The success of m-payments in Kenya can provide a
blueprint for its east African neighbours, driving electronic
payments in a region that has struggled with its payments
infrastructure for years. A currency bloc, slated to be implemented
by 2012, could speed the process. Will Cain reports.


Economy: Kenya - key indicatorsKenya is the testing ground for a revolution that
could help extend financial inclusion to some of the poorest and
most remote places in the world. Its m-payments industry is
considered to be in the same league as those in Korea and

Over KSH318bn ($3.9bn) worth of
mobile payments were made in the Kenya last year, equivalent to
between 11% and 13% of the country’s GDP. Now, with plans to form a
currency bloc between Uganda, Tanzania, Burundi and Rwanda by 2012,
Kenya could be the launch pad for a boom in electronic payments
across east Africa.

As mobile phone use rises, banks
and governments in economies with less-developed payments
infrastructures may be able to bypass investment in areas like bank
branches and ATMs. Instead, they can concentrate on tailoring their
systems to benefit from the ever-increasing technology and
popularity of mobile phones as payment devices.



Fifty percent of Kenya’s population have mobile phones, compared
to the 27% that have access to formal banking arrangements.

The opportunities appear even
greater in Tanzania, where just 11% of its 42.5m population have
access to financial services. Around 52% of Tanzania’s population
are classed as “financially excluded” and its mobile penetration is
only slightly lower than Kenya, at around 42%. Uganda, with a
population of 31.7m, is another country which has a lot to gain
from the explosion in m-payments. It has a mobile penetration rate
slightly lower than Tanzania.

As the economies of the east
African bloc integrate their electronic payment infrastructures, it
should become easier to make transactions between and within these

“This paradigm shift, a change in
technology that is enabling people to conduct business in a
different way, is not replacing existing infrastructure like
branches and bricks-and-mortar,” said Mark Richards, a partner at
private equity house Actis, which specialises in Africa

“In many places the infrastructure
simply does not exist. If you had never built these bank branches
and the rest of it you would do transactions a different way given
the technology that’s available today.”

Driving this paradigm shift is
Africa’s biggest m-payments firm, M-Pesa. The business was
initially set up by DFID, the UK’s Department for International
Development, and Vodafone subsidiary Safaricom (see key
players, overleaf

The Central Bank of Kenya (CBK) has
also played a role in the development. Its strategy has been based
on promoting the uptake of mobile-based financial services to its
rural, unbanked population.

It all points to a clear economic
rationale for the development of m-payments in Kenya and beyond.
M-Pesa and South Africa-based m-payments provider MTN have expanded
in Uganda and other east African markets. They are betting that as
the economies become more closely integrated, payment volumes will
increase even more quickly.


Key statistics: Kenya payments industry – percentage changes 2004-2009Debit, credit and

Mobile is not the only part of the Kenyan payments system which
is experiencing explosive growth. The growth of mobile payments has
overshadowed strong progress in other areas, notably debit. Despite
the popularity of m-payments, debit remains the preferred payment
option by transaction volume, though this is likely to change by
the end of 2010 or during 2011.

Debit cards showed remarkable
growth in the five years from 2004-09, with cards in issue
increasing 357,000 to 3.7m, up 937%.

Transactions for the first six
months of the year were KSH175.6bn, almost 10 times higher than
spending on credit in the same period. There are now 4.3m debit
cards in the country, and debit cards in issue increased 12.5% in
the first half of the year.

The credit card market in Kenya is
relatively limited.

CBK figures show there are 109,271
credit cards in the country in total, with card spending of KSH286m
in July. Credit card spending in the first six months of the year
was KSH1.8bn.

There is a general lack of
enthusiasm for credit in Kenya, particularly among lower income
groups who show a preference for prepaid products. This preference
is part of the reason mobile money transfer through e-wallets has
become so popular.

Prepaid cards are showing some
encouraging signs, although MasterCard admits it has not launched
any of the products in the country. The only pure prepaid product
issued among the country’s leading banks was a Visa product issued
by government-backed Kenya Commercial Bank, the country’s largest
bank by assets. CBK figures show there are 19,701 prepaid cards in
the country, an increase of 17.6% from the end of 2009.

