Kenyans are savers not gamblers

Last week, my General Manager Domestic Affairs(aka GMDA) decided to change her bank provider. GMDA came home that evening gushing praises about how the new Bank X had told her that she could set aside Kshs 1,000 every month to save for school fees and it would be automatically deducted from her salary account. No bank had ever taken an interest in her life, or in providing her with an automated way of saving for this critical aspect of her children’s security

As GMDA was talking, a news item appeared on the television about the uptake of the M-Akiba bond. I turned up the volume, as this could potentially be an option I could provide to my the-savings-scales-have-fallen-from-my-eyes GMDA.

The product is beautiful in its simplicity. Dial a number, register, place Kshs 3,000 for 3 years and earn tax -free interest twice a year. In my view, someone in Serikal is finally using data the way it’s supposed to be done: not to gather dust in shelves at the bureau of statistics but to drive behavior and economic growth. And nowhere is there more rich data than in the Financial Access Household Survey issued February 2016 by FSD Kenya working in collaboration with the Central Bank of Kenya and the Kenya National Bureau of Statistics.

The report finds that 75.3% of Kenyans are now formally included, with the giant leap being taken by women where formal inclusion leapt between 2009 and 2013 driven by the spread of mobile financial services.Formally inclusion is defined as use of banks, mobile financial services, SACCOs and microfinance institutions. Why would there be such a quantum leap in the growth of women users? I daresay that the convenience and the absolute privacy that mobile financial services provide make it a key attraction for the women. Not having to make a trip into a commercial centre to deposit or withdraw from a bank and not having a debit card or statement lying around that can generate heated arguments as to “hidden resources” is a major draw.

While the FSD report doesn’t go into the abominable aspects of betting, it does delve into it’s divine counterparty: savings. The FSD report finds that the number of Kenyans using at least one savings or deposit instrument continues to rise and at least 66.4% of the adults sampled have a savings instrument. Almost half of those adults use savings for meeting ordinary day-to-day needs, a third save for education and 40% also save for medical emergencies and burial expenses.

One more critical finding: 42.6% of business owners and 87.7% of farmers rely heavily on their savings to finance their livelihoods.

It is on the back of this data that we should critically look at the potential of M-Akiba to provide a viable savings platform. M-Akiba has the potential to pull funds sitting tied in a knot in the corner of a leso or under the cooking hearth into the formal economy especially since the FSD report finds that the top two most valued storage places for Kenyans are their mobile financial services accounts and saving in a secret place!

Meanwhile, I tried registering for M-Akiba, so that I could sell it to GMDA. After jumping through several hoops, I ended up feeling like a hamster on a wheel so I jumped off. I called the number provided online and a lovely lady called Brenda answered on the third ring, telling me the system was experience downtime. By the time of submitting this piece it wasn’t yet up. I trust that the developers of M-Akiba will make this an iterative product, tweaking it as they get more and more customer usage data to determine how and why Kenyans are using it. Just like how M-Pesa was launched as a money transfer system but ended up being a virtual repository of cash, M-Akiba might not be used for what its creators envisaged it for. Customers use your product to do a job. Time will tell what the true job of M-Akiba will be, but the ultimate winner will be the government with a new, and far less interest rate demanding investor in its securities.

Banks have to go mobile to stay relevant

The 2016 FinAccess Household Survey – published in February 2016 by Financial Sector Deepening (FSD) Kenya – provides the most recent data of Kenyan behavior around consumption of financial products and services and is a treasure trove of information for any banking strategist.One key finding was the use of credit. In what reflects the wealth distribution within the Kenyan population, 57.3% of the survey respondents in the research reported that they take credit to meet their day-to-day needs. The second highest need for credit was to pay school fees at 21.5% and only 15.8% were using credit to generate wealth in the form of business loans.

Having a customer who has insatiable credit needs is banking nirvana. The question is how to do so in a manner that will be cost effective with minimal loan loss potential. The FinAccess Household Survey should be read together with yet another FSD research paper titled the Financial Access Geospatial Mapping Report launched in October 2015. The report essentially tracks access to financial services across the Kenyan geography, using data from Kenya National Bureau of Statistics, with unsurprising results.

Answering the question as to how many service access points exists per 100,000 people, the report finds that there are 3 banks, 1.5 ATMs and 32 bank agents serving that population. It gets more interesting as you start to look at the extent of mobile money penetration. Mobile money access points are 54 times that of banks at 163 with mobile money agents growing from approximately 48,000 locations in 2013 to nearly 66,000 locations in 2015 which is a 37% growth. Meanwhile, population within 3 kilometers of an ATM remained stagnant at 23% in the two years. Bank branches grew a paltry 1% from 26% to 27%, while bank agents grew from 53% to 60% in the same radius.

What is the data saying? The average Kenyan uses credit heavily to support his basic lifestyle and is nearer a mobile money access point than to a bank. The growth of mobile money agents demonstrates very low barriers to entry and should inform a bank’s decision on whether to purchase an ATM – whose price ranges from Kshs 2 million to Kshs 4 million depending on whether it has deposit taking capabilities – or whether to invest in deepening its mobile banking platform to deliver products through a wider customer delivery channel (at no cost to the bank) that is growing exponentially year on year.The interest rate capping on loans may have curtailed bank appetite for formal unsecured lending, but the two mobile loan products of KCB Mpesa and Mshwari continue to enjoy unfettered demand and have survived the interest capping law due to their fee based rather than interest rate based pricing which the average borrower is apparently indifferent to. The lesson here for the proponents of the interest capping law is that the average Kenyan who is trying to survive is more interested in access to credit than in the actual cost of that credit. The growth of mobile access points demonstrates that it is the preferred mode of not only transferring money but also storing that monetary value.
The critical question bank strategists should be asking themselves is how to piggyback off the cheap mobile agent network to provide loans and take deposits. The evidence already points to the need for smaller branches, fewer ATMS and greater use of historical mobile use data to generate personal credit ratings. Developing mobile banking applications for the average Kenyan is what will separate the chaff from the rice in the future banking industry.

