Ideas Thinkpieces

The Law of Unintended Consequences: How M-PESA can Gain from Adversity

Following up on Safaricom: Past, Present & Future and in response to the ongoing conversation regarding possible regulatory action that may lead to splitting the M-PESA operation from the Safaricom business, or opening up the M-PESA platform to other players. I make my case as follows. From the get-go, I am not convinced that splitting M-PESA from Safaricom would lead to significant increase in competition, a principal argument for the proposed split. Forcing the company to open up a key business segment to competitors does not coincide with my idea of capitalism.

Philosophically, the company should not be punished by the law for its success. The law should ensure that Safaricom, M-PESA and all other players in the market abide by a fair set of rules. A set of rules that aims to enable customers get value for their money, that protects customers’ civil rights, and enables shareholders have a fair chance of making profit in the process. While the M-PESA business is certainly head and shoulders above the rest in terms of market share, the market cannot be called a monopoly (see the Merriam-Webster dictionary definition of monopoly here). Airtel Money, Orange Money, Tangaza Pesa, Equitel and now Pesalink are all players in the mobile money game. A law that seeks to govern the operation of entities in the mobile money space is welcome. But the law cannot be used as a tool to destroy the competitive advantages built by one player to enhance the competitiveness of others. That, I believe, is no just law.

According to Safaricom’s 2016 annual report, Safaricom Limited “operates the M-PESA business on a license basis” from Vodafone Sales and Service Limited (VSSL). VSSL owns M-PESA and, through a Managed Services Agreement, charges Safaricom a quarterly license fee to operate M-PESA. The license fee, which is a percentage of the M-PESA revenue, was 10% up to 31 July 2015, and 5% from then onwards. M-PESA Holding Company, the report says, “acts as the trustee for M-PESA customers and holds funds the M-PESA business in trust to ensure that those funds are safeguarded at all times.” The M-PESA application is installed on a customer’s SIM card, and the company earns revenue principally in 2 ways:

i. A tariff, graduated based on the amount being transacted, is charged on all transfers and withdrawals performed by customers, and,

ii. Through a partnership with the Commercial Bank of Africa and KCB, customers can save and get loans. Revenue from this service, Mshwari, is earned at the point of loan disbursement and is shared between Safaricom and the banks.

While I expect the status quo will remain, I do not consider it impossible that the M-PESA operation can be forced open or to split from the Safaricom business. If such an event was to occur, I do not believe it would necessarily spell doom for Safaricom. In fact, I think there are some possibilities in which such actions could present great opportunities for the company.

Scenario I — Status quo

Revenue from M-PESA operations has been growing at a phenomenal rate over the last 5 years, with the full-year 2016 revenues 2.5 times that reported in 2011, and 4.5 times that reported in 2010. At no point in the last 5 years has revenue growth dropped below 20% per year, and as of the 2016 report, M-PESA contributes over 20% of the company’s total revenue. With the exception of a significant security event, I have no reason to believe that this will change.

M-PESA revenues to the company over the last 5 years would have any capitalist’s tongue wagging | Source: Company annual reports
The number of total customers and M-PESA agents over the last 5 years | Source: Company annual reports

Scenario II — Forced split

In the event that Safaricom is required to separate M-PESA from its core operations, I imagine one way of doing this would be by creating a separate legal entity for M-PESA operations (e.g. “M-PESA Operations Limited”, ‘MOL”). MOL would be a wholly owned subsidiary of Safaricom Limited, and it could be licensed by Vodafone Sales and Services Limited (M-PESA’s owner) to operate the M-PESA business on a license basis, just as Safaricom has been doing. MOL would be free to partner with other entities, such as its parent company Safaricom, to operate the M-PESA platform through a mobile phone SIM card application. In such a scenario, I do not see any material changes to the customers’ M-PESA experience, and no significant changes to operating expenses. In fact, other than the administrative nuisance and associated expenses, I see this working out to result in business as usual.

Granted, this is an oversimplification, but if separation were required, innovation around legal forms would be enough to do the trick.

