By: Ninette K. Mwarania

Towards Sound Financial Health

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  • 09 . February . 2023
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By: Ninette K. Mwarania

Prior to the launch of the first digital financial service provider in 2013, Kenyans relied on mainstream commercial banks to access credit and savings products. The rigorous customer onboarding and application review processes continue to dissuade millions of potential customers from tapping into these facilities, resulting in financially underserved or excluded populations.

Within a year of its launch, M-Shwari had disbursed over Ksh. 20 million loans to 2.8 million borrowers. This clearly signposted the need for financial providers with less stringent requirements. Since then, there has been an astronomical growth of digital finance providers, resulting in increased product variety and availability egged on by ease of access. Whereas this has borne positive outcomes in terms of enhancing financial inclusion, especially among the underserved and excluded populations, it has not translated to better financial health to consumers.

Let’s explore this paradox further.

Financial inclusion refers to opportunities for users to access financial services and use them to meet their needs. Data from the 2021 FinAccess Survey indicates that, while financial inclusion has more than tripled from 26.7% in 2006 to 83.7% in 2021, the overall financial health of Kenyans has more than halved since 2016, from 39.4% to 17.1% in 2021.

The core elements of financial health comprise the ability to manage and meet one’s day-to-day obligations; ability to cope with risks and recover from financial shocks; and ability to invest in the future by building and maintaining reserves.

The ability to manage day-to-day obligations encompasses meeting short term goals, including paying bills on time to avoid negative consequences of late payment, ability to pay off debts and living within an acceptable monthly debt to income ratio. On the other hand, coping with risks and recovering from financial shocks entails having a financial safety net, including an emergency fund and access to affordable credit or a social network, appropriate insurance policies or building or achieving short-term savings goals. Finally, for one to invest in future, they should have the ability to save regularly, save for retirement, and maintain a positive credit profile and plan ahead for the medium and long-term.

I seek to explicate three factors that may influence financial health among Kenyans.

Consumer Behavior and Decision Making

Financial literacy and education play a complimentary role in consumers’ decision-making process, enabling them choose products that will optimize their investment needs corresponding to their disposable income. Moreover, providers of financial products and services should act in a way that increases consumers’ confidence and trust in order to encourage actions that promote proper financial behavior. Data indicates that majority of Kenyans mistrust formal financial services providers when making decisions on financial matters. Indeed, less than 3% of Kenyans rely on formal financial institutions for advice.

Income influences financial health, as does consumer behaviors, particularly those related to planning ahead and saving. It is therefore, imperative that consumers adopt beneficial saving habits, source for as much information as possible on products they intend to take up in order to understand the impact of such decisions on their financial health.

Government Policies

To protect consumers of financial services, some countries have a specific agency that regulates the financial services firms to ensure that providers are accountable for ensuring customers are satisfied with and value their financial services. This is the case with the UK’s Financial Conduct Authority, Australia’s Prudential Regulation Authority, and South Africa’s Financial Sector Conduct Authority, among others.

As observed in the Kenya Kwanza Government’s Manifesto, “when regulatory functions are bundled together, consumer protection gets the short shrift.” Is it time to rethink the current regulatory and institutional dispensation in order to increase financial health, by enacting the Financial Services Authority Bill, 2016? Such a review would provide for protection of retail financial customers— (i) from misleading, deceptive, unfair and fraudulent conduct; (ii) promoting fair, equitable and sustainable access to financial products and financial services; (iii) ensuring that retail financial customers can make informed choices through the provision of useful information about financial products and services; and (iv) promoting financial literacy and the ability of retail financial customers to make sound financial decisions.

Quality of Financial Products

The current shift to digital finance has not only increased access and usage, but has provided consumers opportunities to save and prepare for the future, manage day-to-day obligations and cater for financial risks and shocks. However, consumer risks like mobile app fraud, privacy intrusion and abusive debt collection practices arising from digital finance, may create shocks that reduce consumer pliability and negatively affect their financial health. Moreover, with over 35% of Kenyan digital borrowers using digital credit to meet day-to-day household needs, it is important to note that lower interest rates result in increased financial health.

The advent of technology presents an opportunity for financial sector players to address unmet consumer needs by designing high-quality products and services that will promote consumer financial health. This is especially so for consumers who wish to identify investment vehicles that will enable them to build and maintain reserves for the future, and also give returns that can be applied to meet day-to-day obligations. A good example would be the Financial Inclusion Fund whose objective is to enable small and micro enterprises access affordable credit to initiate and sustain their businesses with the expected multiplier effect being that the beneficiaries will meet their daily financial needs, and save for the future. This is especially so as the other sources of digital credit are perceived out of reach for the lower income citizens.  

Finally, I posit that measurement to assess financial health will provide useful information for consumer protection efforts and help consumers make better financial decisions; market conduct supervision through policy review and designing products that can help consumers manage their financial lives more easily, conveniently, and affordably, should be prioritized.


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