Driving on borrowed funds

[vc_row][vc_column width=”2/3″][vc_column_text]Mutua stops John in BuruBuru and asks for the quickest way to Westlands.
John asks, “Are you on foot or in the car?”
Mutua says, “In the car.”
John says, “That’s the quickest way.”

In case you missed it, there is an obscenely symbiotic relationship between the growth of credit supply in Kenya and the now ubiquitous traffic jams that are spreading beyond this cities of Nairobi and Mombasa. Rather than rehash what I have written before, I pulled out some data from the Economic Survey 2015 that was put together by the Kenya National Bureau of Statistics so as to get a verified position of my thesis. First let me give credit where it’s due. The 2015 Economic Survey, all 334 pages, is a treasure trove of statistical information on all aspects of the Kenyan economy. It is a very useful tool for looking at historical information about education, health, banking, government and many other sectors as well being able to extrapolate trends if you’re so inclined. Well, the data on vehicle importation was eye-popping to say the least. In the last four years, the annual importation of motor vehicles has grown from Kshs 62.8 billion in 2011 to Kshs 101.7 billion in 2014, a 62% growth in value terms. I know what you’re thinking, as you roll your eyes at this number: it must be the confounded boda bodas that are driving this growth.

Actually it’s not. In 2011, there were 140,215 motorcycle registrations, which was actually the highest in the last four years. By 2014, there were 111,124 motorcycle registrations or a 20% drop. Conversely, lorries and trucks grew from 5,247 in 2011 to 10,681 in 2014, a growth of 103%. Now, I find that quite interesting. What are these lorries hauling? Is this growth in any way related to long distance transportation of goods across East Africa or is it related to the SGR construction where countless Chinese trucks criss cross Mombasa Road moving building materials? I did note that many of them did not bear Kenyan registration plates when I last drove past an SGR construction site so my point might actually be moot (since the KNBS numbers describe actual vehicle registrations) and the growth in truck importations could directly be linked to long distance transportation or phenomenal growth in the building construction industry. But I digress, as I wanted to demonstrate vehicular traffic of the jaw-dropping fame that has now consumed us as a country. In the same period, saloon car registrations grew from 11,026 in 2011 to 15,902 in 2014. That sounds low doesn’t it? 44% growth in 4 years? Well you just wait for the kicker. Registration of station wagons grew from 31,199 to 53,542 or 71% growth in the same four-year period! These are your Proboxes, Toyota Wishes, Nissan Wingroads, Subaru Imprezas, and all manner of station wagons that, together with saloon cars, have transformed our roads into the collective sludge of traffic non-movement. What is financing this phenomenal growth in vehicular traffic? The Kenyan banking industry is.

So I pulled up a fairly decent report issued quarterly by the Central Bank of Kenya. The report, titled “Developments in the Kenyan Banking Sector” provides information on sectoral distribution of loans in the banking industry. Using the quarter one 2012 and quarter one 2015 reports, the not-so-surprising revelation is that lending to the personal/household sector (which is where unsecured consumer lending is recorded) is the single largest borrowing segment in the entire Kenyan banking industry. Let me say that again: loans to individual Kenyans are higher than loans to any other singular sector of the economy. (If I handed in this piece on time, my copy editor would have been able to insert an illustrative table, but time doesn’t allow for this insertion, unfortunately). By December 2011, the banking industry had lent out 318.8 billion to the retail sector, which was 27% of the Kshs 1.1 trillion gross loans and advances. Four years later, the banking industry had lent out 518.2 billion to the same retail sector out of the Kshs 1.97 trillion gross loans and advances. So even as the growth in loans and advances has almost doubled in four years, lending to the personal sector has steadily maintained its rate at just a quarter of total bank lending. The bulk of these loans are personal, unsecured loans that are taken to purchase motor vehicles.
I called up an old friend, who heads up the Risk Department in a Tier One bank here in Kenya. He confirmed my numbers that personal consumer lending at his bank makes up about 55% of the total bank loan book. He dropped another bombshell as a parting shot. He had just returned from a credit conference in South Africa where a consultant had made a presentation on the state of credit in many African economies. In South Africa particularly, the rate of borrowing in most households was at 75%. In Kenya, the research had it at 68%. While the banking industry (and to a lesser but noteworthy extent, the Savings and Credit Cooperative Society industry) have democratized access to credit in this country, a key unintended consequence has been to democratize access to vehicle ownership for Kenyans. What we see on our roads daily will not go away. And for those whose hopes had risen with the increase of excise duty on the smaller capacity vehicles as was done in the last budget, you need to peg your hopes down a notch. Increased taxation will not stop vehicle buyers from purchasing cars; it will only increase the size of loans being requested by consumers. For as long as the banking industry is willing to continue growing its personal unsecured lending segment, there will be more cars on our roads that can only mean even more mind numbing traffic and idiotic over lappers. It might actually be faster to walk to Westlands from BuruBuru than to drive in the next five years!

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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]