Next steps for the
digital revolution in Africa
Inclusive growth and job creation
lessons from Kenya
Njuguna Ndung’u
WORKING PAPER 20 OCTOBER 2018
1 — Next steps for the digital revolution in Africa
Njuguna Ndung’u
On leave of absence from the University of Nairobi and the immediate former governor of the
Central Bank of Kenya, 2007-2015. I acknowledge the excellent research assistance of Alex
Oguso, . Student at the University of Nairobi. All comments and questions to be addressed
to nsnjuguna@
Acknowledgements
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2 — Next steps for the digital revolution in Africa
ABSTRACT
In recent years, digitization has emerged as a driver for accelerated provision of financial
services, starting with retail electronic payments system that is being the entry point for
financial services and, thus, enhanced financial inclusion. This has impacted positively on poor
and low-income households as well micro, small, and medium firms. The informal economy in
Kenya has benefited too, and their transactions are being formalized and slowly they are joining
the complexity of the formal system through retail payments, virtual savings and virtual micro-
loans applications. Given this growing and dynamic impact, there is potential for a strong link
between financial inclusion, raising the level of economic activity, and poverty reduction in
developing, frontier, and emerging economies. Emerging evidence seems to point out that
digitization is facilitating employment creation in the affected core financial sector activities
as well as cutting across the economy through the entry of fintechs. In this regard, an analysis
of digitization and employment creation should start with an analysis of the level of
digitization in an economy and the prospects of digital economy taking root. Digitization has
many diverse and dynamic applications. The moment an economy embraces digitization, it
allows sustainable business models to be developed that cut across the whole economy. One
of the most celebrated outcomes of digitization, especially in Kenya, is how it has encouraged
endogenous innovations across sectors of the economy including providing an easier route to
design tax payments platforms and targeted social protection programs. These contributions
suggest that digitization will have greater impact in the coming years on the economy through
the avenues of inclusive finance, growth, and employment. In addition, digitization is allowing
the informal markets to slowly enter formality through retail electronic payments platforms
and virtual savings and credit supply. This paper provides examples of such dynamism and
links digitization to employment creation, with the hope that, over time, as more sectors and
fintechs innovate on the digital platform, the trend will be clearer with more data points to
allow deeper analysis and to reach a formidable set of conclusions. So far, it seems that
digitization is creating new jobs, generating demand for new skills, making it easier to match
jobs and skills, and overall raising productivity for the existing labor force. Survey data and
more data points over time will test these conclusions in future. Due to data limitations, this
paper only provides on tentative conclusions on the next steps for the digital revolution to
provide strong avenues for growth and job creation in Kenya and similar countries in Africa
adopting and pushing the digitization frontier.
3 — Next steps for the digital revolution in Africa
1. INTRODUCTION
The subject of digitization and employment creation is diverse and dynamic, gathering
momentum across sectors after leading a major disruption in the way financial services are
provided. The expectation is that digitization should raise labor productivity, that the overall
economy can experience sustained growth in output, and that, largely, inclusive finance can
encourage inclusive growth. El-Darwiche et al. (2013) show that digitization provided a $193
billion boost to world economic output and created 6 million jobs globally in 2011 with the most
advanced economies (North America and Western Europe) accounting for approximately 29
percent of the output gain and 6 percent of the employment impact. Emerging economies
accounted for 71 percent of the gain in gross domestic product (GDP) and 94 percent of global
employment impact (El-Darwiche et al., 2013). The rapid adoption of digital technologies has
meant that its benefits are widely dispersed, but its indirect growth impacts remain difficult to
estimate (World Bank, 2016). However, World Bank (2016) argues that its greatest contribution
to growth comes from lower costs and the accompanying improvement in efficiency and labor
productivity in practically all sectors of the economy.
Kenya is a prominent case in digitization as it has made immense strides in the sector,
especially in financial services access. In the 2017 Brookings Financial and Digital Inclusion
Project (FDIP) report by Lewis et al (2017), Kenya retained its position as the highest-ranked
country with an overall score of 86 percent ahead of Brazil and Mexico that had a score of 79
percent. The other countries that followed closely with an overall score of 78 percent are
Colombia, South Africa, and Uganda. Rwanda and Philippines had an overall score of 76
percent each. The report gives Kenya the highest score on the adoption dimension of the 2017
FDIP scorecard, primarily due to its mobile phone-based financial services adoption among low-
income adults and women (Lewis et al., 2017). The 2016 Fin Access household survey shows
that, over the past decade, Kenya achieved a 50 percent increase in financial inclusion. The
Findex 2017 credits Kenya’s progress in financial inclusion to the country’s vibrant mobile
phone-based financial services ecosystem that features exceptionally high adoption rates.
Kenya has also made several high-level commitments to financial inclusion, including signing
the 2011 commitment under the Maya Declaration by the Central Bank of Kenya, and serving
as a founding member of the .-based Better Than Cash Alliance and Alliance for Financial
Inclusion (AFI).
The most important conclusion from the financial inclusion-digitization dimension is that once
digitization has taken root in the economy, it allows sustainable business models to be
developed to support a particular market segment or productive activity with ease and with
positive results across all other sectors of the economy. There are several examples from
Kenya that show this emerging trend and fintechs there are working continuously to roll out
new products on the digital platform. In addition, retail electronic payments and transactions
are being used widely and more importantly, the informal sector is slowly formalizing their
transactions.
Digitization has gone beyond the financial sector to affect the real sector and households.
Different products targeted at alleviating constraints in the real sector of the economy like
electricity and agriculture have been rolled out on the digital platforms. Digitization and big data
analytics have transformed product designs and business models in various market segments.
Businesses are able to design products and trade online. Individuals are able to operate
financial services and payments for shopping and investments. The government is also
migrating to online platforms to more conveniently provide public services. Micro, small, and
medium enterprises (MSMEs) are using available digital services to market and sell their
products and to apply for and receive credit at the micro level.
Given Kenya’s established digital infrastructure and continued adoption of digital technologies
in all market segments, understanding the impact of digitization on employment creation is
4 — Next steps for the digital revolution in Africa
important. Though evidence available seems to indicate a huge impact on the economy, poverty
reduction, and employment generation, the impact measurement is a difficult task. There are
three inhibiting factors. First, digitization has accelerated only in the past 11 years in Kenya,
and some sectors have lagged behind. In most of those years, the recipient sector of most
innovation has been the financial sector. Second, there are data limitations on the level of
digitization in the Kenyan economy—hence the challenge in linking digitization with labor
productivity and employment outcomes. Moreover, digitization affects employment through
macro and micro channels, some of which are not easy to measure. Finally, other political
economy and business cycle factors have had an impact on the Kenyan economy in the past
decade, leading to inconsistency in some sectors’ employment and output growth outcomes.
For these reasons, the paper will rely on anecdotal evidence and a selection of economic
activities to make reference on economic activity and potential employment creation. The
paper is organized as follows: Section 2 presents the role of digitization in the evolution of
financial services in Kenya; Section 3 describes how digitization has created a platform for
new product designs; Section 4 explores how innovative delivery technologies of financial
services has opened the frontier of financial inclusion; Section 5 shows the channels through
which digitization has the potential to affect employment creation and productivity growth;
and Section 6 concludes. An Annex is provided that shows the potential framework for
analyzing the impact of digitization on employment creation in an economy.
