Implications of informal money transfer systems on Kenya’s financial sector

Abstract

In Kenya, the informal money transfer system is widely used by its citizens, allowing them to make quick and easy payments across long distances. This system has bridged the gap between those with limited access to formal banking services, allowing them to make transactions without relying on a formal banking institution. While there are numerous benefits to using this type of system, it can also present potential risks to the economy and financial sector in general. This paper examines the implications of the informal money transfer system in Kenya, focusing primarily on its effects on financial sector development, financial inclusion, and risk management practices. A qualitative research approach was adopted for this study to understand the complexities and nuances involved in this type of financial transaction. Secondary data was obtained from surveys conducted by government agencies such as the Central Bank of Kenya (CBK). Other sources included reports on informal money transfers such as web-based searches on informal money transfer services, and databases used by banks and other government departments related to finances. Legal and regulatory frameworks that influence the use and activities of informal money transfer systems in Kenya were also be included. The findings showed that informal money transfer systems provided much-needed access to finance for many individuals excluded from formal banking services, leading to increased economic development opportunities. The findings further uncovered that the drivers of informal money transfers include low-income levels, traditional banks limited geographic reach, limited capital, and a lack of trust in formal banking institutions. As such, informal money transfers aided the velocity of efficient and cheaper cross-borders and cross-regions remittances. It was however demonstrated that although informal money transfers bring benefits to their users, it also carries considerable risks. It is recommended that the current regulatory framework governing informal money transfers needs to be updated to protect consumers from fraud and theft while still allowing them to access the necessary financial resources for their economic endeavours.