Unveiling Opportunities in Kenya’s Lending Landscape

Kenya's lending market surpassed US$ 21.5B in 2023. Growth is the result of a positive confluence of mobile adoption, consumer demand, and a growing ecosystem of suppliers. Opportunities for new and incumbent financial players abound, but the ability to capitalize on growth is uneven and challenging.

This article explores the lending and borrowing ecosystems, untapped opportunities, and potential ways in which players can adapt and win the space.

Kenya's Lending Market

Understanding the Taxonomy of Borrowers

Kenya's financial landscape is undergoing a dynamic transformation driven by a growing and diverse population. KoreFusion’s research in the Kenyan lending market unveils a range of consumer segments with distinct financial behaviors and unattended needs. Understanding these needs presents a significant opportunity for lenders who can tailor products and services that cater to these untapped segments.

Despite growth and new products, this maturing financial ecosystem still faces gaps in loan offerings. The historic focus on financial inclusion, while positive, has resulted in an acute mismatch of offerings for digital-savvy youth, the growing middle class, and established affluent segments. Subsequently, interesting opportunities abound, including the development of appropriate instalment loan products matched to the corresponding customer base of each player, for example.

Lenders can diversify and tailor their product portfolios to better meet the nuanced needs of these segments. By focusing on product innovation, transparent communication, and customer-centric design, lenders can enhance financial inclusion and customer satisfaction across the board.

A Snapshot of Kenya’s Financial Ecosystem

Kenya’s financial landscape is comprised of various actors, each serving distinct niches. Formal channels are dominated by mobile wallets, banks, and SACCOs (Savings & Credit Cooperatives), which offer a range of formal credit products, with an increasing focus on instant, mobile-based personal and small business loans.  

Formal Channels

Amongst the formal contenders, banks hold 17% of Kenya's lending, predominantly catering to the middle and affluent segments in urban and peri-urban areas, with a significant demographic cluster within the 35-45 age group. These clients typically engage with banks for large and planned expenditures, reflecting a relatively mature banking relationship. Banks also currently issue credit cards; however, this market is nascent with a low penetration rate of 38 cards per 100 adults. 

SACCOs (Savings and Credit Cooperative) are pivotal in fostering financial inclusion in Kenya, with 176 regulated deposit-taking SACCOs, 183 regulated non-withdrawable deposit-taking (NWDT) SACCOs, and approximately 3,200 unregulated unions. These cooperatives serve a combined membership of 8M, highlighting their significant role in the community.

The SACCO industry is marked by a high concentration, with eight leading entities like STIMA, Mwalimu, and Harambee holding 50% of the industry's total assets. The distribution of total gross loans, amounting to US$ 4.7 billion, with 77% (US$ 3.6 billion) concentrated among private sector and government employees, underscores the critical role SACCOs play in supporting the salaried segments of the population. Approximately 2.9M government and private-sector employees access loans through SACCOs.

Fintechs are disrupting the Kenyan lending landscape, playing a growing role in instant personal and microloans, and actively developing alternative credit-scoring capabilities. With 51 licensed digital lenders and an estimated 350+ unlicensed apps, the landscape is both vibrant and complex.

The fintech lending market has seen significant concentration, with five leading apps accounting for 80% of net loans, serving over 10 million users. Despite this, the sector is encountering a 'crystal ceiling' due to escalating non-performing loans (NPLs), which have reached 4.2 million borrowers in default, worth US$ 500 million. The market's rapid expansion, fueled by easy access and alternative credit scoring, now faces heightened barriers as regulatory actions mandate write-offs of defaulted loans, signalling a need for more disciplined market practices.

Mobile money giant M-Pesa boasts 32M mobile wallet users, enabling +2,600 transactions per second. M-Pesa has leveraged Fuliza, an overdraft facility, to emerge as the dominant lender. Its volumes grew 500% between 2020 and 2023, reaching est. US$ 6.2B in disbursements; however, the dominance of M-Pesa going forward is not a given. Banks and fintech lenders have ample opportunity to fill latent demand with the right mix of products. M-Pesa also has wiggle room to expand its reach and serve new niches.

Traditional microfinance institutions are experiencing a decline in number of customers and disbursed loans, but attributing this phenomenon solely to losing terrain to fintechs and M-Pesa paints an incomplete picture. The reality is more nuanced. The microfinance landscape is undergoing a digital transformation driven by innovative players like Branch, who recently acquired a microfinance bank to expand their product offerings and reach. This move highlights a shift in microfinance strategies, embracing digital tools and broader financial services to remain relevant and increase their valuations.  

