Infrastructure expansion and user penetration have laid the groundwork for new growth

The telecommunications sector in Kenya is one of the more dynamic in Africa, having garnered recognition in particular for its success in rolling out mobile money platforms and value-added services, and benefitted in a broader sense from the government’s effort to increase the role of telecoms and ICT in the country’s overall development. Kenya and South Africa lead the continent in mobile commerce, for example, and the country has worked to increase the number of subsea cable links to Africa.


The telecoms sector as it looks today began to take shape with the Kenya Communications Act of 1998, which liberalised and deregulated activity. It unbundled the government’s former Kenya Posts and Telecommunications Corporation monopoly, creating Telkom Kenya, the fixed-line operator; the Postal Corporation of Kenya; and the Communications Commission of Kenya, the sector regulator which recently rebranded as the Communications Authority of Kenya (CA). There are currently four mobile operators, along with six mobile money platforms.

The development of the sector has required an enabling regulatory regime that allows space for innovation and a prescriptive approach in which targeted programmes are developed to achieve specific outcomes. An example of the former is the launch of the mobile money platform M-Pesa by mobile operator Safaricom – regulators at both the CA and the Central Bank of Kenya (CBK) have won praise for striking a balance that gave the platform room to grow but also protected consumers in the process.

“One of Kenya’s greatest successes has been the unprecedented uptake and usage of mobile services,” according to the World Bank’s “Broadband Strategies Toolkit”. “It is an example of a country where focused and strategic interventions in the market by government have brought about positive benefits for the industry as a whole.”

Of course, success in the past decade has presented new challenges as well, such as the need to preserve a competition-friendly environment. There is also a focus on extending the benefits of telecommunications to underserved areas of the country, typically far-flung and rural, capitalising on a great leap in broadband connectivity and ensuring that the sector is competitive. The challenge is ultimately one of ensuring that consumers have sufficient options, supporting new innovations in the market and scaling up what has worked so far.


As with most frontier and emerging African economies, Kenya is a highly price-sensitive market and most consumers have active pre-paid accounts with multiple network operators, if not all of them. Dual-SIM-card handsets are popular, and callers are ready to swap SIMs in and out of their phones based on which operator will give them the best voice or data rate at any given time.

The overall mobile penetration rate was at 76.9% at the end of 2013, according to CA data, and this rose slightly to 78.2% as of March 2014. As mobile uptake grows, demand for fixed-line communications is shrinking. As of the end of 2013 there were 205,856 fixed lines, down 1.7% from the end of 2012. The downward trend continued into the first quarter of 2014, with the total number of fixed lines dropping by 0.7% quarter-on-quarter to 204,354. Wireless connectivity has acted as a leapfrog technology, enabling Kenyans to skip fixed-line connections and transition directly to mobile phones.

Growth in mobile subscriptions has slowed in 2013 and 2014, although this is due to specific factors and not general trends. Thanks to a regulatory push to deactivate unused SIM cards, and to ensure that all accounts in use are registered, network providers have been cancelling unused and unregistered accounts. As a result, mobile subscriptions rose just 1.9% in 2013, standing at 31.3m at year’s end. Within that total a trend of moving from pre-paid to postpaid service has emerged. The former dropped 1.2% to 30.7m total accounts in 2013, and the latter jumped from 455,983 to 560, 503, a 22.9% rise.

Mobile data subscriptions increased from 9.4m to 13.1m in 2013, a 39.3% rise. The CA observed success in encouraging take-up through promotions, such as offering free data at off-peak times. Of the total number of internet accounts in the country of all forms, mobile subscriptions accounted for 99%, according to figures from the CA. Fixed fibre accounts were the next-most-popular option at 67,470.


According to Safaricom, the penetration rate for smartphones was 67% as of April 2014, with 100,000 new devices purchased on a monthly basis. For many Kenyans, loyalty programmes are a path to an affordable smartphone – they accumulate points with airtime usage, and use them along with cash to a purchase a smartphone through their mobile network operator. In recent years ICT industry observers in Africa have predicted that smartphones would drive internet access when the devices become cheap enough for the average African consumer to buy and use them. Whilst that price point depends on the source of the prediction, it is generally thought to be around $100 or below. In Kenya smartphones have not yet gotten that cheap – the Tecno D1 broke a price barrier when it was introduced in late 2013, according to local media coverage, at just under KSh12,000 ($136).


