Will Kenya’s decline outpace Safaricom’s new revenue sources?

A little more than a year ago, Safaricom’s entry into Ethiopia seemed risky given the country’s two-year civil war, funding limitations, and hazy prospects for obtaining a mobile money license.

With hostilities over and life returning to normal in Ethiopia, Safaricom’s gamble appears to be paying off. The company was the first foreign company to be granted a mobile money permit, and it has already enrolled three million customers across 22 cities.

In four years, the company expects to break even thanks to the mobile money license.

It is beginning an aggressive network expansion northward with a focus on war-affected cities like Mekele, the capital of Tigray, which is experiencing a return to normalcy with the start of commercial flights.

The company’s management emphasized the need to diversify revenues during the release of end-of-year results, where Safaricom reported a net profit of Sh52.4 billion for the full year ending March 2023, a 22.4 percent decrease from Sh67.4 billion last year. This move was made to offset the slowdown in the voice and messaging business.

The telco aspires to be the largest internet service provider in the nation and supports a government initiative to connect schools and hospitals to fiber infrastructure, targeting one million connections for homes and businesses.

In order to grow its loan overdraft business and partner with banks to provide channels for consumer mobile loans, Safaricom is also extending its Fuliza brand into high-value loans for businesses. It does this by leveraging data and cash flow from Till Numbers.

“We want to deal with the decline in revenues on other sides by accelerating growth in new areas,” said Safaricom boss Peter Ndegwa.

Ethiopia, which has 119 million residents and previously restricted foreign investment in its economy, is a lucrative market for Safaricom despite only having a financial inclusion rate of 35% and a rural population density of 78%.

With 13.3 million Ethiopians aged 14 to 18 and 63 million over the age of 18, mobile penetration is only 57 percent, and the population is also relatively young.

In order to replicate its success in Kenya at moving money via mobile phones, encouraging smartphone use through structured payments, and selling data to the productive sector of the economy, Safaricom is focusing on the young Ethiopian population.

According to Safaricom, advocacy efforts to reopen social media in the nation are already underway.

As its market reaches maturity, plateauing revenue, and concentrating risk on the Kenyan business, which has been subject to increased regulatory scrutiny and tax measures, Safaricom’s focus has shifted to new revenue streams.

Kenya’s telephone traffic dropped by 2.2 percent as a result of taxes on mobile phones and SIM cards, which also affected telecom companies like Safaricom, which reported a drop in profits over the previous year.

The total domestic telephone traffic decreased from 80.1 billion minutes in 2021 to 78.3 billion minutes in 2022, according to data from the Kenya National Bureau of Statistics, while the proportion of mobile phones per 100 people decreased for the first time from 141.7 to 140.38.

Voice revenue dropped by 2.6 percent to Sh81 billion, according to Safaricom, while mobile revenue dropped by 17.7 percent to Sh8.1 billion from Sh9.8 billion.

Sales of Safaricom mobile handsets fell to Sh11.4 billion, a 20.1 percent decrease from Sh14.3 billion, as a result of the new taxes.

According to Mr. Ndegwa, the company is pleading with the authorities to come up with a better regulatory strategy that won’t surprise it.

Recently, the government has targeted internet, airtime, handsets, and SIM cards with new tax measures in addition to reducing mobile termination rates at will and freezing and then reducing mobile money transfer fees.

“The review of the Mobile Termination Rates and introduction of additional taxes on SIM cards and mobile phones has also led to a slowdown momentum in the industry. We continue engaging with regulators to find mutually beneficial solutions for all stakeholders,” said Mr Ndegwa.

Even as it struggled to provide for a customer base with declining incomes and competing expenses, Safaricom cited growing regulatory risks to the company’s operations.

“We are navigating a complex operating context in Kenya with Mobile Termination Rates (MTR) reduction, fiscal pressure (increased taxation), increased regulatory scrutiny, customer acquisition/subscriber registration, changes and the return to charging on the bank to/from M-Pesa transactions,” Safaricom said.