Informal Channels

Informal channels, driven by ROSCAs (Rotating Savings & Credit Associations known in Kenya as CHAMAs) are also still running strong, drawing on deep cultural preferences. They hold an impressive US$5.4 billion and can also capitalize on market trends.

Unveiling Challenges and Opportunities by Type of Player

Given Kenya’s current financial ecosystem and the distinct needs of various segments of borrowers, our research yields four key areas on which all lenders should focus:

1. Product Development: Design loan products that address the specific needs of each segment, considering factors like loan size, repayment terms, and desired features. Make more flexible and transparent products.
2. Channel Diversification: To reach diverse segments, utilize a multi-channel approach that includes mobile applications, physical branches, and agent networks.
3. Financial Literacy Initiatives: Offer educational resources and tools to promote responsible credit use across all segments.
4. Building Trust: Informal credit users prioritize trust. Building trust requires transparency, fair lending practices, and a focus on financial well-being.

The following sections outline in greater detail how each player stands to benefit and the necessary strategies to optimize outcomes.

Banks

Bank relationships with clients rest soundly on the bedrock of trust and satisfaction. These players dominate the market with a concentrated influence, with three leading banks accounting for nearly 40% of all banking assets.  While banks show stable lending portfolio growth, most of that is attributable to alignment with overall GDP growth. A conservative yet consistent approach to consumer lending underpins this steady increase, which tends to correlate with broader economic trends.

Many banks have sensed the growing headwinds presented by M-Pesa and other fintechs that are quickly gaining traction and driving new customer demand. In response, the largest banks have launched ‘fintech spin-offs’ to expand traditional banking models into new niches. These platforms cater to a wider spectrum of financial needs, offering loans ranging from US$ 10 to US$ 2,500. With a user base nearing +2.5M, these digital channels are steadily gaining traction (Vooma, for instance, has gained +300K new users in the last year, reaching 750K now), and leverage banks' extensive datasets for increased underwriting. 

The proliferation of fintechs and M-Pesa in the small, instant loan segment has driven banks to focus on serving the more substantial financial needs of the middle to affluent segments. Yet, untapped opportunities persist within the middle and younger consumer demographics, particularly for consumption-driven and mid-sized loans. Historically, perceived risk and the competitive pressure of agile fintech companies and M-Pesa hindered further exploration of these novel segments. Furthermore, insufficient infrastructure for product development and market launch prevented banks from more assertively pursuing these potentially interesting niches.

To address these challenges and capitalize on the untapped opportunities, banks in Kenya are engaged in a strategic realignment. This includes shifting towards mid-ticket loans and customized financial solutions for small businesses and consumers. Such a realignment, however, necessitates consolidation to ensure efficacy and sustainability. Bridging the traditional and digital spaces through this strategic pivot would not only cater to a broader spectrum of consumer needs and preferences but also aim for increased financial inclusion, ultimately contributing to the sector's growth and resilience.

Key Identified Opportunities:

• Explore instalment loans with higher tickets: Tapping into the middle and younger segments' need for larger, yet manageable financial products can cater to their lifestyle and investment aspirations.
• Small business loans and working capital loans: Addressing the underserved small and medium enterprise (SME) sector with tailored financial solutions can unlock significant economic potential and foster entrepreneurship.
  
  

What to Have:

• Develop online and mobile loan applications with enhanced and seamless UX
• Explore partnerships and collaboration with fintechs to leverage agility and reach
• Tailor products to reach new segments (small businesses, young professionals, self-employed
  
  

SACCOs

Despite their community-based approach, SACCOs face digital adoption challenges and competition from fintechs and banks. However, a significant shift is underway, with 45% of regulated SACCOs now offering digital credit products, predominantly through USSD-based mobile money services. This digital pivot aims to expand their lending portfolio while adapting to the evolving needs of their members.

The landscape of SACCO offerings has diversified, with deposit-backed loans, salary advances, and short-term loans becoming commonplace. The emergence of instant loans indicates a strategic move to cater to immediate financial needs, positioning SACCOs as competitors to fintech solutions and M-Pesa. Despite an average loan ticket size of US$ 1,100—half that of banks—these products signify a targeted approach towards salaried individuals with substantial financial needs, such as housing, business assets, and durable goods.

The current distribution of loans focuses on government and private sector employees, revealing a gap in the mid to affluent segments, SMEs, and other consumer segments identified in the borrower taxonomy section above. This gap presents an opportunity for SACCOs to broaden their reach and product offerings, catering to a wider array of financial needs and contributing to a more inclusive financial ecosystem.