In mobile telephony, Safaricom is the main player, with an overall market share of 67.9% at the end of 2013, according to the CA, which publishes a quarterly statistical update that serves as the main source of data on the sector. Safaricom’s share has actually fallen in recent years, as a price war has prompted customers to switch operators. Its dominance in data was even more pronounced, at 73.6%, compared to its overall market share of 67.9%. Safaricom also developed and owns the country’s largest mobile money platform, M-Pesa.

Bharti Airtel is the second-largest operator. Unlike Safaricom, which operates in Kenya only, Airtel is amongst the handful of operators with operations in multiple African countries. In Kenya, its market share was 16.9% of all mobile subscriptions as of the end of 2013. In third place was Essar Telecom, a division of the Indian conglomerate Essar Group. Its Kenyan network, yuMobile, had a market share of 8.5% at the end of 2013. Orange Telkom Kenya, the former public-sector monopoly player in Kenya which is now majority owned by France Telecom, finished the period at 7.2%. After buying out a minority partner and with the government declining to add more capital, Orange had a 70% stake in July 2013.

Publicly traded Safaricom is the largest stock by market capitalisation on the Nairobi Securities Exchange, although only a minority share floats on the bourse. The government holds 35% and Vodafone has 40%, making it the largest shareholder.

The state also has key stakes in assets across the board, including a national broadband fibre network called the National Optic Fibre Backbone Infrastructure (NOFBI) and The East African Marine System (TEAMS) subsea fibre-optic cable. The government was the driving force behind the fibre-optic cable project, as it was concerned about the pace of construction of other cables and wanted to ensure that the country would see a significant increase in international connectivity.

Kenya and the UAE’s Etisalat built TEAMS as a public-private partnership (PPP), and the government later bundled ownership stakes with usage rights to broadband providers in Kenya and Uganda. This PPP structure gives it a measure of control over broadband supply in the country, and therefore it may have a non-regulatory mechanism for controlling prices, according to analysis from the “Broadband Strategies Toolkit” (see IT chapter).

Roster Changes 

Essar has been looking to exit the market and in March 2014 it arranged a purchase agreement under which it would sell its network and related assets to Safaricom and its customer base to Airtel. The CA approved the transaction on the condition that Safaricom open up its M-Pesa platform and others for competitors to use, although it later dropped this requirement (see analysis).

Essar subsequently signed binding agreements for the sale with Airtel and Safaricom in August 2014. The deal, valued at $120m, will see Safaricom acquire Essar Telecom Kenya's network, IT and office infrastructure, while Airtel will take over its subscriber base of over 2.7m users MOBILE MONEY: M-Pesa’s creation came about as an outgrowth of a trend in the early 2000s, where residents throughout a number of African markets would send each other airtime via prepaid scratch card codes for use or resale. This homespun solution to transferring value across networks led the UK’s Department for International Development (DFID) to fund further research. It partnered with Vodafone, the British telecoms firm, which had been interested in using its mobile platform to support microfinance operations. DFID funded Vodafone to experiment with a system in Kenya, and M-Pesa was formally launched in 2007. It was popular immediately – in less than two months it had almost 20,000 users. Vodafone, which owns the intellectual property underpinning it, has expanded the concept in eight countries in total, and several similar models have since emerged elsewhere on the continent, although as of yet M-Pesa’s Kenya success remains a one-off, with take-up and adoption in other markets – both of M-Pesa and other mobile money platforms – proving far slower.

In Kenya Vodafone is guaranteed a fee of between 10% and 25% of M-Pesa revenues on a quarterly basis, although that agreement was being renegotiated as of late summer 2014 and a new deal may take effect starting sometime in 2015. The average has been about 11% in recent years. According to industry publications, Vodafone’s take from M-Pesa revenue is expected to drop to a simple royalty structure that will amount to less than the 11% average.