2. THE ROLE OF DIGITIZATION IN THE EVOLUTION OF FINANCIAL
SERVICES
In the past decade, the mobile phone-based financial services platform has shaped the
development of financial markets in Kenya. In March 2007, following a pilot project, the M-
Pesa technological platform was launched as a bank product in partnership with a
telecommunications company. This innovative development has since undergone four stages:
the introduction of a retail electronic payments platform, pushing the financial inclusion frontier
through virtual savings, integrating credit platforms, and finally pushing the frontier of cross-
border remittances and electronic payments.
Stage 1
The mobile phone technological platform was used for electronic money transfers between
users (person to person, person to government, and government to person), and later for retail
electronic payments and settlement. The emergence of a retail electronic payments system
created a radical change in the payments ecosystem. Payments system is the entry point for
financial services
Stage 2
The platform integrated with more commercial banks, Savings and Credit Cooperative
Organizations (SACCOs), and insurance companies and introduced virtual savings accounts.
The virtual savings accounts became a platform for managing micro-deposits and micro-savings
accounts, payment of utility bills, insurance premiums to insurance companies, and settlement
of insurance claims. This made it easier for banks to provide accounts for the unbanked and
pushed financial inclusion frontier. A new definition of digital financial services emerged, but,
more importantly, it improved the banking intermediation process. Consequently, commercial
banks in Kenya built mountains of deposits and expanded their networks across the country
and the East African region. In 2009, Safaricom launched its pay bill services. In the subsequent
expansion, Safaricom partnered with 25 banks and over 700 businesses to facilitate fund
deposits, bank transfers, and the regular payment of utility bills, insurance premiums, and loan
installments. Other mobile network operators (MNOs) followed with similar products and
5 — Next steps for the digital revolution in Africa
competitive services. In addition, others moved to mobile virtual network operations (MVNOs)—
a wireless communications services provider that does not own the wireless network
infrastructure over which it provides services to its customers. Businesses using the online
shopping platform to reach customers who eventually make their payments through the digital
finance platform have expanded. Additionally, most utility companies have embraced electronic
payments. Consequently, sustainable business models have been developed on the digital
platform across all sectors of the economy.
Stage 3
The mobile phone financial services platform is developed from virtual savings account to
virtual credit supply platform. The M-Shwari, launched in November 2012 through a partnership
between Commercial Bank of Africa (CBA) and Safaricom, became the virtual platform in Kenya
at this stage. After 40 months of operations, M-Shwari had over 15 million customers. It has
expanded to Tanzania as M-Pawa and to Uganda and Rwanda as MoKash. The novelty of this
stage is the use of transactions and savings data as the basis to price micro credit and assess
credit risks. Several products were launched and have been replicated across the East African
region. In March 2015, Safaricom partnered with Kenya Commercial Bank (KCB) to introduce
KCB M-Pesa—a mobile phone-based savings, credit supply and retail payments transactions
platform. In addition, other products such as M-Kesho, Tangaza, and Mobicash have led to
increased access to credit and improved savings in the country. The savings and credit supply
products in the banking sector such as M-Shwari, M-Kesho, and KCB-Pesa have provided virtual
banking services and cover over 18 percent of the adult population. The other MNOs have also
produced mobile phone-based financial services such as Airtel money, Orange money, and Yu
cash. In July 2015, Equity Bank’s subsidiary MVNO launched its thin subscriber identification
module (SIM) card that permits its customers to use its new mobile phone service (Equitel) with
other mobile network operator services.
Stage 4
Cross-border payments and international remittance payments were made possible and the
regional payments system was improved. This has given Kenya a name in the financial inclusion
policy success.
Growth in banking
The digital revolution in Kenya’s financial sector has provided a means of managing bank
accounts enabling commercial banks to reach more customers and grow mountains of
deposits. Subsequently, the huge deposits have provided banks with capacity to grow and
intermediate, leading to the emergence of strong banks leveraging the digital platform to
manage micro-accounts, build up deposits, and extend financial services to previously
unbanked and underserved population. Figure 1 and 2 show the growth of deposit accounts
and gross deposits in Kenya since 2005.
6 — Next steps for the digital revolution in Africa
Source: Central Bank of Kenya
Source: Central Bank of Kenya
The figures shows that the number of deposit accounts have increased from million in
2005 to million in April 2018. This growth has been accompanied by an increase in gross
deposits from $6, million in 2005 to $31, (KShs trillion) in April 2018. The
Central Bank of Kenya statistics also show that the number of micro accounts has increased
from million in 2005 to million in April 2018. These show evidence of increased
deposit accounts that depict increased access to financial services and, most importantly,
enhanced financial inclusion in Kenya during the period.
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Figure 1: Growth in Deposit Accounts and Gross Deposits in
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Gross Deposits (USD Millions) Number of Deposit Accounts
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Figure 2: Growth in Deposit Accounts and Gross Deposits in
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Gross Deposits (Ksh Trillion) Number of Deposit Accounts (Million)
7 — Next steps for the digital revolution in Africa
3. DIGITIZATION AND NEW PRODUCT DESIGNS
The digital financial services platform has provided a payment avenue for different products
related to agriculture, investment, and utilities. This has strengthened the argument that retail
electronic payments system has changed the whole economy. These business models reflect
the evolution of digitization and more importantly, they provide evidence on the impact on
productivity and the potential for employment and growth.
Agriculture
The Kenyan economy is agricultural reliant, and a large proportion of agricultural activities is
undertaken by smallholder farmers. Smallholder production, generally on plots of less than two
hectares, is characterized by low yields, low quality, poor market linkages, and little access to
finance. Most of the challenges have to do with reliance on rain-fed agriculture and cost of
inputs. The majority of the smallholder farm households live below the poverty line. Therefore,
rapid diffusion of digital financial services to supply inputs and prompt payments of their output
is important. Digitization has been used as a platform for input supply financing and output
payment thus enhancing market linkages and subsequently the livelihood of the smallholder
farmers. For instance, Klapper et al. (2016) show that financial inclusion of farmers leads to
bigger investments in the planting season, resulting in higher yields and hence progress toward
the attainment of the . Sustainable Development Goal on improving food security. Goldman
et al. (2016) point out that access to savings account can help smallholders cover a portion of
their financing needs (as well as create a buffer against shocks). In addition to credit, most
smallholder households stand to benefit significantly from access to savings accounts,
insurance, and electronic transactions. Increased savings enhances capital accumulations
whereas insurance covers the smallholder households from risks on their livelihood.
Smallholder farmers also benefit from virtual banking services that makes it easier to receive
remittances, facilitate seamless money transfers from buyers or government programs and to
input providers (Goldman et al., 2016). With this understanding, One Acre Fund (OAF) was
launched in Kenya in 2006 and currently serves farmers in Rwanda, Burundi, Tanzania,
Uganda, and Malawi as well. The program aims to serve at least 1 million smallholder farm
families—covering more than 5 million people by 2020.
