How State regulation bit off Sh2.8b from Safaricom profits

Two weeks after his inauguration, President William Ruto made good on one of his campaign promises to bring down the cost of digital loans with a special emphasis on Safaricom’s Fuliza overdraft facility. 

After a series of meetings and a hurriedly scrambled press briefing, Safaricom, NCBA and KCB Bank announced the restructuring of Fuliza starting October 1, 2022. 

Customers making transactions valued at less than Sh1,000 now enjoy a waiver on the daily maintenance fees for the first three days.

All customers also enjoy reductions in daily maintenance fees on transactions above Sh1,000 and up to a maximum of Sh70,000. 

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Last week, Safaricom released its financial results for the 2023 financial year casting a revealing picture of the impact that regulatory and State policy interventions have had on the Sh661 billion-telecommunications firm.    

While other M-Pesa business segments such as global payments, consumer payments and business payments grew by double digits (20 per cent, 15.4 per cent and 39 per cent respectively), financial services, which entail Safaricom’s lending products, reported a 9.2 per cent decline. 

Data from the firm’s latest financial report further indicates that revenues from Fuliza fell nine per cent in the year ended March 2023 and a further 27 per cent last year to Sh3.9 billion.

The number of distinct customers also fell by one million from 8.1 million recorded in the year ended March 2023 to 7.1 million last year. 

“Financial services declined 9.2 per cent year on year, primarily due to price optimisation of our Fuliza product,” explained Safaricom’s Chief Financial Officer Dilip Pal.

“If you exclude Fuliza the revenue grew 23.9 per cent.”  Mr Pal further points to the 18 per cent growth in the total value of Fuliza disbursements that hit Sh833.8 billion as a testament to the success of the price optimisation. 

The firm’s financial report, however, indicates that Fuliza’s contribution to the firm’s lending revenue recorded a net loss of Sh400 million in 2022 and Sh1.5 billion last year. This is compared to a net gain of Sh1.7 billion in 2021 and Sh1.4 billion in 2022, before the new price changes. 

Another policy change in Kenya’s telecommunications sector that hit the giant firm hard is the decision by the Communication Authority (CA) to cut the mobile termination rate by 41 per cent. 

Call termination rates are key because they set the ceiling that mobile operators can price their voice calls to each others’ networks and significantly affect the pricing of both on-net and off-net calls. 

CA had proposed to cut the rate by 87 per cent beginning January 2022, but Safaricom moved to the Communications and Multimedia Appeals Tribunal and reached an out-of-court settlement with interested parties including Airtel Kenya, Telkom Kenya, Jamii Telecommunications Ltd and the Consumer Federation of Kenya. 

According to the firm’s latest financial report, the reduced MTR beginning in August 2022 led to a 0.4 per cent drop in service revenue growth last year, translating to Sh1.3 billion in forgone revenue.      

The slide in Safaricom’s voice revenue following the cut in the MTR is another illustration of the consequences of state and regulatory intervention on the company’s bottom line. 

This has further been emphasised by the impact of the reinstatement of charging for bank to and from M-Pesa wallets. 

In 2020, the Central Bank of Kenya (CBK) scrapped charges on money transfers between mobile money wallets and bank accounts to promote the use of mobile money during the Covid-19 pandemic. 

These transactions accounted for 19 per cent of the total value of M-Pesa transactions and 3.2 per cent of total volumes, translating into billions in forgone revenue. 

Reinstatement of the charges from January 2023 registered almost immediately on the company’s bottom line. 

“With the return to charging for bank to and from M-Pesa in Q4, we were able to record a double-digit growth of 12.2 per cent year-on-year, effectively bringing the H2 growth to nine per cent from 8.7 per cent reported in H1,” said the firm in its 2023 annual report. 

The latest financial results have painted a stark picture of Safaricom’s exposure to policy pronouncements and changes by state actors and regulators. 

This comes at a time when the National Treasury has proposed new levies on digital products and services that are set to further impact Safaricom’s profitability as well as the price consumers pay for them.