Safaricom digs in as CBK steps up plan to split telco

Customers queue outside a Safaricom shop along Kenyatta Avenue in Nairobi in a rush to beat Sim Card registration. [Wilberforce Okwiri, Standard]

Safaricom and financial services regulator, the Central Bank of Kenya (CBK) have differed over proposals to separate M-Pesa from the telecommunications service provider. 

This comes as the CBK closes the window for collecting public comments on proposals to introduce a digital currency backed by the regulator as part of the National Payments Strategy launched earlier this year.       

CBK is banking on the strategy to cut friction between customers and digital payments providers, boost interoperability between payment platforms, introduce transparency in pricing and stricter corporate governance as well as customer protection safeguards.   

“The question is how we are going to ring-fence the payment service providers (PSPs),” CBK Governor Dr Patrick Njoroge told the Senate’s Committee on Information Communication and Technology during a briefing in March this year.

According to Dr Njoroge, this is meant to mitigate risks that may come from the non-financial side of the core telco business.

“What we are thinking of is sort of a group structure, very similar to what we’ve done in the banking sector,” he explained.

“We have a group arrangement where the group has subsidiaries underneath it and that way, you can isolate better the risks coming from the other subsidiaries.”

CBK said both Airtel Kenya and Telkom Kenya have discussed separating their fintech businesses from their core GSM (Global System for Mobile Communication) function and are in the process of effecting the plan.  

“For Safaricom, we’ve been in discussions with them, and they too understand the reasonableness for this,” said Dr Njoroge.

“At this moment, all the mobile money and GSM work is inside the green in the middle, and that is what we want to be separated. They (Safaricom) will create the equivalent of or another subsidiary, which will be the mobile money entity and the GSM voice and data can remain within Safaricom or separated,” he further told the Senate committee.  

Data from Safaricom’s latest financial report indicates that earnings from M-Pesa crossed the Sh100 billion mark for the first time last year and now account for more than a third of the company’s total revenue.

Mobile data

The number of 30-day active customers now stands at 30 million, higher than those on voice (28 million), SMS (22 million) and mobile data (25 million), representing the highest user base of a digital financial service in the region. 

Safaricom Chief Executive Peter Ndegwa says there is no official proposal from the regulator to separate M-Pesa and maintains that the telco’s value proposition is stronger if it keeps the fintech and GSM arms of its business together. 

“I think there’s a misunderstanding,” said Mr Ndegwa during the company’s recent investor briefing when asked about the proposal by CBK.

“There isn’t a proposal by CBK to separate M-Pesa from Safaricom. If there is some media coverage, that’s not from CBK.” 

According to Mr Ndegwa, the success of M-Pesa is tied to Safaricom’s GSM business, and the mobile money platform relies on the infrastructure provided by the core business. 

“We’ve always said M-Pesa and Safaricom have benefited millions of Kenyans, and one of the reasons is because they are together,” he said.

“You need the GSM business to provide the services to individuals, including those who have feature phones, and that is why the two being together is very important,” added Mr Ndegwa.

This is not the first time that the telco is fighting plans to hive off its mobile money business.

The company has for years lobbied against legislative proposals seeking to compel the creation of a new entity out of M-Pesa.

In 2017, the late Jakoyo Midiwo, then deputy minority leader, sought amendments to the country’s banking and communication laws to break up Safaricom into several entities.

Again in 2019, Gem MP Elisha Odhiambo, who took over Midiwo’s parliamentary seat, proposed similar amendments to the Kenya Information and Communications (Amendment) Bill, 2019.

“A person may engage in any other business provided that such person shall; obtain the relevant licences from the respective regulators of any industry or sector ventured into; legally split or separate the telecommunication business from such other business; and provide separate accounts and reports in respect of all businesses carried out,” explained the amendments proposed by Mr Odhiambo in part.

Both attempts failed to make any headway. CBK boss Dr Njoroge says separating fintech services from the core business of telcos will further prevent transfer pricing and enhance corporate governance.

“For instance, the telephone towers need not be part of the financial services, and that will be isolated,” he explained.

“The telecoms towers company can provide that service to any other telco at the correct price and that way, you do not have transfer pricing of services and transactions within the group.”

Last year, Airtel Africa spun off its mobile money business, Airtel Mobile Commerce BV, and sold minority stakes to an investment firm The Rise Fund for Sh2.3 billion and Mastercard for Sh1.1 billion.

The transaction valued Airtel Money’s African business at  Sh265 billion. Bharti Airtel is eying an initial public offer (IPO) by 2025.

Africa’s largest telecommunications firm MTN Group last month hired US investment bank, JP Morgan, to advise the telco on the process of separating its mobile money arm, which is valued at over Sh575 billion.

Both firms have a strong presence in Uganda where the Bank of Uganda recently enacted the National Payment Systems (NPS) Act, 2020 mandating the separation and fresh licensing of all mobile money providers in the country.

CBK boss Dr Njoroge said the growth of the digital financial services sector has prompted the regulator to insist on stricter controls while seeking to promote innovation and competition.  “These actions are already allowed for in the national Payments Strategy laws and the CBK laws,” he explained.

“I think the point is to appreciate that we have a pretty good set of laws that allows us to move in this direction, and what we need to do is to implement.”

According to Dr Njoroge, Safaricom’s recent move to create M-Pesa Africa, a joint venture with parent company Vodacom Group Plc launched in March 2020, is a case in point that the telco is diversified. 

Digital lifestyle

M-Pesa Africa is now available in seven countries on the continent, and the company is investing significant resources to develop the service into a digital lifestyle product. 

Last year, the company launched the M-Pesa Super App, which enables customers and businesses to make payments, including for airline tickets, utilities and insurance, without having to download numerous apps. 

“They (Safaricom) already have other subsidiaries and institutions they have interest in,” the CBK boss told the Senate Committee.

“M-Pesa Africa is the one with the M-Pesa technology, and now they have interest in Ethiopia with others.” 

Dr Njoroge said splitting M-Pesa from Safaricom will strengthen corporate governance and stimulate innovation and diversification. 

“There need to be correct corporate governance structures in these institutions because they will become systemic for us,” he said.

“In the same way, we insist on proper governance structures for banks and accountability. That way, we will allow greater flexibility and growth through efficient diversification and management of the affiliates.”

But Safaricom CEO maintains that the telco already runs M-Pesa as a separate business, with the telco’s payment services and products also independent units.

“Internally, the business is operated separately as a department, and now that we’ve gone agile...,” he said.

“But in terms of separation, we would have to do what is in the best interest of customers and society, and at the moment, keeping them together benefits society and customers.”