Scenario III — Forced interoperability

Interoperability has been said to be the ICT Ministry’s preference on the matter. While the exact structure has yet to be revealed, I propose the following form. Like in scenario II, the newly created “M-PESA Operations Limited” is free to partner with mobile telecommunications operators. In the case of merely splitting the companies, scenario II suffices, with MOL limiting its partnership with telcos to Safaricom. If interoperability were required, or desired, MOL could easily partner with other telcos. Unlike in the current case where the M-PESA application is baked into Safaricom SIM cards only, this could be extended to the SIM cards of partner telcos. Alternatively, a USSD or software application could be created, through which the customers of partner telcos could access M-PESA. In this scenario, infrastructure costs and likely to be significant, with the telcos and MOL having to streamline IT systems and the like, but over time, Airtel customers in Kenya would be able to use M-PESA as easily as Safaricom customers.

Again, an oversimplification; I imagine opening-up the platform would result in an arrangement such as this

Given the adoption of M-PESA and competitive advantages such as its 100,744 agents across the country (FY 2016), I think that Safaricom could end up gaining the most. Simply, if an Airtel or Orange Money customer uses the M-PESA service more than their parent company’s service, M-PESA would gain market share and earn revenue from sources it previously was unable to access. Recall that the law would cut both ways; Airtel and Orange would also be required to open up their mobile money platforms. Consequently, the advantages network operators bear by baking mobile money applications into their SIM cards would be erased. In effect, any mobile phone user in Kenya could potentially have their pick of mobile money service provider to choose from, regardless of their network operator. In such a scenario, I am convinced that the other telcos would have much more to lose than they stand to gain. By opening-up the M-PESA operation to other players with the aim of increasing competition, it could result in reinforcing the platform’s leadership position in the market, reducing competition.

In a complex world, things we imagine cannot happen, frequently do. It is possible that Safaricom will be required to separate the M-PESA platform from its core business operation. It is also possible that in doing so, M-PESA’s market dominance in fact could be reinforced and competition in the mobile money space suppressed. Who stands to benefit? Safaricom. Beware of unintended consequences.


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Safaricom: Past, Present & Future


On the 1st June 2008, the first day of trading after a hugely successful IPO, the shares of Safaricom Limited closed at KES 5.61 valuing the company at KES 224.7 billion. Within a year, the share was at an all-time low, touching KES 2.41 with shareholders, many of them first-timers bitterly disappointed. Following the spike in the KENGEN share price soon after its IPO, retail investors even took on loans to buy the Safaricom stock, hoping for similar market price results, and an easy profit. Not so. Massive share sales over the next year drove the price down 50% and many short-term oriented folks burnt their fingers. Was the company really that much less? Certainly not. Merely a demonstration of the fickle nature of markets.

Over 8 years, 2009 to 2017, the stock price has risen more than 3-fold | Source: FT Markets

The second entrant into the mobile telecommunications industry after Kencell (currently Airtel, previously Zain and Celtel), the company is the only mobile telco to report a profit in Kenya. All the other players — Airtel, Orange and the now defunct Yu– have never generated economic surplus for their shareholders, Safaricom has done so every year since its listing.

The company’s profit before tax over the last 5 years | Source: Annual reports

In that time, the executive management team has been rejuvenated several times, the company has introduced a host of new products and even thrilled us with its invocative television ads (remember the Naaaaafurahia… one that used to be aired just before 9PM evening news?). Safaricom has grown to become the most profitable business operation in East and Central Africa. According to World Bank data, Kenya’s GDP is US$ 63.398 billion (2015, current US$). Using the CBK’s indicative exchange rate from 10 March, 2017, this comes to about KES 6.5 trillion. Basically, the price of goods and services produced in Kenya in 2015 adds up to approximately KES 6.5 trillion. As of 10 March, 2017, at KES 16.90 per share, Safaricom Limited was valued at KES 677.1 billion, about 10% of Kenya’s 2015 GDP figure. Not to say that Safaricom is worth 10% of Kenya’s economy; the company does not employ 10% of the country’s working population, does not contribute 10% of the taxes collected by KRA, nor did it earn 10% of all the revenue generated that year. What can be said, though, is that the company has become an important cog in the Kenyan economic machine. For instance, the M-PESA service has over active 30-day 17.6 million users (H1 2017). With a national population of about 46 million (World Bank, 2015), the numbers suggest that about 1 in 3 Kenyans used the service at least once within a 30-day period. Overall, the platform has 24 million registered users, that is, 1 in 2 Kenyans. The group remitted almost KES 62 billion to the Government of Kenya in taxes and license fees (FY 2016), enough to meet the 2016 budget of Nairobi County government almost twice. Quite an important cog in the Kenyan economic machine. New entrants into the mobile money sub-sector and an ongoing debate about the company’s market dominance involving the industry regulator suggests that the firm may face some turbulence going forward.