Spending on the cards showed a
steady decline over the start of 2010, with spending of KSH218m in
the first quarter of 2010 and KSH206.6 in the second quarter of the

The number of ATMs in Kenya has
been increasing rapidly, by 464% between 2004 and 2009. ATM card
transactions rose steadily throughout the first six months of 2010,
with KSH26.4bn in the first quarter and KSH28.1bn in the second
quarter. Point of sale infrastructure is also developing quickly.
There are 21,934 POS machines in the country, an increase of 38.2%
since December 2009.


History of

The reason Kenya has one of the more advanced payments markets
in Africa is because it has a different history to many of the
countries in the region. Nigeria, the second-largest economy in the
region after South Africa, which was covered in the last edition of
CI, has a powerful domestic card scheme, Interswitch, and
a large number of domestically-managed banks.

This is in part a legacy of the end
of colonisation, when banks including Barclays and Standard
Chartered were nationalised. In Nigeria, Union Bank is the old
Barclays business, while First National Bank of Nigeria is the old
Standard Chartered business.

Kenya, by contrast, did not
nationalise its banks, so businesses like Barclays and Standard
Chartered remain among the country’s leading players along with
domestic champions like Kenya Commercial Bank, a government-backed
institution, Co-operative Bank and Equity Bank.

Another factor in the development
of Kenyan electronic payments is the development of organised
retail, which is where point of sale purchases begin to develop.
Point of sale has also been driven by tourism, which contributes a
more substantial part of Kenya’s economy than many other African

As a result, Visa and MasterCard
are already established brands in Kenya. According to CI
research Visa has significantly more penetration in credit, debit
and prepaid.

The biggest development in the
electronic payments industry in the country in the past five years
has been the advent of the mobile phone and the ubiquity of
person-to-person payments. Stephen Mwaura, head of payments at
Kenya’s central bank, said regulatory policy has been designed to
foster an environment for mobile-based financial services to

For higher value payments, the CBK
implemented a real-time gross settlement system (RTGS) in 2005.
This is a SWIFT-based system and complies with Bank of
International Settlements guidelines on funds transfers. A
value-capping system was put into place in October 2009, meaning
all transactions over KSH1m have to be settled using RTGS.

This has created a two-tier system
between retail and wholesale payments.

“On large-value payments you have
efficiency and safety because we are using an RTGS system which
meets SWIFT standards,” said Mwaura.

“On low-value payments we get
efficiency. We can access the rural poor using mobile telecoms so
we have been able to extend financial services to the whole
population, which was not possible before.”

Transaction values: Kenya – value of transactions by card type and POS devices

Monetary union

As well as these initiatives, the central bank has been working
with the neighbouring central banks of Uganda, Tanzania, Rwanda and
Burundi on integrating payments policy.

Leaders of the countries have
signed a memorandum of understanding which involves tighter
integration between the countries, ultimately leading to a single
currency bloc which is currently slated for 2012.

Political complications and delays
mean the current deadline looks ambitious. But as the countries
increasingly harmonise their policies, the opportunities for growth
in electronic payments look strong in the coming years.

“The benefit in payments is all
about efficiency, which drives economic gain. You are reducing the
cost of doing business across borders, effectively,” said

“When we harmonise, we are
influencing each other. We pioneered mobile usage here in Kenya,
and you have seen M-Pesa go into Tanzania and Uganda. You can
expect that kind of integration to happen more and more.”

Politically, the country has been
seen as stable in comparison to other African countries.

The country is largely peaceful,
although violence – notably after the 2008 general election when
rioting left 124 people dead – is a concern and deterrent to inward


Key players

Kenya Commercial

Kenya Commercial Bank is the country’s biggest bank by assets.
It offers five different card products across the corporate, debit,
credit, co-brand and prepaid categories.

Its corporate card is a MasterCard
charge card which is marketed as a product that can help employers
keep control of employee expenditure. Its co-branded product is
also a MasterCard product. It is co-branded with hotel chain Serena
and can be used at any MasterCard-accepting ATM or merchant. It
also offers a range of classic and gold Visa credit cards, a
corporate payroll card which can be used to credit employee
accounts – effectively an ATM card – and a similar general-purpose
Visa prepaid product which is run on the Electron brand.


Standard Chartered Bank

Standard Chartered (StanChart) has just one specific card
product in the country – a debit card on the Visa Electron brand.
Features include the ability to pay utility bills via an ATM and
topping up Safaricom mobile phones. It also offers a foreign
currency debit card, a card which is aimed at
internationally-mobile customers.

