Kenya has received world-wide recognition as leader in financial innovation. This is a laudable achievement because finance holds the potential to unlock solutions to the real-world problems that Kenyans face in their daily lives. Much innovation activity in the country has centered on payments and digital lending solutions, both of which provide the rails for trade. Financial innovation can largely be attributed to the tremendous growth of financial inclusion in Kenya, standing at an all-time high of 83% according to the 2019 FinAccess Household Survey conducted by the Central Bank of Kenya (CBK), the Kenya National Bureau of Statistics (KNBS) and FSD Kenya. This unprecedented leap in financial inclusion – coupled with the enactment of regulations that largely support innovation and establishment of critical financial market infrastructure such as the credit referencing bureaus and the movable collateral registry – mean that opportunities for financial innovation remain unlimited.
Despite the remarkable pace of innovation in Kenya, there is little evidence that access to finance has had significant developmental impact for low-income households and smaller enterprises. The 2019 FinAccess report measured the financial health of Kenyans. Financial health refers to the ability of Kenyans to use financial services for managing daily needs, protecting themselves from shocks and helping them to achieve their long-term goals. The results indicated a drop financial health from 39 % recorded of Kenyans in 2016 to 22% in 2019. This clearly demonstrates that despite the increasing breadth and reach of finance in Kenya, the depth and value accruing to Kenyans remains wanting.
FSD Kenya believes that having access to financial instruments in and of itself is not adequate to alleviate poverty and improve the quality of people’s lives. In order for finance to add value to end users, it needs to be delivered in a timely manner and in the right quantities to enhance its usefulness. Pricing must equally be right to ensure that value is not extracted from the end user while meeting costs for sustainable financing. In addition, there is a need for adequate information to enhance trust between supply and demand of finance, and very importantly, financial innovation has to factor in the realities (real economy) of the users if it is to maximise value for them.
One easy way to illustrate the gap in value is to look at the agricultural sector in Kenya. Despite having 73% access to finance, the agriculture sector attracts less than 5% of total gross commercial loans. This is despite the key role that agriculture plays in Kenya’s economy, directly contributing 26% to the country gross domestic product (GDP) and a further 27% through linkages with other sectors. Agriculture also employs more than 40% of Kenya’s population and provides the livelihood (employment, income and food security needs) for more than 80%.
Source: 2019 FinAccess
Source: Paul Gubbins / FSD Kenya analysis of 2019 FinAccess Data
One explanation as to why this sector is largely underserved by formal finance is the high level of informality that brings about high opacity where formal finance is not able to optimally price risk in this segment. With this reality in mind, how then can value of finance be enhanced for this sector? The question, while seemingly simple, is a complex one. The reality is that financial providers need to dissect the fine workings of the agricultural sector to better understand opportunities for finance in unlocking potential of the sector. The sector itself might also need to innovate new models of how business is conducted to enhance productivity and transparency for finance to be embedded. Thus, to enhance value, innovation in finance needs to complement innovation in the real economy.
To facilitate the financial market to shift innovation activity towards real economy constraints, FSD Kenya launched its Financial Innovation for the Real Economy (FIRE) project in 2018. The project’s core objective is to evolve financial innovation by; (i) developing linkages between financial innovators with innovators in real economy sectors; (ii) supporting financial innovators develop solutions that address constraints in real economy sectors; and (iii) supporting innovators in real economy sectors embed financial solutions.
As we saw in the paradox of the Kenyan agricultural sector above, mere access to finance is not enough. Innovation must play its rightful role in addressing actual bottlenecks. The FIRE project has undertaken multiple interventions to demonstrate how financial innovation could enhance value and growth in real economy sectors. I will showcase some of our key learning including successes and shortcomings in subsequent blogs.