Safaricom’s growth over the years has been propelled by a combination of growth in the number of subscribers and increased usage of its services. I expect that growth from the first source is likely to plateau over the coming years. In addition, unless consumer behavior changes, I do not expect much growth from voice minutes and SMS services for the firm. On the other hand, the mobile data service seems to me to be a big growth area, for two reasons:

(i) Most of Kenya’s population is under the age of 40. It is quite likely that a large number of Safaricom’s customers are, by extension, under the age of 40. I do not think that the over-40’s are likely to spend say 10% more on calls and SMS over the next few years, while I do think that the under-40’s are likely to spend at least 10% more on mobile data services going forward. This youthful (“millennial”) subscriber base is tech-savvy and plugged in, requiring bytes of data for every retweet and Instagram like.

(ii) With smartphones becoming cheaper by the day, more and more people have access and are buying these devices. Cheaper and more interactive, I think messaging applications such as WhatsApp and Telegram are likely to steal away growth from SMS and voice minutes, increasing the revenue spent on mobile data. H1 2017 financial results seem to support this, with revenue from outgoing voice calls up 1.9% YOY, messaging revenue up 8.1% YOY and revenue from mobile data up 46.3% in the same period.


I expect Safaricom will continue to rule the roost. The company enjoys 65% of market share (number of subscribers) and the rest of the industry is unable to entice away a critical mass of subscribers that would enable them break even and turn in a profit. The company sustains over 180,000 direct and indirect jobs, a number the firm says increases to 845,000 (FY 2016) if the wider economic impact were to be included. M-PESA and Safaricom are considered leading brands in Kenya, enjoying levels of consumer recognition that many businesses can only dream of.

Based on the earnings reports from recent periods, summarised below, the company seems primed to compete well in the future.

Source: H1 2017 earnings reports and the FY 2016 annual report

As of the latest full-year earnings report, the company had no long-term debt on its books, and non-current assets exceeded non-current liabilities 10 times over. In fact, if total revenue reduced by 10% and total expenses increased by 10%, the revenue would still exceed expenses by over 20% passing my fragility heuristic[1].

Source: Full year financial reports | Analysis my own

In the absence of leverage, the company’s return on equity is at its highest in full-year 2016 at, 33.86% although it has been trending upwards over the 5-year period. Owner’s earnings are at 19.94%, nearly doubling over the period, suggesting that for every 5 shillings of sales made, the company reports 1 shilling as net income. The cash conversion cycle (tells us how long it takes to convert an investment in cash back into cash) is negative, and has been so over the 5 years from 2011, effectively suggesting that no cash is tied up by the business. In fact, with the number of days of payables owing more than the operating cycle, the negative cash conversion cycle suggests that the company is effectively financing its operations with other people’s money. Ofcourse this cannot be taken literally since these are merely crude measurements, but it is a pretty good indicator of how much liquidity the company needs to finance its operations. And based on these numbers, I conclude, very little. This cash rich position is emphasised by the quick ratio, suggesting that current assets (excluding inventory, which can be considered the least liquid current asset) exceed current liabilities by 68.62%. In summary:

  • Assets (both short and long term) are 26.66% financed with debt (short term)
  • The company has no long-term debt
  • Assets are 1.36 times the book value of shareholder’s equity
  • The company has a basic earning power of 35.2%, operating profit margin of 28.26% and net profit margin of 19.94%
  • The return on equity, based on the book value of shareholder’s equity, is 33.86%


While the company will face competition on the mobile data front, the sub-sector remains a promising one. A large swathe of the country remains underserved and 4G coverage is low (there are 5x more 3G base stations than 4G base stations). I expect that the company will continue to invest in this area and may even make acquisitions.

That said, I think the firm faces several key challenges going forward:

· Not much more organic growth — I think the runaway growth the company has enjoyed over the last decade is likely to slow down going forward. With 65% of mobile phone subscribers already on the network, and the firm enjoying 77%, 93% and 63% market share in the voice calls, SMS and mobile data segments, there really isn’t much growth to be expected from acquiring much more market share. With the exception of mobile data, I think the company is unlikely to experience extraordinary performance in these segments.