The OAF interventions recognize and reduce the binding constraints that smallholder farmers
in the East Africa region face in terms of inputs, managerial skills, markets, and effective real-
time payments platform. The program supports the field staff in the respective countries by
providing finance, accounting, human resources, logistics, marketing, and administration
services. The program accommodates smallholder farmers who require financial products that
offer flexibility to their uneven and seasonal income. The OAF loan product is designed in a way
that offers farmers flexible repayments with no repayment schedule. The smallholder farmers
can pay as little or as much as they want at any time through their mobile phone accounts, as
long as they complete repayment by the final deadline. Prior to 2014, farmers’ repayment was
entirely cash based with payments being made through the OAF field officers. This process took
about 12 to 16 days and was faced with uncertainty, inefficiency, insecurity, leakages, and high
costs (Waldron and Amusin, 2017). Since 2014, OAF has enabled farmers in Kenya to make
loan repayments digitally using M-Pesa instead of cash. This method has increased economic
opportunity and financial inclusion in some of the world’s poorest farming communities. This
flexibility allows farmers to closely match repayments to cash flow and reduce pressure on
household finances.
This platform is one important example that has allowed sustainable business models to be
developed and farmers to make and receive payments in real time improving transparency,
accountability, and reducing leakages. The results from OAF program show that a combination
of farm inputs (including improved seeds and fertilizer) and convenient and timely delivery of
inputs has enhanced productivity and output, increased income per acre by 50 percent and
8 — Next steps for the digital revolution in Africa
has generated a dollar impact of roughly $135 per farmer. For the poor households, the
program has improved food security and created opportunities for self-employment.
Investment
M-Akiba is a micro investment in government securities using mobile phone accounts. It has
presented a unique opportunity for Kenyans to save and invest in the short run with a risk-free
government paper. Through the program, the government of Kenya sought to borrow 5 billion
Kenyan shillings (KShs) (approximately $50 million) to fund government infrastructure projects
in the financial year 2017/18. The M-Akiba bond also aimed at enhancing the savings (which
is at 11 percent of GDP for Kenya compared to 22 percent for her neighbors like Rwanda and
Uganda) and encourage an investment culture among Kenyans. The initial minimum
investment amount per account was set at KShs 3,000 (approximately $30) with consecutive
trades in multiples of KShs 500 (approximately $5). The proceeds of M-Akiba bond are tax-free
and earn an interest rate of 10 percent per annum, payable semi-annually. Thus, the M-Akiba
has opened up an investment opportunity for individual small investors in the country who have
constituted less than 2 percent of government bond uptake.
Table 1: Breakdown of the Initial M-Akiba Uptake
Amount Analysis by Band
(KShs)
Value (KShs
Million)
Number of
Investors
Share in Total Number
of Investors (percent)
Minimum amount = 3,000 1,772
3,001 - 10,000 1,963
10,001 - 20,000 595
20,001 – 50,000 677
50,001 – 100, 000 366
Above 100,000 318
Total 5,691 100
Source: The National Treasury, Government of Kenya.
The table show that the KShs million (approximately $ million) uptake of the initial
M-Akiba bond was mainly dominated by small investors who invested less than KShs 10,000
(approximately $100). Those who invested the minimum amount of KShs 3,000 constituted 31
percent of the total investors whereas those who invested between KShs 3,001 and KShs
10,000 constituted percent. The idea that small savers can use their savings to lend
money to the government and so make investments with good returns marks the success of
digitization in Kenya transcending across market segments.
Water
The digital platform also enhances access to utilities. A water vending machine aims to provide
adequate supply of water to households. An estimated 36 percent of Kenyan households do
not have access to clean drinking water, acute in rural Kenya and urban slums. In Nairobi’s
Mathare slums, a public-private partnership between Nairobi Water and Sewerage Company,
Safaricom (a telecommunication company), and Grundfos (a Danish water engineering firm)
installed water vending machines. To buy clean water, users load points onto smart cards with
credit bought on-site or via their mobile phones, then use the cards to access the water vending
machines around the slum. By a simple swipe of their smart card on the vending machine
sensor, water is released from the main storage and into a waiting container. Through M-Pesa,
payment is collected from customers more efficiently, while a cloud-based system receives and
9 — Next steps for the digital revolution in Africa
publishes all transactional and operational data from each water dispenser, ensuring
accountability and reducing service costs. The vendor machines are located in safe areas and
are closely monitored to immediately detect and respond to operational problems and theft
attempts.
The machines are revolutionizing water availability and distribution to poor slum dwellers that
have long been at the mercy of water traders who do not guarantee clean water at affordable
prices. Grundfos’ report on the program shows that the vendors operating in the slum would
charge KShs 50 ($) for a 20-liter container of water (an average family would perhaps
require five containers a week). However, with the introduction of the water vending machines
in 2015, the slum dwellers are now charged a half a Kenya shilling (half a . cent) for a 20-
liter container of water. It seems that since the introduction of this payments platform and many
water vending machines, unit costs have declined substantially. The weekly expenditure on
water in the slum reduced from KShs 250 ($) to KShs ( cents)—a 90 percent
reduction on water costs. This innovative water supply system supported by an electronic
payments ecosystem not only increase efficiency and cut out the intermediary, but also, above
all, flatten the market segmentation and variable pricing. The program has increased the use
of retail electronic payments in the slums, enabling poor households to access clean, affordable
water, and improved their welfare.
Solar power
The M-Kopa solar program helps low-income consumers acquire and own high-quality,
affordable energy solutions. The program was initiated in 2010 and so far has connected over
500,000 households to affordable solar power and employed 1,000 full time staff and 1,500
sales agents in East Africa. M-Kopa has developed a proprietary, patented technology platform
that combines embedded global system for mobile communications and retail electronic
payments to revolutionize asset financing in emerging markets. The solar home systems are
purchased on an affordable payment plan, with an initial deposit followed by daily payments for
up to one year through mobile phone accounts. After completing payments, customers own the
product outright. The program reports show that the households who have benefited from the
program are expected to make projected savings of $375 million over four years and enjoy
kerosene-free lighting, thus improving their welfare.
E-government and E-service delivery
Kenya’s eCitizen digital platform has reduced bureaucracy and improved access to government
services. Through the platform, Kenyans apply for government to citizen services and pay via
mobile money, debit cards, and eCitizen agents. The platform provides portals that enable
individuals to access government services such as business licenses, permits, and
registrations; obtaining driver’s licenses; processing police clearance certificates; searching for
official land titles for Nairobi blocks; and applying for passports. In addition, targeted social
protection programs have also taken advantage of digital revolution to enhance efficiency on
ways payments to and from the government are made. The payments from national and county
governments are now more efficient and transparent thanks to the introduction of the Central
Bank’s G-pay system that has reduced paperwork and ensured direct transmission of money
from the accounts at Central Bank of Kenya to the intended recipients. The faster, efficient,
and transparent processing of payments through the Integrated Financial Management
Information System (IFMIS), which is integrated in the Central Bank’s G-Pay system and the use
of the eCitizen technological platform, has revolutionized how the government relates to and
provides services to its citizens.
These tools have created a more efficient government’s social protection programs that focus
on social insurance, social assistance, and affirmative action funds targeted at the youth (Youth
Enterprise Development Fund), women (Women Enterprise Fund), and the physically
disadvantaged Kenyans (Uwezo Fund); as well as devolved funds for constituencies
(Constituency Development Fund introduced in 2003) and marginalized areas (Equalization
10 — Next steps for the digital revolution in Africa
Fund mandated by the 2010 Constitution, which is percent of all revenue raised nationally).
