Which Will Dominate the Credit Sector in Kenya?
In 2024, more banks in Kenya introduced lending mobile apps to capture the growing market for quick loans. These apps also offer additional financial services, including saving, money transfers, and bill payments. Does this signal that digital banking is set to replace the microfinance sector?
For a long time, low-income individuals lacked access to financial services, particularly loans. Microfinance institutions (MFIs) stepped in to offer loans to underbanked and unbanked individuals, promoting financial inclusion. Now, traditional banks in Kenya are also offering unsecured digital loans, claiming to provide inclusive financial solutions. But between microfinance and digital banking, which will lead in financial inclusion?
Comparing Their Roles and Achievements
Microfinance in Kenya
While microfinance gained widespread popularity in the 2010s and 2020s, its origins date back to the 18th century with Jonathan Swift’s Irish Loan Fund system. Modern microfinancing surged in the 1970s, with Grameen Bank pioneering financial services for low-income individuals.
Today, microfinance institutions in Kenya provide loans to low-income individuals and small businesses without requiring collateral. These funds enable Kenyans from underserved communities to pursue business goals, achieve financial independence, and contribute to socio-economic development.
Key Benefits of Microfinance in Kenya
Financial Inclusion: Individuals in rural areas without access to traditional banks now receive financial services, such as loans.
Guaranteed Loans: Unbanked individuals can secure loans for daily essentials or business capital without collateral.
Quick Loans: Many microfinance institutions offer digital loan apps, and some, like Positiviti Lending, provide USSD options for non-smartphone users.
Group Lending: Institutions collaborate with SACCOs, expanding loan access while reducing default risks.
Financial Education: Borrowers gain financial literacy through partnerships with local credit unions, helping them manage finances effectively.
Digital Banking in Kenya
With a shift toward microfinance, commercial banks in Kenya have embraced digital banking to retain customers. Digital banking allows users to manage financial accounts via mobile apps and USSD platforms, enabling transactions, loan applications, and account management anytime, anywhere.
While some digital-only banks, like Monzo and Revolut, operate exclusively online, traditional banks in Kenya use digital platforms as an extension of their services. Branch International, for example, offers savings, money transfers, bill payments, and instant loans, positioning itself as a microfinance bank.
Services Available via Digital Banking in Kenya
Open a digital bank account
Transfer and receive money
Manage checking and savings accounts
Deposit and withdraw via mobile wallets
Apply for and repay loans
Pay bills
Request bank statements
Monitor transactions
Access customer support
Financial institutions in Kenya offer these services online or through USSD platforms, ensuring security and efficiency for customers.
Will Digital Banking Replace Microfinance in Kenya?
No, digital banking is unlikely to replace microfinance soon. As an extension of traditional banks, digital banking imposes strict requirements, particularly for loans. Customers often need a steady flow of payments or savings to qualify for loans through banking apps.
Some banks have launched digital microfinance-like services, such as KCB’s VOOMA and Standard Chartered’s SC Juza. However, these platforms still require users to have an existing banking relationship before accessing loans.
Microfinance institutions, on the other hand, focus on bridging the financial gap left by banks. They provide microcredit to unbanked individuals without requiring collateral, using alternative methods to assess creditworthiness. For example, Positiviti Lending evaluates borrowers through credit checks and mobile phone usage patterns.
Ultimately, while digital banking is expanding, microfinance remains essential in providing accessible credit to Kenya’s underserved communities.