Kenya is set to capture more of the revenue from M-Pesa for an additional reason – the underlying IT platform through which transactions pass is currently located in Germany, but a new system has been developed that will be housed in Kenya and is being tested in 2014. “The new rates will be known after negotiations between Safaricom and Vodafone,” according to Michael Joseph, the former Safaricom CEO who is now director of mobile money for Vodafone. “The current charges are partly driven by payments made by Vodafone to the people who manage the M-Pesa platform in Germany,” he told local media in February 2014.

The mobile money market is dominated by Safaricom, which has a share of 72.4%. However, other players are trying to maintain a foothold as well. Airtel has the second-largest share, at 16.9%, with yuMobile in third with 8%. Mobikash and Orange occupy the smallest slots with market shares of 1.9% and 0.7%, respectively (see analysis).

Regulatory Role 

One reason for the impressive growth of M-Pesa and other mobile money platforms has been Kenya’s government regulators. With M-Pesa blurring the lines between banking and telecommunications, both the CA and CBK have roles to play. Safaricom’s position is that it is not a bank and therefore should not be regulated by the CBK, even though Kenya’s banks have pushed for that outcome in the past. While this issue has primarily affected Safaricom because of its dominant role in the market, it also involves and affects other mobile money platforms as well.

Formally, the CA is the only regulator with any authority over Safaricom, although the central bank has a measure of control given that cash held in MPesa customer accounts is deposited in banks that partner with Safaricom. All mobile money platforms in Kenya use at least one bank to store the money held in their accounts. “We allow it to happen as long as it passes through the banking platform,” Njuguna Ndungu, the governor of the CBK, told OBG. “When the market wants to innovate, and you don’t have the rules in place, you must try to be flexible. In the end, M-Pesa is a platform, so banks should integrate with it, not fight it” (see analysis).

As part of the CBK’s research function, M-Pesa is becoming a valuable tool as a short-term indicator of economic activity in the country, Ndungu said. In its quarterly statistical bulletins the central bank has published basic details since December 2007, when KSh3.77bn ($43m) was moved through M-Pesa. In August 2014, the most recent month for which detailed statistics are available, the country’s six mobile money platforms moved KSh206.72bn ($2.36bn) in 78.90m transactions, while the total for the first eight months of 2014 was KSh1.53trn ($17.44bn) and 583.66m transactions.


The next few years will be a busy time for the CA. In addition to the potential for new acquisitions of some of the mobile sector’s smaller operators, ensuring a competitive environment is high on its agenda. Several ongoing moves aimed at addressing monopoly concerns include the lowering of interconnection fees, the introduction of mobile virtual network operators and a plan to build a 4G/LTE network as an open-access platform.

Complicating matters was the Communications Commission of Kenya’s recent transition into the CA, a change mandated by the 2010 constitution and outlined in a 2013 law. The new constitution mandates the body licensing broadcasting must not be under the control of two arms of government, the executive branch and the National Assembly.

The regulatory approach to licensing in Kenya is a unified framework – which is still uncommon in a number of Africa’s larger markets – meaning that those with a network facilities provider (NFP) licence can own and operate any type of communications infrastructure, be it terrestrial, satellite, mobile or fixed. These licences can be either for national infrastructure or international, such as a subsea cable. At the national level there are three categories – for use of spectrum across the country, in a region, or in a specific administrative district. Two other types of licences are for applications service providers (ASPs) and content services providers (CSPs), which use existing networks to deliver their services.

An NFP licence costs KSh15m ($171,000) for the national and regional categories, and KSh200,000 ($2280) for one covering a single administrative district. For international connectivity the fee is KSh15m ($171,000) plus the higher of either 0.5% of gross annual turnover or KSh5m ($57,000) on an annual basis. ASP and CSP licences cost KSh100,000 ($1140) to start, as well as either KSh100,000 ($1140) a year or 0.5% of gross annual turnover.


Ensuring a competitive environment is one of the sector regulator’s top priorities. As has been seen in other markets around the world, as users of mobile telephony increase in both sophistication and spending power, value-added services gradually come to replace calls as the main driver of revenue and growth for operators.