The transmission of these funds to the targeted people and areas has been made easier by the
electronic payments system and ensured that recipients are identified, thus minimizing
leakages.
4. HOW INNOVATIVE DELIVERY TECHNOLOGIES OF FINANCIAL
SERVICES HAS OPENED THE FRONTIER OF FINANCIAL INCLUSION
From the Fin Access surveys by FSD Kenya and Central Bank of Kenya (2016; 2013; 2011),
the results of financial inclusion profile in Kenya between 2006 and 2016 is summarized in
Table 2.
Table 2: Financial Inclusion Profile in Kenya 2006-2016 (Percentage of the Adult
Population)
Financial Access Category Total% Urban% Rural% Male% Female%
2006
Formal
Other Formal
Informal
Excluded
2009
Formal
Other Formal
Informal
Excluded
2013
Formal
Other Formal
Informal
Excluded
2016
Formal
Other Formal
Informal
Excluded
Source: Fin Access Surveys (2006; 2009; 2013; 2016)
The big picture shows financial inclusion success in Kenya. It starts with those served by the
formal sector increasing from percent of the adult population in 2006 to percent in
2016. In a span of 10 years, financial inclusion improved by 49 percent. This has reduced those
11 — Next steps for the digital revolution in Africa
financially excluded from percent in 2006 to percent in 2016. Those being served
by informal financial channels have declined to percent of the adult population in 2016,
from percent in 2006. Though the financially excluded population is still high, there has
been quite a dramatic decline on the proportion of the financially excluded population. The
2016 FinAccess survey shows that insurance industry is serving about percent of the adult
population compared to percent in 2006. Therefore, Kenya has performed quite well on
financial inclusion in the region. Figure 3 compares Kenya’s financial inclusion profile with that
of selected sub-Saharan African countries, according to the 2017 Global Findex data
(Demirgüç-Kunt et al., 2018).
Source: Global Findex 2017 database by Demirgüç-Kunt et al. (2018)
The figure shows that Kenya’s financial inclusion for adults aged 15 years and above hit 82
percent in 2017, substantially higher than most of the selected African countries except for
Mauritius. Male adults included was higher than that of female adults included in all the
countries except South Africa. However, the gender gap in financial inclusion seems to have
generally reduced across the countries following the mobile financial services revolution in
Africa, which is evidence of inclusive finance. The digital financial instruments allow women to
participate in financial transactions, savings, and credit with instruments that cannot be
encroached.
In Kenya, the financial inclusion picture that has emerged is consistent with the fact that mobile
phone financial services have allowed accelerating financial inclusion where new financial
services and products have emerged—encouraged by innovation and sound regulation, and
new effective, transparent and efficient delivery channels. In addition, new business ventures
are on the digital platform. The evidences presented on design of new products and financial
inclusion show how a successful digital platform can change an entire sectors and how new
products across all segments of the economy can be introduced. When more people and firms
have access to these products, the whole economy is provided with an efficient and dynamic
51%
59%
58%
82%
90%
40%
50%
69%
47%
59%
55%
0% 20% 40% 60% 80% 100%
Botswana
Gabon
Ghana
Kenya
Mauritius
Nigeria
Rwanda
South Africa
Tanzania
Uganda
Zimbabwe
Figure 3: Financial Inclusion in Select African Countries,
2017
Included, Female (% age 15+) Included, Male (% age 15+)
Included, Total (% age 15+)
12 — Next steps for the digital revolution in Africa
vibrant economic platform. Thus, the evolution of financial services via digital platforms has led
to an exponential increase in access to financial services, transforming elements of Africa’s,
and especially Kenya’s, social and economic development.
Inclusive growth
Digitization has so far created financial services, retail electronic payments, and electronic
transactions platforms. The vibrancy in the financial sectors propelled the economy in 10 years
as shown in Figure 4.
Source: Kenya Economic Survey (Republic of Kenya, 2010; 2012; 2014; 2016; 2018)
The figure shows that the financial sector GDP growth has generally pulled the overall GDP
growth in Kenya as compared to the other key sectors of the economy, that is, agriculture and
manufacturing sectors. This picture is clear from 2008 and in 2016, when the financial sector
growth seems to be taking a tumble, overall GDP takes a huge dive. This means that financial
sector growth has important implications for the overall GDP growth as well as inclusive growth
in Kenya. Inclusive growth entails equitable sharing of benefits for increased prosperity, equal
opportunities for employment and education, decent paying jobs, improved access to health
care, and improved access to financial services. These developments are important for
employment creation and sustainable poverty reduction. In this way, digitization is a key enabler
in realizing the . Sustainable Development Goals, as it has led to the retail payments
evolution, to greater financial inclusion, and to savings and credit market development for
investment, as well as provided an efficient digital platform for sustainable business models.
The pro-poor economic growth strategies should generate adequate and well-paying
employment opportunities, which are in turn expected to lead to poverty reduction via savings
and investment/capital accumulation. When poor people are excluded from the formal
financial system, the foundations of shared economic growth are weak (Klapper et al., 2016).
The starting point in Kenya is that digitization and the presence of virtual savings platforms
allowed the poor, those with low income and irregular flow of that income, to save via virtual
savings accounts. Savings would support their consumption smoothing and enlarge their asset
base to escape poverty cycles. The additional development of virtual credit supply platforms,
allowing transactions and savings data to be used to price short-term credit, has accelerated
the prospects for asset accumulation and investment of poor households in Kenya. Digitization
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Figure 4: Kenya's GDP Growth Rates, 2006 - 2017
Agriculture Manufacturing
Financial & Insurance Overall GDP Growth
13 — Next steps for the digital revolution in Africa
of the financial system thus may be seen to reduce inequality by disproportionally relaxing the
credit constraints on poor people, who lack collateral, credit history, and connections (Cull et
al., 2014). Indeed, El-Darwiche, et al. (2013) show that an increase of 10 percent in a country’s
digitization scores fuels percent growth in its GDP per capita. Suri and Jack (2016) show
that access to the M-Pesa technological platform increased per capita consumption levels and
lifted 194,000 households, or 2 percent of Kenyan households, out of poverty. Notably, an
important conclusion in this study was that the impacts were more pronounced for female-
headed households, driven by changes in their financial behavior, asset accumulation, and
labor market outcomes. Digitization therefore has played a key role as an easy entry point into
the financial system for the poor, especially in Kenya for the 40 percent of its population that
are poor (with low levels of education and capital accumulation) enabling them to save, invest,
and participate in various economic activities. Access to mobile phone-based financial services
has supported the establishment of a retail electronic payments system that is the entry point
into Kenya’s financial sector for many informal traders and low-income earners. Products such
as M-Shwari and KCB M-Pesa have enabled many low-income earners to open virtual savings
accounts and access micro-credit from commercial banks, microfinance banks, and SACCOs.
5. EMPLOYMENT
Digitization has influenced financial inclusion and financial development with these effects
cutting across all sectors of the Kenyan economy. The important question is whether it has
produced ripple effects on inclusive growth and employment generation in the country. There
is no doubt about inclusive finance in Kenya, but employment generation requires further
research and survey data.