Key Identified Opportunities:

• Partnerships with Fintechs and Marketplaces: SACCOs can benefit by forming partnerships with fintechs to expand their reach, especially to younger, tech-savvy customers.
• Financial Literacy and Trust-Building Initiatives: SACCOs have a strong trust-based relationship with their members. Leveraging on this through financial literacy programs, transparent processes, and digital trust-building measures will further deepen engagement with members and attract new ones.
  
  

What to Have:

• Increase product range to cater to current members.
• Leverage technology to automate processes and improve service delivery.
• Explore partnerships with fintechs and other digital players (e.g., marketplaces, embedded finance) to reach new segments.

Fintechs

Fintechs face fierce headwinds including high default rates, regulatory scrutiny, and shifting consumer trust. Concerns over harassment, aggressive recovery tactics, and high interest rates have eroded trust among borrowers. Also, evolving regulations pose operational limitations for some players, and M-Pesa's growing presence in the lending space presents a significant challenge.

In response to these challenges, licensed fintech lenders are increasingly pivoting towards business loans, which now constitute 60% of new product offerings. Despite this shift, all-purpose loans continue to dominate, representing 85% of the total loan portfolio, with an estimated disbursement of US$ 1.4 billion in 2023. This transition reflects a strategic realignment towards more sustainable lending practices and diversification of loan products.

The Buy Now, Pay Later (BNPL) segment is rapidly emerging as a significant player in the fintech space, with a current Gross Merchandise Value (GMV) estimated at US$ 160 million across five licensed providers. The anticipated entry of M-Pesa-backed Faraja is expected to catalyze the BNPL market further. KoreFusion’s research indicates a positive consumer sentiment toward BNPL products, attributed to their flexibility, transparency in fees and costs, and enhanced customer experience.

The fintech lending sector in Kenya is at a critical juncture, balancing rapid growth with emerging challenges and regulatory pressures. The strategic shift towards business loans and the burgeoning BNPL segment signify the sector's ability to adapt to market demands and regulatory expectations. As fintechs navigate these complexities, their ability to innovate responsibly and enhance consumer trust will be pivotal in shaping the future of digital lending in Kenya.

While M-Pesa has transactional-oriented services like Fuliza, fintechs can gain a foothold by targeting specific use cases where the flexibility of BNPL offers more value to consumers.

Key Identified Opportunities:

• Product Diversification: Beyond all-purpose loans, tailored financial products that cater to specific needs — such as SME financing, education loans, or healthcare financing — can address untapped market segments. Also, financial management tools both for individuals and businesses will be key to lend responsibly.
• Partnerships and Ecosystem Development: Collaborating with banks, mobile money operators like M-Pesa, and other fintechs can create synergistic relationships, expanding reach and enhancing product offerings.
• Innovation in BNPL: With the burgeoning BNPL segment, fintechs can innovate in this space by building specialized BNPL solutions for sectors such as e-commerce, education, or healthcare, tapping into the growing consumer preference for such products.

What to Have:

• Develop educational initiatives to inform users about financial literacy, responsible borrowing, and the nuances of digital financial products, building a more informed user base.
• Design clear and understandable fee structures for all financial products, ensuring users are fully informed about costs and terms.

M-Pesa

Money mobile platform giant M-Pesa has evolved from a transaction facilitator to a comprehensive financial super app serving millions of Kenyans — especially those who would otherwise be unbanked. M-Pesa's impact is crystal clear in the lending space, where its wide range of product offerings caters to diverse needs.

M-Pesa’s star product, Fuliza, is an overdraft facility designed to bridge shortfalls and enable transactions that might otherwise fail. By providing instant credit for person-to-person transfers, bill payments, airtime, and more, Fuliza has unlocked a US$6.2 billion nano-loan market and facilitated over US$15 billion in M-Pesa transactions in 2023 alone. With over 10 million borrowers, Fuliza has enormous reach, particularly among low-income segments, as evidenced by the average loan size of US$3, which consumers often use many times per week.

Accessibility and convenience underpin Fuliza’s success. Seamlessly integrated within the M-Pesa platform, its user-friendly interface makes getting an instant loan very easy. Despite new players entering the game (e.g., Hustler’s Fund), Fuliza's outstanding customer experience keeps borrowers coming back, solidifying its position for sustained growth in the Kenyan lending landscape.

M-Pesa also offers traditional microloan products like KCB M-Pesa and M-Shwari. However, their market share has been declining (-69% from 2019 to 2023), suggesting a potential need for M-Pesa to diversify its offerings and cater to mid and affluent segments.

M-Pesa's journey has just started. By addressing the evolving needs of its diverse customer base, embracing innovation, and forging strategic partnerships, M-Pesa can solidify its position as the predominant player in shaping Kenya's inclusive financial landscape and accelerate its growth trajectory. 

