Ideas & Debate

How digital lenders and banks are helping to drive inequalities

Central Bank of Kenya. PHOTO FILE | NMG


  • Banks can be indicators of inequality in economic development, wealth and income.
  • This corresponds to monetary theory but invites to focus on mobile money and digital lenders (Fintechs).
  • The segment is a growing focus of unregulated lending in Kenya, relying on M-Pesa since 2007.

According to data from the Central Bank of Kenya, the counties of Nairobi, Mombasa and Kiambu hold the shares of the county bank branches: 794 branches or 53% of the 1,502 bank branches or outlets in Kenya. The July 6, 2021 Busines Daily article, “Bank branches reveal rich and poor counties,” links this to their 30.9% contribution to Kenya’s GDP, with Nairobi accounting for 73% of Kenya’s billionaires.

Banks can be indicators of inequality in economic development, wealth and income. This corresponds to monetary theory but invites to focus on mobile money and digital lenders (Fintechs). The segment is a growing focus of unregulated lending in Kenya, relying on M-Pesa since 2007.

Kenya performs better than most emerging markets. The downside is that our economic policy has not caught up much in balancing the pros and cons of digital access.

Consumer protection, monetary and fiscal potential, etc. are involved. In the recent Ipsos survey on credit use, for example, loans are taken to start or develop a business (35%), buy food (25%), pay school fees (24%), etc. Yet traditional banking is in decline.

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

Traditionally, regulated commercial banks are essential for balanced development. They transfer excess capital from developed regions to less developed ones, which is called financial intermediation.

If the flows go to predatory lenders like fintechs, they trap consumers and the poor in cycles of debt and inequality. This explains why a Trump-era “real lender” rule in the United States is being removed by President Joe Biden. It circumvents interest rate ceilings via fintechs.

Step into Kenya’s money and digital lenders for market share, praised for financial inclusion, SME finance, and the chance discovery that our capital account is open.

One hoped that their dominance through fintech and foreign forays like Tala and Branch, relying on M-Pesa, would increase the excess flows attracted by international funding.

Not really. Instead, Kenya’s major banks made the decision to shift customer deposits (as liabilities on commercial bank balance sheets) to assets (loans) funding unregulated loans rather than regulated loans.

Much higher interest rates are charged but coded as “facilitation fees”; or the ease of discovery of Fuliza. In this way, the banks bypassed the 2016 interest rate cap and Kenya caved in. M-Shwari, for example, is a fully digital bank account running on the rails of M-Pesa.

The unregulated lending backdoor simulates the predatory and predatory lending that the United States is cutting. Annual percentage rates (APRs) reach over 500 percent, 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, generate a trickle of foreign funding, expatriate massive surpluses unhindered but sideline traditional banks’ goals of consumer and data protection, partnership agreements, and requirements. central bank capital.

Seeing the same problems for the poor as in microfinance entities, the CBK should have been given rules to exploit the segment, recapture fair surplus flows, protect consumers and even pave the way for the National Treasury to tax the very lucrative fintechs. for income. .

Questionable surplus leaks and anti-developmental uses are proliferating. Fintechs impoverish borrowers; for example, loans for gambling, gambling, betting and consumption with questionable productive results. The outings even help fund English football clubs. The migration of banks to digital lines also cuts jobs to cut costs and could increase poverty.

Unregulated lending forays into Kenya’s financial sector, our GDP growth, developed and less developed countries, borrowers and the Treasury could be the main losers.

The anti-developmental effects deflate the enormous potential of fintech into technological advantages. A way exists in Article 231, the Constitution, for the CBK to regain the balance rather than allow usury and greed.

Yet in a stunning display of Kenya’s resilience under autopilot in economic policies cited in the Business Daily article, economic struggles sometimes defy obstacles and disincentives.

A World Bank study on Kenya and Rwanda (WPS7461-October 2015) focuses on country performance. Kiambu’s GDP per capita in 2013 was $ 1,785, calculated in constant 2005 dollars.

It was the highest in Kenya ($ 694). It overtook not only the Central Region counties under the Central Region Economic Block (Cereb), but Nairobi ($ 1,081). Only three of the ten counties in the central region had lower GDP per capita than Kenya.

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

Analysts of the consequences overlook inequality and the surplus is the perpetration of disparities in growth and industrialization, how they ruin the future prospects of disadvantaged countries.

The Kiambu potentials highlighted in the World Bank study are illustrative. Thanks to an economic structure dominated by the secondary and tertiary sectors, it revealed very high prospects for industrialization.

The sectors stimulate the transformation of raw materials, added value, services and light industry. They increase jobs, incomes and boost savings. Kiambu sectors occupy more than 93 percent of economic activity compared to the oft-touted agriculture (tea, coffee, eggs, livestock and dairy products) which takes up 7 percent.

Other evidence from the KNBS shows not only the notable economic weight of the counties in central Kenya, but also of the major powers of Nairobi, Mombasa and Kiambu cited in the BD article. The central region in the early stages of its CEREB strategies had an economic size of over US $ 20.54 billion (Ksh 2.12 trillion) during the period 2013-2017.

While it would be a major beneficiary of better financial intermediation, its economic size in world comparison is remarkable. If it were a state in 2018, its GDP would have been ranked in the World Bank’s global ranking at number 113 out of 204 countries / territories.

In Africa, it would rank 21st out of 53 countries / territories (with Rwanda ranking 34th). It would be an economy larger 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, Gambia, Seychelles, Guinea Bissau, Eritrea and South Sudan.

What about Kenya’s responses to financial sector disruption and resulting inequalities? All counties would be better off with increased intermediation. Borrowers would benefit from lower rates and the public treasury would share in the benefits of Fin Tech. The income and wealth inequalities of the counties would decrease. Kenya’s GDP performance on the continent and globally would be a miracle.

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

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