Jobs through macroeconomic channels
At the macro-level, increased financial inclusion through mobile payments contributes to
greater capital accumulation and investment, hence a potential for employment creation.
Digital technology creates significant spillovers on local demand for services; it is estimated
that one additional technology job creates around five new jobs in the local non-tradable sectors
(Frey and Rahbari, 2016). Since most employment in low- and middle-income countries is in
micro, small, and medium enterprises, these firms are often targeted by interventions to
support their formalization, growth, and job creation. Typical interventions include the provision
of finance services, credit access, entrepreneurship training, business support services, wage
subsidies, and measures that transform the business environment (Grimm, 2016). Digitization
provides a platform for the success of such interventions.
Evidence indicates that the digital evolution in the financial services has shortened the savings-
investment cycles and that the investments have the potential to generate employment, poverty
reduction, and output growth in the country. For instance, a Dupas and Robinson (2013)
randomized evaluation trial in rural western Kenya found that access to a new commitment
savings service enabled female market vendors to mitigate the effect of health shocks,
increase food expenditure for the family (private expenditures were 13 percent higher), and
increase investments in their businesses by 38-56 percent over female vendors without access
to a savings account.
From a macro-financial approach, digitization has resolved information asymmetry problems in
the financial sector and in the labor market. Increasing efficiency, certainty, and security in an
environment where information asymmetry is critical for economic growth and job creation. In
the financial sector, digital financial services leave tracks of the financial transactions of
individuals that banks use to determine the credit worthiness or generate credit scores of their
14 — Next steps for the digital revolution in Africa
customers. Virtual savings account and virtual credit supply platforms such as M-Shwari, KCB
M-Pesa, M-Kesho, Tangaza, and Mobicash enabled the use of transactions and savings data
as the basis to price micro credit and assess credit risks. This information is critical for risk
profiling of customers as they seek credit. Information symmetry lowers the risk premium and
search costs loaded in the cost of credit by the financial institutions. Thus, credit information
sharing has helped to promote access to affordable credit in Kenya. This has enhanced access
to credit by small traders enabling them to sustain and/or expand their businesses thus
creating employment opportunities across the country.
The digital platform also facilitates information sharing of financial products between the
financial institutions and their customers. As a result, it helps increase financial inclusion and
financial intermediation. The digital platform also allows the financial regulators to improve the
anti-money laundering and combating the financing of terrorism regime creating vibrancy and
confidence in the financial system. The confidence in financial systems helps spur savings and
investments, which generate employment opportunities. One important aspect of retail
electronic payments platform at the macro and micro level is the contribution to economic
efficiency. This is still difficult to measure but a major contribution to production efficiency.
Jobs through micro channels
The different stages in the evolution of financial services (discussed in Section 2) has
provided some evidence of endogenous developments and vibrancy in Kenya’s financial
sector. These increased levels of activities have increased the number of participants and
service providers and thus employment opportunities. For example, in the first stage—the
emergence of electronic payments—created the need for a variety of jobs at different levels,
including the demand for agents, master agents, and super agents. This expanding network
of agents has supported the strong growth in mobile phone-based financial services. The sub-
agents, supervised by the telecommunications companies, transform cash into electronic
units of cash and load it into SIM cards, whereas the master agents, also referred to as
aggregators, serve the sub-agents in a given locality as liquidity distributors. The master
agents are institutions that recruit “Lipa na M-Pesa” (“pay with M-Pesa”) merchants and
provide them with added value services like credit and reconciliation services. Super agents
mainly are agents that purchase electronic floats from the telecommunication companies in
bulk and distribute them to the sub-agents. The super agents are banks, micro-finance
institutions (MFIs), or chain supermarkets with no transactions limits and are interoperable
across MNOs. This set up has created employment for thousands of Kenyans in the digital
ecosystem as shown in Figure 5.
Source: Central Bank of Kenya
15,216
35,350
51,455
80,492 83,690
96,155
124,084
152,077
307 1,582 6,104
23,012
50,471
76,912
113,130
123,703
143,946
165,908
182,472
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Figure 5: Mobile Financial Services Agents in Kenya
Sum of M-Pesa Agents Sum of Consolidated Number of Agents
15 — Next steps for the digital revolution in Africa
Figure 5 shows that the total number of mobile financial services agents in the country has
tremendously grown since 2007, when M-Pesa was launched, from 307 agents to 182,472
agents as of December 2017. M-Pesa agents have dominated the mobile financial services
agents’ network and its growth throughout the period. Out of 182,472 agents in the network,
M-Pesa (Safaricom) agents stood at 152,077 (or percent) across the country whereas the
combined agents for all other MNOs and MVNOs were 30,395 (or percent only). Besides
increasing the impact and coverage, there are huge investments, returns, and employment
opportunities that have grown with this ecosystem. The evidence provided in Box 1 is a clear
proof of the economic activities, economic rent and employment opportunities that digitization
in Kenya has ushered into the economy.
Box 1: Pioneer M-Pesa agent who transacts over KShs 400 million ($4 million) monthly
Julius Wababu, a 1987 Bachelor of Education graduate from Kenyatta University, went
straight into teaching for about 10 years but his entrepreneurial mind led him to business
of importing photocopying machines and accessories. In October 2007, a few months
after mobile money transfer service M-Pesa was launched, a client who visited his
photocopying shop wearing a T-shirt branded “M-Pesa” made him enquire on how to
open a M-Pesa shop. Using the money from the photocopying business, he decided to try
the idea, starting as a sub-agent of another dealer. The unfortunate events following the
2007 general election came as a blessing in disguise to him as many people wanted to
send money to their relatives and friends and the only convenient way was through M-
Pesa. Additionally, many more registered for M-Pesa and within a short time, the
transaction volumes grew. Between October 2007 and February of 2008, he moved
“huge volumes” prompting him to pull out of the photocopy business. For a structured
business, he decided to form a company, Wabcom Technologies, with his wife. They
opened three shops—one in Nakuru where he was based and others in Meru and Embu
towns. He decided to commit all the cash he had in the business and also approached
Equity Bank and Kenya Commercial Bank in 2008 for short-term loans to manage the
cash-in, cash-out platform or float. In 2010, Wababu who is in his 40s, approached
Tuskys Supermarket, one of leading retail stores in Kenya, and got the chance to run M-
Pesa shops in all its premises. That was a win-win partnership. He also benefitted from
the evolution of agent network management of Safaricom and was positioned as a
master agent. It implied he had a secure place for money transfer business while Tuskys
benefited from increased traffic and customer convenience. Currently, he serves 48
Tuskys outlets. Overall, his outlets have grown from just three in 2008 to more than 200
and employs about 300 people. He also uses aggregator module, where about 100 small
operators give him commission to run under his name. To ensure employee growth, he
started Wabcom Sacco where employees can guarantee each other for loans. Currently,
his business has expanded to cover most of the counties in Kenya except where float
management and security has been a challenge. The business relies on banks to ensure
proper float management and makes about 5,000 transactions every day. As of
December 2016, the business had a minimum turnover of KShs 400 million ($ 4 million)
every month. In 2011 and 2012, his business was ranked the best performing M-Pesa
agent in the country. His firm has consistently bagged awards since 2010, including
2016 where he was ranked second runners up in airtime sales.