While profit (in shillings and cents) has generally increased over the years, year-on-year profitability has reduced since 2013. Something I expect to continue in future

· More players in the game — An increasing number of players in the data and mobile money sub-sectors could result in increasing price pressure, that may have a gravitational pull on revenues. In addition, the company may have to invest in its infrastructure (4G, fibre, cyber security) to maintain its competitive advantages. Equitel and Pesalink look like they may provide a level of competition that Safaricom has not experienced of late.

  • Regulatory pressure — A draft report commissioned by the industry regulator proposes that the M-PESA business be split and separated from the telecommunications business, with a view of reducing Safaricom’s dominance and increasing competition in the sector(s). Counter-proposals to this suggest that the M-PESA platform be opened up (to other market participants) for interoperability, sharing of infrastructure and pricing adjustments. There have also been murmurs over the years suggesting that M-PESA should be regulated under the provisions of the Banking Act. Whether Safaricom is split up or M-PESA is opened-up to other players, key strategic and competitive advantages may be significantly diminished depending on the outcome of these proposals (I shall present a thinkpiece on this. There are possibilities in which Safaricom may benefit from a possible split/opening-up. Let’s explore them). Recent news reports suggest that the push to split the firm has died down; a wise (wo)man would be careful not to believe that the matter is settled with finality.
  • Keyboard cartels — Reports of hackers targeting banks and attempting to infiltrate KRA are a reminder of the temerity of cyber criminals today. Safaricom will have to continually invest to ensure that its network, data, M-PESA and other system defenses are always up to date, ensuring operations go on smoothly.
  • Complacency — Having been so successful for so long, there is the possibility that a sense of complacency could creep in. The company has worked hard to earn its number one spot, and it deserves all the success that its effort has produced. That said, we know all too well of companies that dominated entire industries a decade ago and today are merely fractions of what they once were, if they exist at all (remember Nokia?). Complacency does not announce its arrival; it creeps in slowly, looks around, makes itself comfortable, buys a new sofa and then, suddenly, makes itself known. Often when it is too late. The challenge is for the board and management team to remain vigilant and ensure that this attitude does not find its way into Safaricom House.

“There is no ultimate finish line in a highly visionary company. There is no “having made it.” There is no point where they feel they can coast the rest of the way, living off the fruits of their labor.”Jim Collins and Jerry Porras (Built to Last)

On a global level, investors have come to get used to double-digit YOY growth, something unlikely to go on for much longer. One of the strategies employed by the company to generate new growth is the new-venture vehicle, Spark Fund. The fund has already invested in several startups — Sendy, Eneza Education, Lynk, FarmDrive — and other moonshots like Little Cab, that could become important revenue streams in future. Given the company’s sheer size, it seems to me that large (over KES 1 billion) acquisitions may provide an avenue for the firm to put its cash to work. The company enjoys good business in the sales of mobile phone handsets and other electronic devices, with revenues up 12.3% to KES 6.4 billion. This is an operation I think Safaricom can continue to enjoy growth from, with a large network of dealers and owned retail outlets scattered across the country. The firm can leverage on its already-established retail infrastructure to increase its value proposition to customers, for instance, by providing customers with access to unique products and accessories (e.g. the Google Pixel, Amazon Kindles, etc.). While we may not call or send text messages much much more, we are not likely to stop making calls or sending messages altogether; the bread and butter, in my opinion, is secure. The M-PESA and data businesses offer the company vast possibilities for growth. The moonshot bets the company has begun to place may lose Safaricom money (the downside is known [cash investment]), but the potential upside… well, M-PESA was a moonshot a few years ago, and look at how that has turned out.

In November 2016, the Safaricom share price touched an all-time high of KES 21.75, valuing the firm at KES 871 billion. I am no seer and cannot claim special skill in the dark art of prognostication, but I would not be surprised if Safaricom became Kenya’s first trillion-shilling company[2] by market capitalisation in the not-too-distant future.

[1] This is a simple rule of thumb that I use to evaluate how at-risk a company is to sudden changes in its operating environment. A simple simulation where future revenue decreases by 10% while future expenses increase by 10%, gives me an indication of how close a company may be flying to the sun, with respect to my personal appetite for risk.

[2] I am evaluating Safaricom merely as an operating business and not as a potential investment. I do not have any skin in the game (a position, long or short, on its equity that gives me exposure to the stock market performance of the company) and it would be unethical for me to express myself on the soundness or otherwise of an investment in the company.

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