruments that better serve their customers and further promote financial sector deepening.
For example, CBA Kenya, through their M-Shwari platform (which since its launch in November 2012 has amassed over 23 million customers, over US$140 million in deposits and has provided over US$2.7 billion in small loans) is easily able to identify the savings and investment culture of their clients. Their figures highlight that in Kenya women are more attracted to saving than men, that men over 40 years old are more attracted to savings than their younger counterparts, and that individuals between 25-34 years old are most likely to take out a loan.
CBA’s M-Pawa platform in Tanzania (launched in May 2014, during which time the mobile financial services provider has amassed over 7 million customers, over US$8 million in customer savings and has provided over US$56 million in loans) has also been able to provide relevant figures on financial behaviour amongst a wide population of Tanzanians, that should help to direct product development and future market interventions. For example, M-Pawa’s figures in Tanzania have identified an equal demand for financial services uptake and activity between rural and urban areas (contrary to typically assumptions of lesser demand in rural areas, premised on lower rural financial inclusion) and a pattern whereby savings tend to peak at the beginning of the week and borrowings at the end of the week.

Constraints of financial technology: digital literacy
According to SAP, by 2020, 80% of all jobs will be related to the STEM fields (science, technology, engineering and mathematics). Further, between now and 2020, Africa’s potential labour force will have increased by an additional 122 million young workers, more than any other continent in the world. Africa therefore has the potential to be the fastest growing digital consumer market, contingent that young people are granted the opportunity to develop digital skills.
However, the STEM fields are drastically overlooked and underfunded across Africa. According to SAP CEO, Bill McDermott, there is a direct link between a country or region’s digital adoption and its overall economic competitiveness. Therefore, an intervention, or a series of interventions, is necessary to increase the level of digital literacy across the continent and to consequently increase the potential positive impact of digitalization and financial technology.
At the East African Development Bank, we are acutely aware of the shortage of skilled workers in the STEM fields amongst our member countries (Kenya, Rwanda, Tanzania and Uganda) and have consequently developed an intervention in the STEM fields. Our STEM Scholarship Programme offers Masters degrees at Rutgers University (New Jersey, US) to East African teachers and lecturers in the STEM fields, on the premise that they return to East Africa to continue teaching STEM. We have already seen positive results from teachers developing online teaching courses to improve the quality and outreach of STEM education across East Africa.
Another intervention that has excited those in the development of STEM is SAP’s Africa Code Week. Africa Code Week 2018 aims to empower 600,000 young Africans across 35 African countries with digital skills, including the ability to code. In it’s first three years of operation, from 2015 to 2017, Africa Code Week has empowered over 1.8 million young Africans with digital literacy and coding skills. Indeed, Africa Code Week is an initiative that EADB are watching closely for collaboration opportunities in East Africa.

Constraints of financial technology: financing
Unfortunately many of the interventions in promoting STEM and the digitalization of Africans has been led by philanthropic causes, leaving a sizeable financing gap in the sector, both in terms of training the population in digital literacy and in terms of financing new digital product innovations in the financial sector.
There has been an influx of investment into the sector over the recent period, yet more investment is required. A study jointly compiled by East Africa Venture Capital Association (EAVCA), Intellecap, Financial Sector Deepening-Africa, FMO, and UKAid uncovers an estimated US$722 million invested in fintech across East Africa between 2010 and 2017.
Disrupt Africa further report that amidst a 51% increase in venture funding for African startups in 2017, from US$129 million in 2016 to US$195 million in 2017, one third of venture funding raised was by the fintech sector, where Kenya was a leading investment destination.
Whilst sizeable sums of money are being invested into the sector, where relatively small investments can make a disproportionately large impact on how the sector operates and to the socioeconomic development of the region, the majority of investments originate externally. Only 28%, or US$202 million, of all fintech investments in East Africa between 2010-2017 were from East African sources.

Figure 12: Local financing for fintech

Source: East Africa Venture Capital Association (EAVCA), Intellecap, Financial Sector Deepening-Africa, FMO, and UKAid

For the fintech sector to mature it requires a combination of targeted debt and equity financing from financiers that understand the region. For the first time in history, technological innovations in East Africa have been created by East Africans, it is a shame that East Africa cannot provide the required relevant financing to drive financial sector deepening and socioeconomic development through financial technology. The East African Development Bank currently collaborates with commercial banks and SACCOs in Kenya and Uganda to provide affordable financing for the rural and agricultural SME sector. Under these programmes, EADB offers technical assistance to the partner financial institutions to enhance their risk assessment, environmental management and social performance management. At EADB, we are currently investigating the possibility to collaborate with our partner financial institutions to develop a range of digital financial services to achieve our mission to promote sustainable socio-economic development in East Africa by providing development finance, support and advisory services.

Conclusion
Since the launch of M-Pesa in Kenya in 2007, mobile money has spread throughout East Africa and developed from a service that streamlines simple cash transactions to providing an array of financial services that have fostered business development, social wellbeing and financial inclusion, particularly amongst low income earners and the rural population.
Further, financial technology continues to be a vibrant sector in East Africa, where new innovations continue to bring efficiency gains in everyday business transactions and socioeconomic gains to the general population. In 2018, we can expect innovations that team financial technology with healthcare, education, capital markets, pension providers and blockchain technology, all of which offer an enormous socioeconomic impact for relatively little cost.
However, to realize the full potential of financial technology and to make Africa the fastest growing digital consumer market in the world, significant investments are needed in enhancing the digital literacy of our population and in providing relevant local financing to innovations in financial technology, particularly for mobile financial services. Further, at EADB we believe that financing should be provided by investors that understand the specific needs of the region and the prevailing business landscape. EADB will continue to promote investments in STEM education and in the digitalization of the financial sector, yet we implore more investors to join us.