Mobile phone penetration has reshaped financial services in sub-Saharan Africa. One country synonymous with this transformation is Kenya, widely recognised as the global epicentre for mobile banking thanks to the success of M-Pesa, the country’s mobile phone-based money transfer and financing service.
Since launching in 2007, M-Pesa has amassed 31m users – around 63% of Kenya’s population – and 50% of the country’s GDP is estimated to flow through the network.
Earlier this year, Kenya again showed how the rapid adoption of mobile banking can make it a world-leader in financial innovation. In March the Kenyan Treasury issued the first mobile-only government bond, M-Akiba. The government offered the bond to investors through the M-Pesa platform.
For many emerging economies, the lack of developed financial infrastructure necessitates innovative solutions, like M-Akiba, to traditional challenges. M-Akiba differs from conventional government bonds not only because of the use of a mobile platform, but because it was designed with the goal of improving financial inclusion.
Institutional investors typically dominated Kenya’s market because only they could reasonably afford the minimum of Kes50,000 (around $500) for government bond purchases. M-Akiba tries to address this imbalance by reducing the entry price to Kes3,000, making the programme more accessible for less affluent retail investors.
Central bank statistics show the gross deposits in Kenyan banks amounted to around Kes2.7tn at the end of November 2016, with 95% of all accounts holding less than Kes100,000. In comparison, banks in Spain, which has a similar population to Kenya, hold deposits of around $1.6tn, more than 60 times higher.
One reason for these small volumes is that the Kenyan banking sector has capped interest rates on savings accounts and products, meaning consumers are offered low or even negative rates of return. Traditionally, small savers have put their money in illiquid investment vehicles, such as investment clubs, where they must wait for months before being paid a lump sum, often without interest.
M-Akiba, however, is a three-year bond and provides investors with 10% tax-free interest, payable every six months. By pricing the bond at 10% the government is able to compete with the low interest rate products and savings accounts offered by banks, as well as the less formal investment clubs. Moreover, as M-Akiba does not require a formal bank account, it will attract savers from Kenya’s large unbanked population.
In addition to boosting financial inclusion, M-Akiba is intended to finance large infrastructure projects. The initial tranche was worth Kes150m and targeted 50,000 mobile money users in a two-week window in March. The pilot was a success; more than 104,000 people registered for the auction and the issue sold out two days ahead of schedule. However, the main listing of Kes1bn in June had a slower uptake, with the bond reaching only 25% of the targeted amount and the Treasury extending the deadline by seven weeks.
One explanation for this is timing, as the launch coincided with the contested presidential election. With so much political uncertainty, many Kenyans opted to hold their cash. The initial bond offering was extended to after the elections, though the Supreme Court ruling annulling the result of the election dealt another heavy blow. Protests during the poll’s re-run last Thursday, in which at least three people were killed, deepened the country’s political crisis.
There is a broader issue which explains why the main listing underperformed and remains undersubscribed. Initially there was a great deal of interest surrounding the launch of the bond. Investors in the pilot were early adopters, whereas the main issue targeted a broader population. These are different groups and demand alternative marketing strategies. A sustainable market must be in place for M-Akiba to become a recognised investment channel.
This issue is far from insurmountable. The challenges of launching a new product include marketing it correctly and educating investors to promote interest. Average Kenyans need to feel confident in M-Akiba before they begin to pay in. As Wohoro Ndohho, director general of public debt management at the Treasury, has said, this process ‘is a marathon, not a sprint’.
Oliver Thew is Programmes Manager at OMFIF.