Key Identified Opportunities:

• Value-added Services: M-Pesa can leverage its massive user base to offer value-added services such as wealth management tools, financial planning, and insurance products.
• Collaborate with Fintech Enablers: To address gaps in higher loan sizes or niche markets, M-Pesa could partner with fintechs that specialize in these areas.
  
  

What to Have:

• Develop loan products for the middle & affluent segments (larger sizes, longer terms, value-added services).
• Collaborate with fintech enablers to leverage expertise and expand reach. Utilize user data to gain deeper insights and develop personalized financial solutions.
  
  

MFIs

International digital players are acquiring mid-sized traditional microfinance banks, suggesting a potential for growth through new business models. These collaborations combine the established infrastructure and experience of microfinance institutions with the agility and innovation of fintechs, creating a synergistic approach to financial inclusion.

While challenges remain, this evolution promises a brighter future for microfinance institutions. By adapting to changing demands and embracing digital solutions, microfinance institutions can continue to play a crucial role in providing financial access to underserved communities in Kenya and beyond.

MFB acquisitions by digital players

Key Identified Opportunities:

• Target Niche Segments: MFIs to continue exploring underserved segments such as rural businesses, women-led enterprises, and microentrepreneurs, providing tailored products that fintechs may overlook. Specific products for agricultural financing or seasonal loans could also be explored.
• Partnerships with Digital Players: Collaborations with fintech companies or digital banks can expand MFIs' product range and market reach. Leveraging fintechs’ agility while retaining the trust that comes with MFIs’ established customer relationships can unlock new growth opportunities.
  
  

Four Emerging Opportunities for Growing the Market

It is clear Kenya's lending landscape is in the midst of substantial change, driven by innovative technologies, evolving regulations, and shifting consumer demands. Mobile lending is expected to continue dominating the scene, but exciting new trends are emerging, presenting both opportunities and challenges for stakeholders across the board.

1. Beyond Mobile Apps: The Rise of Embedded Finance

Embedded finance is surging. Integration of BNPL solutions into top marketplaces and the acquisition of microfinance banks by regional digital players, for instance, highlight the growing trend and opportunities. An increasing number of challenger players recognize that this approach broadens reach and enhances convenience, especially for underbanked segments who might find traditional banking systems less accessible. Embedded finance holds immense potential for financial inclusion, but it will require synergistic collaborations between financial and non-financial players, as well as an enabling regulatory framework.

2. Collaboration is Key for Unlocking New Frontiers

The changing landscape is demanding increased collaboration among players:

• Fintechs and Banks: Combine agility and innovation with infrastructure and legacy.
• M-Pesa and Fintech Enablers: Leverage M-Pesa's reach for broader credit solutions.
• SACCOs and Fintechs: Enhance digital offerings and attract younger generations.
  
  

3. Broaden the Reach of Financial Inclusion

Stakeholders have made significant progress in advancing financial inclusion, but gaps remain. Underserved segments like women-led businesses, rural communities, and young entrepreneurs still face challenges accessing financial services. The need for more flexible, accessible products with straightforward fees is clear.

Moving forward, it's crucial to go beyond microloans and cater to the growing middle class and affluent segments. This means offering:

• Larger loan sizes and longer repayment periods to cater to bigger needs like housing, education, or even desired purchases.
• Value-added services like wealth management and investment options, enabling individuals to manage their finances more effectively.
• Personalized financial advice and planning tailored to diverse goals and risk appetites.
  
  

We are convinced that broadening the lending ecosystem encourages a long-term financial planning across borrowers and fosters a more inclusive and equitable financial system. Subsequently, these outcomes drive economic growth and development.

4. Beyond Borrowing: Catering to the Cautious Segment

Our research revealed a significant cohort of individuals who are cautious about borrowing but who still have financial needs, particularly across urban micropreneurs and the consolidating business owners. These cohorts understand the risks associated with debt and seeks tools that enable financial management and manageable credit. This segment represents an opportunity for innovative solutions that combine:

• Savings and credit products: Offer products that blend saving and borrowing options, allowing individuals to build financial security while accessing credit responsibly.
• Financial education and literacy: Provide accessible and engaging resources to educate individuals on responsible borrowing, budgeting, and financial planning.
• Credit-building products: Offer small & mid, manageable credit lines with clear and transparent repayment conditions, designed to build creditworthiness.
  
  

By addressing the needs of both those seeking credit and those seeking alternative financial tools, stakeholders can create a more inclusive financial ecosystem in Kenya.

For more information on this and other topics in Payments and Fintech, please contact us at information@korefusion.com where we will be glad to advise.