Source:
million-monthly
16 — Next steps for the digital revolution in Africa
The second stage—integration with commercial banks—also grew demand for employees, as
the branch outlet expansion created employment opportunities and increased the need for
information technology experts to cope with the expansion. In the third stage, the use of
transactions and savings data as the basis to price micro credit and assess credit risks relaxed
the need for security to access credit in Kenya. This led to improved savings and increased
access to credit by informal traders and poor households, which spurred investment thus
resulting in growth of SMEs that continue to create employment across the country. These
SMEs, without corporate identity, that is, informal, could not access loans from banks. In the
fourth stage—including cross-border payments and regional payments—the Kenyan banks have
replicated their products in the East African Community with success. M-Pesa and M-Shwari
have been replicated in Tanzania, M-Pawa in Uganda, and Mo-Kash in Rwanda with similar
success. These have created employment opportunities through the growth of agents’ network
across the region. As evidenced by the growth in mobile phone financial services’ agents and
establishment of agency banking in the financial sector in Kenya, digitization influences
employment creation as the digital financial ecosystem provides a platform for the emergence
of new businesses and growth of existing ones—providing employment opportunities.
The successful launch of agency banking in 2010 was a complementary addition to the
commercial banks’ branch network in Kenya. In agency banking, an entity, contracted by a
commercial bank and approved by the Central Bank, provides limited scale banking and
financial services to the underserved population on behalf of the commercial bank. The agency-
banking model has allowed banks to locate non-traditional outlets in remote areas where “brick
and mortar” branches and other outlets are not financially feasible. Agency network for banks
have increased to over 35,000 entities since inception. This development has presented an
opportunity to small entrepreneurs, such as those operating retails shops and service stations,
to also offer agency-banking services to their customers, thus creating more employment
opportunities across the country or enhancing their SME operations. Moreover, there has been
an increase in bank branches and automated teller machines (ATMs), with the branch outlets
increasing from 534 in 2005 to 1,443 in 2015. The rural branch network has also grown from
181 branches in 2005 to 660 in 2015. In addition, 11 Kenyan banks have expanded to other
East Africa countries, with over 330 branch outlets. Kenyan commercial banks have also
embraced mobile and online banking. Evidently, since 2010 most commercial banks have
either stopped or slowed down in opening brick and mortar branches in favor of digital branches
as well as internet banking and internet transactions. There is inherent preference for internet
banking to reduce operational costs for the banks and transactional cost to the customers. All
these developments have led to increase in employment creation in the banking industry. The
commercial banks are now reducing the brick and mortar branches and embracing the
relatively cost effective online banking. This has led to fears of job losses in the banking
industry. However, the introduction of agency banking has opened another window for self-
employment opportunities in the industry.
Digitization has also enabled the establishment of various online shopping platforms. The e-
commerce platforms mean that traders do not necessarily have to establish physical shops all
over since customers can log on to their websites, view their products, purchase, and wait for
the products to be delivered at their convenience. This has led to establishment of online
shopping malls, to the convenience of many shoppers, on top of the supermarkets that have
physical shops across the country. Additionally, it has created job opportunities to individuals
and firms offering door-to-door delivery services. In Kenya, there are a number of online
shopping platforms, such as Jumia Kenya, PigiaMe, Nuria, OLX, and Kilimall. The digital
platform enables these businesses to save on operational costs, market their products, engage
with their customers via digital financial services, and deliver the purchased products. There
are other opportunities on the digital platform, ranging from self-employment in Uber taxi
services to YouTube to Amazon self-published books and application stores also referred to as
“digital consignment” (El-Darwiche et al., 2013). The government of Kenya launched Ajira
17 — Next steps for the digital revolution in Africa
Digital Programme to create employment opportunities for the youth. It links the companies to
a community of online workers in Kenya who use the internet to find, complete, and submit
work. Through the program, businesses can contract for freelance services at individual or firm
level. More than 40,000 Kenyans are already registered on Upwork, the leading freelance
platform and are participating in the world of online work. In a 2014 survey of oDesk (now
Upwork), Kenya ranked 10th overall on a list of countries providing online workers, and first in
Africa. Additionally, there are freelance academic writing jobs that entail research and writing
of academic related works. The online academic writers handle technical and academic work
in their various fields of specialization. The client presents the writer with a topic to research
on, the terms of payment and the assignment’s time frame. Upon completion of the
assignment, the writer is paid through PayPal, Skrill, or Payoneer. Indeed, these pieces of
evidence go a long way to show that the digital platforms provide opportunities for self-
employment to many people across the world.
Informal and formal employment
In an economy like Kenya with diverse market segments and a preference for informal markets,
the first stage is to move informal markets to the complexity of formal markets via the digital
platform. The impact of their growth, productivity gains, and employment potential creation can
thus be immense. However, creating new jobs that offer gainful employment and decent
working conditions is one of the major challenges faced by low- and middle-income countries
(Grimm, 2016). In Kenya, the share of employment in the informal sector has been larger than
that of the formal sector since the early 1990s (Ikiara and Ndung’u, 1999). Digitization presents
an opportunity to formalize these informal sector businesses and move them to gainful
employment. In this way, digitization through simple payment platforms and accessibility to
markets lays hope that informal markets in Kenya, and indeed Africa, will one day join the
complexities of formal transactions. African economies are predominantly characterized by
market segmentation. Critical, is the informal sector. The process of formalization has not been
successful in any of the economies in Africa. Emerging evidence shows that the informal sector
is constantly using retail electronic payments system, virtual savings, and virtual credit supply
platforms. Gradually, digitization appears to be formalizing the informal sector activities.
The second dimension that supports employment creation is that M-Pesa and the emerging
payments platforms have supported coordination across market segments. Market segments
can communicate across each other through one retail electronic payments platform allowing
for market and production vibrancy. Figure 6 shows the proportion of formal and informal
employment in Kenya from 2001 to 2017.
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Figure 6: Proportion of Formal and Informal Employment in Kenya,
2001-2017
Formal Sector Employment (Proportion of the Total)
Informal Sector Employment (Proportion of the Total)
18 — Next steps for the digital revolution in Africa
Source: Kenya Economic Survey (Republic of Kenya, 2006; 2010; 2014; 2018)
The figure shows that the proportion of formal employment in Kenya (measured on the primary
y-axis) has been on a decline over the period, reducing from percent in 2001 to
percent in 2017. However, the proportion of informal sector employment in Kenya (measured
on the secondary y-axis) increased from percent in 2001 to percent in 2017. This
increase seems to have accelerated between 2008 and 2012 but has slowed down since then.
The acceleration in informal employment seems to coincide with the period when digitization
took off in the financial sector in Kenya. This shows that digitization has created potential for
increased informal employment in the country. However, the quality of the informal employment
cannot be discerned from the available statistics but is expected to have improved as the digital
platforms are argued to present an opportunity for the informal businesses to formalize. Garcia-
Murillo and Velez-Ospina (2017) argue that empowerment that comes from digitization, that is,
greater and deeper access to information and resources can help reduce the informal
businesses in an economy. In an economy with huge unemployment, especially for youth and
the informal sector seems to be the sector to absorb them, digitization provides an easy
application for self-employment. This improves the informal market operations and increases
labor absorption.
