Interest Rate Caps in Kenya – Eight Reasons for Mobile Banking and Crowdfunding to Remain Optimistic
On 14 September 2016, the Banking Amendment Bill (2015) will come into force in Kenya.
The stated rationale behind the amendment is to promote transparency and protect consumers in the country’s highly profitable, bank-dominated credit markets. It caps interest rates for any “credit facility” at 4% above “the base rate set and published by the Central Bank”; and to pay a minimum rate of interest to depositors of 70% of that base rate on “interest earning in Kenya”.
The consequences of this new legislation remain to be seen, namely whether credit will be extended to the mass consumer market at lower rates or in fact rationed.
For certain, under the new framework, Kenyan banks will be challenged to find models which balance outreach and profitability. Less certain is the impact on Kenya’s fast growing mobile credit industry – internationally recognised for innovation and inclusiveness.
At Pesa Zetu – East Africa’s first mobile phone-led, peer-to-peer lending platform – we find eight reasons to remain optimistic about our marketplace model of facilitating mobile lending to very low income borrowers in Kenya:
- Mobile credit has not penetrated the Kenyan mass low income market. It is not ubiquitous. Recent data from FSD Kenya shows that only app 10% of the poorest 40% of Kenyans have used a mobile credit product like Mshwari.
- That’s unlikely to change any time soon particularly if bank-based mobile lenders (e.g. Mshwari, KCB Mpesa, Equitel) are now restricted in their ability to offer risk-adjusted and priced loans generally and/or to the poorest 40% – a possible consequence of the new legislation.
- There’s justified excitement about the affordability and rapid rise of smartphone penetration. That said, GSMA forecasts show that smartphone penetration in Kenya does not reach 50% prior to 2019 – that is 3 years away. So, the smartphone based lenders by virtue of the right long-term technology choice (they rely on smartphone usage), cannot (for now) penetrate this segment of the population as the vast majority of the poorest 40% don’t have smartphones.
- Pesa Zetu’s sole strategic borrower-side focus over the last year, in collecting data from and talking to over a thousand low-income borrowers, building and testing our credit models with our partners at First Access and working with the likes of CGAP and the Busara Centre for Behavioural Economics to understand how to best to communicate and structure products for this excluded borrower base, has been to focus on mass market borrowers, the poorest 40%.
- We believe that being “all in” in this mass-market segment now, at a time when mobile credit penetration amongst this segment is so low, allows us and our Kenyan lenders to build lasting relationships with communities at a time when the battle amongst mobile credit providers is focused on the middle class and the aspiring middle class – there’s an interesting anecdote doing the rounds that the advertisements of two competing app based lenders show the same customer – that’s instructive. Building those relationships early gives us an important head start for the long term.
- We understand what we are doing by focusing on the poorest 40% is very hard. The other reason that the mass informal market is underpenetrated is because it carries, or is perceived to carry, significant credit risk. We are excited because, over the last 12 months, we have started to identify profitable segments of borrowers that repay on time, become loyal repeat borrowers, and to whom Kenyan lenders can lend and earn returns.
- Any marketplace has buyers and sellers, in our case lenders and borrowers and we know we will have to manage demand with supply. We focused on the borrower side first. We are now actively engaging with lender communities. Kenya has 1.2m retail investors on the Nairobi Stock Exchange. Investment and lending groups are built into our social fabric. Over 70% of Kenyan adults lend and borrow socially. Kenyans like the value digital marketplaces can bring – just look at the success of Uber and the impact it has had on driving prices down. We believe that the combination of these factors make Kenya and other sub-Saharan African markets ready for peer to peer lending and finance models.
- On the ground, peer to peer markets are on the move in East Africa. On 15 June 2016, FSD Africa and the Kenyan Capital Markets Authority hosted a ground-breaking first meeting of East African regulators, sector participants, including ourselves, M-Changa (donation-based crowdfunding), and the Lelapa Fund (equity crowdfunding), investors and advisors to initiate a conversation around best practice regulation peer to peer finance. To follow up, FSD Africa commissioned Anjarwalla and Khanna and the Cambridge Centre for Alternative Finance to review international best practice in crowdfunding regulation to support the design of an East African approach. We are committed to being at the heart of that conversation.
Pesa Zetu will launch in Kenya later this year.
The Pesa Zetu model focuses on ways to leap frog and catalyse the growth of the peer to peer lending sector in East Africa. It aims to be a scaleable alternative avenue for digital finance and financial inclusion where the potential for earning returns as lenders is democratised and localised. We work in partnership with FSD Africa, FSD Kenya, and CGAP.
If you would like to try out lending on Pesa Zetu or to learn more then please write to us. Otherwise – watch this space. We think there are many reasons to remain optimistic.
Founder, Pesa Zetu
His email is: firstname.lastname@example.org
He tweets at: @PesazetuAfrica
 Capital Markets Authority – Q1, 2015 – Statistical Bulletin.
 Financial Sector Diaries – 2014