In October, it will be exactly 10 years since Abubakar Godhana Ali accessed his first-ever credit from the formal financial sector. Much has changed in his life since then, but he has never forgotten the Sh250 loan he received from a digital lender.
“It was a lifeline,” he recalls. “It looks small, but in university that was enough to get by for one week, even two if used well.”
As a student, the only loans he could access were from friends and family. In many occasions, however, they had nothing to lend. At times, that meant going to bed hungry.
When a friend told him about a smartphone app that could instantly lend him Sh250 without any form of security, he was astounded. It was something unheard of at the time. He reluctantly tried it, and his relationship with credit changed completely.
“I am working now, but I still use digital loans. Today, there is an unlimited supply of those loans. I can get them from multiple sources anytime,” he says.
Ali’s experience mirrors that of millions of Kenyans who accessed their first formal credit through digital lenders, reflecting a quiet transformation that has reshaped Kenya’s financial sector over the past decade.
What began with a handful of digital lenders offering small, instant loans has evolved into an increasingly crowded financial technology ecosystem that is rewriting the rulebook and threatening a market long dominated by traditional financial institutions.
To keep pace, banks and insurers are increasingly courting the very startups that once sought to disrupt them, in what is becoming a case of: if you can’t beat them, join them.
Equity Group Chief Executive James Mwangi has admitted that there’s no certainty that banks, in their traditional sense, may not survive the onslaught by fintechs, which are more agile and are fast eating into the market traditionally dominated by banks.
“What is certain is that financial services will be required, who will provide them is what is debated,” Dr Mwangi said at a forum in March.
His fear is real. Over 70 percent of digital loans are disbursed by fintechs and not banks, yet it is the fastest growing segment. In insurance, more than half of the microinsurance market share is captured by startups deploying AI to serve low-income households.
Financial institutions, which are the among the most valuable firms at the Nairobi Securities Exchange (NSE) are not waiting for startups to eat their lunch. They are choosing to share it instead.
An increasing number of leading banks and insurers have created dedicated innovation or venture investment arms that not only develop technologies to complement their core businesses but also identify, incubate and invest in startups once seen as disruptors of traditional financial services.
Equity Group has created Finserve, which develops digital financial products and partners with fintechs. NCBA Group runs Loop, its digital banking platform, while also partnering with fintech firms through products such as M-Shwari.
KCB Group has expanded its digital innovation efforts through partnerships with technology startups and accelerator programmes. Last year, the lender bought 75 percent stake in Riverbank Solutions, a fintech providing agency banking, payment systems, revenue collection and business management software.
Insurers are also stepping up. Last week, Britam announced a plan to invest up to Sh1.9 billion in insurtech and fintech startups through its corporate venture capital arm BetaLab.
Kevin Mutiso, founder of digital lender Oye, which is among the first firms BetaLab invested in, believes this shift is not an indication of feeling threatened, but of the realisation of a need to cooperate for the betterment of the market.
“Startups do not come to take away the market of legacy firms, they come to grow it. The question then becomes how we can grow each other faster and not how to edge out each other,” said Mr Mutiso.
Experts contend that there is no winner without the alliance between startups and traditional financial institutions. Each bring strengths and weaknesses, and complement one another for better, and faster delivery of financial services.
“Startups bring speed, experimentation, and customer-first product thinking. Traditional financial institutions bring trust, capital, regulation, distribution and scale,” argued Ayisi Makatiani, CEO of Caava Group, an insurtech company.
“The future will belong to those who combine both – not through loose innovation theatre, but through disciplined partnerships tied to measurable business outcomes. The real opportunity is not in one replacing the other but in collaborating.”
Beyond investing in and acquiring startups, collaboration with legacy financial institutions is evident. Of the 31 banks polled by the Central Bank of Kenya in its latest Banking Innovation Survey last year, none said it is taking a unilateral approach to innovation.
A whopping 86 percent said they are partnering or collaborating with external firms, and also outsourcing innovation solutions to third parties. 11 percent are only partnering, and 3 percent outsource.
For financial institutions, improved financial inclusion and better personalised services are the top benefit of product innovation to their consumers, cited by over 90 percent of lenders in the country. This is driving them to embrace startups more.
“A few years ago, startups were mainly seen as competitors to established financial institutions,” avers Mercy Kimalat, the CEO of the Association of Startup and SME Enablers of Kenya (Assek).
“Today, there is a growing understanding that innovation in finance and insurance is most effective when startups, corporates, investors and ecosystem players work together.”
Yet, there are hundreds of startups that continue to struggle to scale and reach financial breakthrough. From a wider lens, only a few startups attract the attention of legacy financial firms.
According to Mr Mutiso, many startups are not yet investor-ready, and legacy financial institutions “are not ready to engage with all levels of startups,” as many want to limit exposure.