The bank’s main focus has been
extending its online and mobile banking services, which it sees as
the best way to lower the cost of banking and attract new
customers. The products, launched in 2009, have attracted an
impressive number of customers. Thirty-four thousand customers
signed up for e-statements, 15,000 are transacting through its
mobile banking platform and 4,800 are using the new online banking

StanChart Kenya’s consumer banking
division registered a KSH2.5bn pre-tax profit in 2009, up 36% on

Key statistics: Kenya – number of cards, ATMs and POS

Co-operative Bank of

Co-operative Bank offers a range of debit and credit card
products segmented vertically. Its credit products are a “local”
Visa card which has a credit limit of KSH50,000, an international
Visa “classic” card with a limit of KSH274,000 and a gold card
product which no upper credit limit.

The gold card product offers free
entrance to VIP lounges at Nairobi’s international airport and
offers discounts on airlines, hotels and hospitals. At the end of
2009, the bank had KSH535m in credit card balances, up less than 1%
on the previous year (2008: KHS530m). The average interest rate on
outstanding balances was 42%, the same as in 2008.

Co-operative Bank offers one
standard debit card product under the Visa Electron brand and
offers mobile banking through the M-Pesa service.

The bank also has an agreement with
Kenyan savings and credit co-operatives (SACCOs). Its Visa-branded
Sacco Link card allows members of the credit unions to access their
money through 250 ATMs.


Barclays Bank

Barclays in Kenya made a pre-tax profit of KSH4.7bn in the first
half of 2010, an increase of 5% from KSH4.5bn the previous year.
The profit figure did not include the KSH3.6bn it is expected to
earn from the sale of its custody services business to Standard
Chartered. Interest income increased 7%, though net interest margin
(NIM) was down. Aden Mohamed, the bank’s managing director for east
and west Africa, said at an investor briefing that NIM had declined
from 20% in 2005 to between 5% and 10% this year.

The bank has a range of nine
transactional accounts, which includes a student account, two
Sharia-compliant accounts and a range of Visa-branded debit

Barclays has not had such an easy
time breaking into the Ugandan market. Earlier this month, it
rolled out its upmarket Premier service to Uganda, Barclays’ second
attempt to extend its retail banking services in the country in
four years. In 2006 it acquired locally owned Nile Bank and the
business has yet to register a profit.



Kenyan mobile phone-based money transfer service M-Pesa
continued to go from strength to strength in 2009, ending the year
with some 8m users, or about 21% of the country’s population.

A joint venture between UK mobile
network operator (MNO) Vodafone and Kenyan MNO Safaricom, M-Pesa
appears set to build on its success in 2010 thanks to a number of
innovative service enhancements. The latest of these follows an
agreement with Kenya’s ATM and electronic POS network operator
Kenswitch to allow bank customers to send money to M-Pesa accounts
by means of an ATM transaction.

Family Bank has become the first
Kenyan bank to announce its participation in the new service,
Chapaa Chap Chap (CCC), which comes at a KES0.50 ($0.01) fee over
and above the normal M-Pesa fee. Kenswitch, which is owned by a
consortium of Kenyan banks, provides switching services for some
650 ATMs.

A significant enhancement brought
about by the CCC service will be consumer convenience, in that it
eliminates the need for bank customers to withdraw cash at an ATM
and then seek an M-Pesa agent to make a deposit into their M-Pesa
account before undertaking a transfer. The CCC service also enables
bank customers who are not M-Pesa account holders to make transfers
to M-Pesa accounts.

This CCC service also overcomes one
of the problems faced by M-Pesa: cash flow constraints experienced
by some of its 13,300 agents in Kenya, especially in rural areas
where consumers more frequently make cash withdrawals than cash
deposits. According to Safaricom, M-Pesa’s monthly person-to-person
transaction volumes in September 2009 totalled $302m, up from $183m
in January 2009, while by the end of September 2009 transactions
totalling $3.4bn had been processed since the service’s launch in

The CCC service follows another significant breakthrough made by
M-Pesa in October 2009, when it launched a mobile phone remittance
service between the UK and Kenya. First mooted in March 2008, the
launch was delayed by regulatory hurdles which were resolved
following negotiations – including those relating to foreign
exchange issues between the Bank of England and the Central Bank of

M-Pesa: Mobile payments – person-to-person transfers