As Bill Gates famously said, ‘Banking is necessary, banks are not’, Kenya is taking on a new lead to put into play digital finance.
While banks still exist, developments show that other platforms are capable of providing banking services. This has been made possible by the huge strides made in the field of ICT which has opened up a whole new world of possibilities for designing and distributing financial services.
It has also transformed traditional banking business in Kenya with online banking becoming the main point of access for many bank customers.
Digital finance has opened up opportunities but we shouldn’t neglect the risk it entails. Digital finance currently delivers a wealth of benefits, bringing about efficiency gains, competition within the financial system and contestability of the financial market and most of all it has revolutionized financial services and infrastructure.
Apart from radically transforming the payments and security settlement infrastructure, digitalization had enabled newcomers to mount a challenge against the incumbent market players. It has also boosted the transparency of the financial systems thus reducing information asymmetries.
Nowadays, it’s easier to get support from an online crowd funding or peer to peer lending platforms a step that the traditional sources of finance wouldn’t take.
Generally, digital finance has facilitated easy access to financial services eg M-Pesa services. This has indeed been the key driver of financial inclusion in the country; mobile money accounts have gained popularity. The benefits that came with financial inclusion are clear; it has promoted economic growth, lowered inequality, development of new businesses, and investment in education, risk management and absorption of financial shocks.
Even with the benefits that come with financial inclusion, there is a trade-off between financial inclusion and financial stability. Expanding access to financial services especially to credit at a too fast a pace and with too little control, exposes the economy to stability risks. A good example is the Indian microfinance crisis in 2010 that shows us what can happen if too many households have access to credit.
Financial literacy is crucial, people with access to finance need a basic understanding of financial concepts like interest and risk diversification. Effective monetary policy communication relies on the basic grasp of concepts such as inflation and interest rates.
Kenya has the potential to be one of Africa’s success stories from its growing youth population, a dynamic private sector, and the pivotal role in EA. Kenya has a major goal in addressing the challenges it faces like poverty, inequality, governance, climate change, low investment and low firm productivity to achieve rapid, sustained growth rates that will be able to transform the lives of ordinary citizens.