According to Fred Matiangi, the Cabinet secretary for the Ministry of ICT, this is helping to drive competition. “The sector is moving more towards a data-centric environment and because of the dynamism of this environment I do not see a monopoly – first of all, because the very fact that you are stepping onto a new platform that is data-centric introduces new players and new aspects that will impact on the market,” he said in April 2014.

One way the government is aiming to further encourage competition is through the introduction of mobile virtual network operators (MVNOs), which will lease network space from existing players in order to offer services instead of building their own infrastructure. The CA licensed three MVNOs, according to an April 2014 announcement, under the ASP licence category. They are Mobile Pay, offered by Tangaza, which operates a mobile money platform currently not affiliated with any one network; Zioncell Kenya; and Finserve Africa, a subsidiary of Equity Bank, one of the largest lenders in the country. They are licensed as ASPs and can provide the same range of service as the established network operators, including voice, data and text messaging.

Of particular interest was the application in March 2014 of Equity Bank, which was originally a micro-finance institution but has since become a full-service bank. Mobile data applications are expected to be a large element of MVNO services, and chief among them are likely to be mobile transfer and mobile banking platforms.

The move into telecoms by financial institutions provides a means to capture more revenue via products that can be sold over mobile platforms, in particular for third parties that work in partnership with the owners of mobile money platforms.

“There’s not a strong business case for us to go through banking agents,” said Peter Gross, regional director for Africa for Microensure, a company that helps establish and manage mobile microinsurance programmes. “They have many products to sell, and the commission they require is greater than our products can bear” (see analysis).

The three new operators have each signed lease agreements to use Airtel’s network, and that has raised concern from some of the other incumbents. According to press statements, Orange has communicated to the CA that a lack of clarity on the rules of operation for MVNOs made it difficult for the network operator to enter into lease agreements, although with clarity it would have been willing to do so. The CA said in April 2014 that it would introduce detailed rules later in the year. Orange’s former CEO for Kenya, Mickael Ghossein, has also raised concerns over the gap between NFP and ASP licences, stating that it is large enough to provide a competitive advantage to the latter.

Rates Falling 

In another effort to ensure competition the CA has been driving interconnection rates lower, and they have fallen in stages in recent years from KSh4.42 ($0.05) per minute to KSh0.99 ($0.01) as of June 30, 2014. This follows on EU recommendations to institute caps on termination rates based on costs, according to the long-run average incremental cost (LRIC) modelling method. As of 2010, when the cost was KSh2.21 ($0.025), the rate was the lowest in the region, according to a sector study by the International Development Research Centre, a Canadian development agency. That compared with $0.082 in Uganda, $0.07 in Rwanda, and $0.075 in Tanzania, the study found. PLANNING FOR 4G/LTE: For 2014 one of the CA’s priorities will be to finalise a plan for a 4G/LTE network on an open-access basis. Various options have been considered already, including a PPP structure and other joint ventures. A proposed consortium including the government, the country’s four mobile operators, local broadband providers and international equipment vendors was announced in August 2012, but the plan lost momentum when Safaricom withdrew from the group in late 2013, citing concerns over the pace of progress.

According to reports in the local press, Safaricom has proposed building its own network, and the firm has said that it would boost investment if it were allocated spectrum for 4G/LTE by the government. 4G/LTE is considered to be a potential solution for last-mile connections, linking high-speed networks to individual houses and businesses. As of April 2014 it was unclear how 4G would proceed, and Matiangi said the matter is open to discussion, but that regardless of the structure Kenya wanted construction on the network to proceed by 2015.


Kenya’s success in innovation has made it an example studied worldwide, but it has also brought additional challenges, in particular the task of ensuring a competitive market for the future. It has also created investment opportunities, as network operators work to gain efficiencies and find profitable advantages and niches, and as policymakers experiment with further innovations.

With virtual network operators, a possible open-access 4G/LTE network and increased broadband capacity available, the Kenyan telecommunications sector seems set to continue its rapid evolution.

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The Report: Kenya 2014

Telecoms & IT chapter from The Report: Kenya 2014

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