How will the removal of the interest rate cap shake up Kenya’s fintech ecosystem?

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In early November Kenya’s Parliament agreed to remove a cap on interest rates that had been in place since 2016.

The limit was initially introduced to rein in high borrowing costs, but gave rise to a slowdown in lending and has been blamed for stymieing economic growth.

Micro-, small and medium-sized businesses (MSMEs) were particularly affected by the cap.

“More than 80% of the businesses in Kenya are MSMEs. They generate around 75% of all jobs and 30% of annual GDP,” Charles Waithaka, chairman of the Micro and Small Enterprises Authority, told OBG. “Consequently, they constitute a significant loan market, as well as a major economic driver.”

Prior to the interest rate cap, the MSME loan portfolio was growing at an annual rate of 15%, but this more than halved after 2016, with traditional banks preferring low-risk borrowers such as corporations or government entities.

See also: The Report – Kenya 2018

Market opportunity for non-traditional lenders

In response to the new lending environment, a number of non-traditional lenders – such as financial technology (fintech) firms Branch, Tala and Saida – moved in to help bridge the gap in lending and provide loans to MSMEs. This also had the effect of boosting Kenya’s vibrant fintech ecosystem.

A significant development in this regard has been Stawi, a platform for lending to MSMEs that was launched in early November by the members of the Kenyan Bankers Association (KBA), namely KCB Group, NCBA Bank, Cooperative Bank of Kenya and Diamond Trust Bank.

It is designed to offer credit to start-ups via loans of between KSh30,000 ($291) and KSh250,000 ($2430), with repayment periods of between one and 12 months, and an interest rate of 9%. The service acquired 100,000 users during a trial phase that began in May, a figure that is set to expand considerably.

Stawi offers a rate that is lower than the figure that was stipulated by the cap, suggesting that traditional banks have learned from the last few years, and are ready to compete with digital lenders.

“It is important for start-ups and micro-enterprises to move into the formal banking segment, away from potentially predatory lending practices,” Habil Olaka, chief executive officer of the KBA, told OBG.

Strong fintech growth

Increased digital lending is one aspect of broader developments that have seen solid growth in fintech – and in particular mobile money – platforms in recent years.

The value of mobile money transactions has expanded rapidly over the past decade, from KSh166.6bn ($1.6bn) in 2008 – the first year that the Central Bank of Kenya (CBK) recorded results for the segment – to KSh3.7trn ($36bn) last year.

This rise has been led by the growth of M-Pesa. The platform, which was launched in 2007 by telecoms firm Safaricom and controls around 80% of the mobile money market, allows users to send money, pay bills and apply for loans via SMS.

The rapid expansion of mobile money over the past decade has improved access to financial services. According to a study carried out by the CBK and consultancy FSD Kenya, the rate of financial inclusion has risen from 27% in 2006 to 83% as of April this year.

Highlighting the importance of mobile services, the report found that 79% of the adult population had a mobile money account and 25% used other forms of mobile banking, while just 41% held a traditional bank account.

Mobile Money 2.0

As growth in digital payments continues, much of the segment’s ongoing success stems from its adaptability, with many fintech players in the country looking to pivot towards more advanced products and services.

While initial mobile money offerings were simple SIM card-based solutions enabling the transfer of funds, many have developed into more sophisticated platforms that use Android or iOS operating systems.

This phenomenon, known in the industry as Mobile Money 2.0, has also led to the creation of so-called “digibanks” that are looking to expand beyond traditional payment and remittance functions.

“The Kenyan fintech market has evolved into its second stage after the initial proliferation of mobile money transfers, and now offers a wide array of credit products rolled out by both traditional banking players and digital lenders,” Ken Njoroge, group CEO of digital payment firm Cellulant, told OBG.

The sector has also seen establishment of partnerships between mobile money platforms, local banks and other financial institutions, with a view to offering fully fledged financial services.

For example, Safaricom has in recent years signed agreements with the Commercial Bank of Africa Group and Kenya Commercial Bank to allow them to offer loans and take deposits via the M-Pesa app. Meanwhile, in April this year Safaricom signed a deal with Kenya’s Equity Bank to re-launch the M-Kesho mobile banking app, after an unsuccessful attempt nine years ago.

These developments point to a promising future for fintech companies, both as standalone players and in collaboration with traditional banks following the removal of the interest cap.


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