Productivity
On aggregate, the most profound impact of digitization in the labor market is that it raises labor
productivity (World Bank, 2016). Digitization increases overall productivity by improving job
matching hence the allocation of labor and skills to the most suitable opportunities in the
market (Chen and Haymon, 2016) and relieving workers of repetitive routine duties so that they
can focus on assignments that are more productive.
A key feature of the digital job search platforms is their ability to accumulate a large database
of job seeker profiles, job positions, and employers (Chen and Haymon, 2016) thus providing
an opportunity for labor force participation of those at the bottom of the pyramid who have
limited professional connections. The digital platforms can make the recruitment process
efficient. For instance, digital platforms such as LinkedIn match job seekers’ skills with
employer needs, video interviews save time and cost, and social media can efficiently reach
youthful job seekers. Most employers in Kenya have also made it a requirement that potential
employees provide Credit Reference Bureau (CRB) clearance as part of the background check
during the recruitment process. Generally, the digital platforms’ ability to lower information
search costs increases opportunities for people who face barriers in finding employment or
productive inputs. This promotes labor force inclusion for those at the bottom of the pyramid
such as the poor, women, persons with disabilities, and people in remote locations
disadvantaged by physical infrastructure.
World Bank (2016) shows that digital technologies can also improve management by
monitoring the performance of workers. The internet also provides real-time data for better
planning and management of service facilities and provides an opportunity for various
companies and government to receive complaints, track their resolution through an automated
workflow, and regularly update citizens on progress.
In Kenya, available literature shows a major decline in labor productivity during the structural
adjustment period, that is, the 1980s and early 1990s (Ikiara and Ndung’u, 1999), but an
increase in labor productivity over the past decade (Kimenyi et al., 2016) when the digital
diffusion has been significant. Kimenyi et al. (2016) analyze labor productivity in Kenya in terms
of GDP per person employed and agriculture value added per worker using data from World
Bank (2015). The results from the analysis for GDP per person employed were as shown in
Table 3.
19 — Next steps for the digital revolution in Africa
Table 3: Labor Productivity in Kenya
Period GDP per person employed ($)
1990-94 2,
1995-99 2,
2000-2004 2,
2005-2009 2,
2010-2012 3,
Source: Kimenyi et al. (2016)
The results show that GDP per person employed before 2005 experienced a sluggish
inconsistent growth, as compared to the period after 2005 when it has been consistently rising
to an average of $3,070 in the period 2010-2012. On the other hand, Kimenyi et al. (2016)
show that agricultural productivity has been quite erratic over the period, dropping
inconsistently from a high of $ in 1983 to a low of $331 in 1997. However, since 2009,
agricultural productivity has consistently increased from $ to $ in 2014. The trends
of GDP per person and agricultural productivity in the recent years are an indication of growing
labor productivity with the increased digital diffusion in the country among other incremental
factors.
Net job creation
Recognizing the fact that digitization has transformed employment relations between workers
(labor) and employers (capital) as well as business relations between consumers and
producers/traders, the result could be job creation or destruction, depending on the nature of
work. Nevertheless, more importantly, digitization seems to increase the supply of sustainable
business models that have a large effect on the economy and they are also sustainable
because they operate in critical sectors that touch on livelihoods of households. Where
digitization has led to a full automation of services, job losses are expected. According to World
Bank (2016) technology augments higher skills while replacing routine jobs, forcing many
workers to compete for low-paying jobs. For instance, the e-commerce platforms where traders
do not necessarily have to establish physical shops all over and the internet banking services
could mean lay off of certain cadre of staff. However, Arntz et al. (2016) point out that
digitization is unlikely to destroy large numbers of jobs. In their study, they show that on average
across 21 OECD countries included in their study, only 9 percent of jobs are automatable, thus
the threat of job destruction from technological advances seems much less pronounced.
In Kenya, a closer look at the effects of digital innovations in the sectors suggests that there
could be more of job switching rather than job destruction as new opportunities emerge. The
main opportunities of income generation in an excess capacity environment cannot destroy
jobs but create them. This suggests net increase in job creations in the sectors on aggregate.
For example, as online shopping platforms such as Jumia Kenya, PigiaMe, Nuria, OLX, and
Kilimall gain ground in Kenya, the physical shopping malls occupied mainly by supermarkets
and market stalls for small traders continue to be established in various towns across the
country. In fact, the traders are taking advantage of the online shopping platforms to reach
more customers out of their location and deliver to them products purchased without them
visiting the shops. This also means increased opportunity for those providing door-to-door
delivery services. In the financial sector, agency banking, that seems to be riding on the mobile
phone-based financial services agents’ network, has also created job opportunities across the
country, overriding the likely job losses by tellers resulting from online banking. As data points
and activities enlarge over time, the clear picture will emerge and the potential for digitization
and net employment creation will show some positive results.
20 — Next steps for the digital revolution in Africa
6. CONCLUSIONS FROM THE KENYAN EXPERIENCE
The arguments and evidence in this paper show that digital revolution in Kenya’s financial
sector has gone through four major stages of innovative development of mobile phone-based
financial services platform, driving economic growth. The stages show that financial services
have improved with integration of banks, microfinance institutions, and SACCOs with the M-
Pesa platform and other mobile phone applications. Additionally, the retail electronic payments
evolution has further supported an easy entry point to financial services and the efficiency of
payments ecosystem. Financial inclusion has improved financial development, created strong
banks and microfinance networks. This has expanded the branch network of banks and
financial services’ points of service countrywide. Improved financial savings have lifted the poor
households from poverty and encouraged the integration of markets from the financial sector
to other areas of the economy.
The Kenyan experience also provides evidence that there have been improvements in access
to credit through virtual microcredit products that have been developed by the financial
institutions. They have enabled new businesses and improved investment of the existing
businesses. The paper also shows that digitization has created a platform for rolling out new
products and businesses in different sectors that have important economic effects upstream
for product designers and downstream for clients, users and employment/income generation.
Interventions such as the One Acre Fund (OAF) have helped to reduce some of the binding
constraints faced by small-holder farmers in the East Africa region. The binding constraints
include access to farm inputs, limited managerial skills, access to market for output, and
effective real time payments platform for their produce. Such a program is making in-roads into
the agricultural sector, raising output productivity, food security, and incomes to the
smallholder peasant farmers.
The digital platform has provided a platform to realize innovative ideas for enhancing
infrastructural development and improving the supply of social utilities in the country. This is
where fintechs continue to introduce products and businesses that benefit all the sectors of
the economy. These include M-Akiba for investment in government securities for small savers,
water vending machines for water supply to poor urban households, M-Kopa solar energy
programs for urban and poor households, and many more are coming into the market. These
are sustainable business models because they affect critical sectors of the economy and
peoples’ livelihood. In addition, digital platforms have revolutionized the way payments to and
from the government are made, leading to a more efficient and transparent implementation of
targeted social protection programs by the government and easier platforms for tax payments.
The eCitizen digital platform has reduced bureaucracy and improved access to government
services. Through the platform, Kenyans apply for government to citizen services and pay via
mobile money. These electronic platforms that have emerged solve a major component of
transactions costs with government and government services on individuals and firms.
Digitization in Kenya has supported the economy via a retail electronic payments system,
financial inclusion, increased financial sector vibrancy, and pushed GDP growth with it. These
developments no doubt have led to employment growth, increased outputs, and enhanced
labor productivity across diverse sectors of the economy. There are also numerous products
and business activities on the digital platform ranging from Uber taxi and TaxiFY services in the
transport industry that has created opportunities for self-employment in Kenya to YouTube that
includes videos and entertainment. Above all, retail electronic payments platforms have
coordinated the segmented informal markets in Kenya and are responsible for inducing
incentives for formalization through their transactions, payments, and virtual savings and micro
credit demand. Given that informal markets contribute about 83 percent of total employment
in Kenya, the digital evolution will greatly influence employment generation and enhance labor
productivity in Kenya. Survey data and more data points over time will test these conclusions
in future. Due to data limitations, this paper only provides on tentative conclusions on the next
21 — Next steps for the digital revolution in Africa
steps for digital revolution to provide strong avenues for growth and job creation in Kenya and
similar countries in Africa adopting and pushing the digitization frontier.
22 — Next steps for the digital revolution in Africa
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ANNEX
The potential framework of analysis
In analyzing the impact of digitization on job creation in an economy, it important to first analyze
the empirical question of the level of digitization in the economy. Some authors, like El-Darwiche
et al. (2013), have used Strategy’s Digitization Index, which is a composite score that calculates
the level of a country’s digitization using 23 indicators. The Digitization Index measures a
country’s level of digitization on a scale of 0 to 100, with 100 signifying the most advanced,
and 0 the most constrained. The distinct stages of digital development are generally
categorized into constrained, emerging, transitional, or advanced stage. Such a composite
index enforces the uniqueness of the multiple attributes since an update to any attribute of the
index causes the score to change. In a composite index, all the columns are key and count
toward the maximum index size, thus the dynamics and endogenous developments on the
attributes are taken into account. For a country-specific analysis, the digitization index can be
established for the respective sectors of the economy. The key attributes measured by this
index are shown in Box 2.
Box 2: Key attributes of the Digitization Index
• Ubiquity: The extent to which consumers and enterprises have universal access to digital
services and applications.
• Affordability: The extent to which digital services are priced in a range that makes them
available to as many people as possible.
• Reliability: The quality of available digital services.
• Speed: The extent to which digital services can be accessed in real time.
• Usability: The ease of use of digital services and the ability of local ecosystems to boost
the adoption of these services.
• Skill: The ability of users to incorporate digital services into their lives and businesses.
Source: El-Darwiche et al. (2013) (For more information, see “Maximizing the impact of
digitization” at http://www.
Maximizing-the-Impact-of ).
The other contribution that has been in this area is by McKinsey Global Institute analysis (MGI)
Industry Digitization Index that combines 20 indicators to measure digital assets, digital usage,
and digital workers in each sector (See Bughin et al., 2016). This tool has been applied to
measure the level of digitization in different industries of the economy.
In measuring net job creation in a sector, gross job creation is determined by summing
employment gains in expanding and new establishments within the sector whereas gross job
destruction is calculated by summing up employment losses at shrinking and dying
establishments (Davis and Haltiwange, 1992). The net job creation rate in the economy at any
given time can be estimated using the framework in Box 3.
25 — Next steps for the digital revolution in Africa
Box 3: Framework of analysis for net job creation rate
The net job creation rate in an economy at time t can be estimated using the following
equations:
𝐽𝑂𝐵𝐶,𝑠𝑡 = ∑ (
𝑥𝑖𝑡
𝑋𝑠𝑡
) 𝑔𝑖𝑡
𝑛
𝑖𝑡=0 , 𝑔𝑖𝑡 > 0 for job creation …………….. (1)
𝐽𝑂𝐵𝐷,𝑠𝑡 = ∑ (
𝑥𝑖𝑡
𝑋𝑠𝑡
)𝑛𝑖𝑡=0 |𝑔𝑖𝑡|, 𝑔𝑖𝑡 < 0 for job destruction …………… (2)
𝐽𝑂𝐵𝐶𝑁,𝑡 = ∑ (
𝑥𝑖𝑡
𝑋𝑠𝑡
) 𝑔𝑖𝑡 − ∑ (
𝑥𝑖𝑡
𝑋𝑠𝑡
)𝑛𝑖𝑡=0 |𝑔𝑖𝑡|
𝑛
𝑖𝑡=0 …………………...………..……...(3)
Where;
𝐽𝑂𝐵𝐶,𝑠𝑡 is job creation rate in sector s at time t
𝐽𝑂𝐵𝐷,𝑠𝑡 is job destruction rate in sector s at time t
𝐽𝑂𝐵𝐶𝑁,𝑡 net job creation rate in sector s at time t
𝑛 is the set of establishments in sector s at time t
𝑥𝑖𝑡 is the size of establishment i at time t, measured by the average of establishment
employment at time t and t-1.
𝑋𝑠𝑡 is the size of sector s in the economy, measured by the average of sector employment at
time t and t-1.
𝑔𝑖𝑡 is the growth rate of establishment i at time t, which is measured by the change in
establishment employment from time t-1 to t, divided by the measure of the establishment
size.
A digitization index (DI) for each sector can be developed using the attributes in Box 2 and
the index scores determined. The following model can then be employed in analyzing the
impact of digitization on net job creation rate in the sectors:
𝐽𝑂𝐵𝐶𝑁,𝑠𝑡 = 𝛼0 + 𝛼1 𝐷𝐼𝑠𝑡 + 𝛼2 𝑃𝑟𝑜𝑑𝑣𝑡𝑦𝑠𝑡 + 𝛼3 𝑦𝑠𝑡 + 𝜀𝑡 . … … … . (4)
Where
𝐷𝐼𝑠𝑡 is the digitization index of sector s at time t.
𝑃𝑟𝑜𝑑𝑣𝑡𝑦𝑠𝑡 is the labor productivity of sector s at time t, which is measured by the ratio of
output (sectoral GDP) to number of employees in the sector (this variable will capture each
sector’s level of value-added per employee).
𝑦𝑠𝑡 is the growth of output in sector s at time t, measured by sectoral GDP growth.
𝛼0 is the autonomous rate of job creation in the sectors.
𝛼1, 𝛼2, 𝛼3 are the coefficients to be estimated.
Since digitization is the variable of interest in this analysis, the result for the coefficient 𝛼1
captures the effect of digitization on net job creation rate in the sectors. The specification of
Equation 4 implies a panel data analysis with the sectors as the cross-sectional units.
Source: Author’s modification of Davis and Haltiwange (1992) Analytical Framework
The framework is not used in this paper due to data limitations. However, with availability of
data points, it provides a better framework of analysis. The net job creation rate in the whole
26 — Next steps for the digital revolution in Africa
economy can be obtained by summing up the net job creation rates in all the sectors of the
economy. In estimating the net job creation rate in the sectors, an assumption is made that
there is no job switching between the sectors, which could be a strong assumption given the
interdependence of sectors in any economy. Where sector-level employment data is available,
like in the case of Kenya, job creation or destruction rates for each sector computed using the
published data. Using the attributes in Box 2, a digitization index for each sector can be
developed and the index scores determined. Further, an analysis can be carried out with net
job creation rate in each sector as the dependent variable. The main independent variables
would include sectoral digitization index, sectoral output, and sectoral labor productivity.
