By Matina Stevis And Patrick McGroarty

NAIROBI, Kenya--In Kenya, where telecom companies dominate the mobile-payments market, one of the country's largest banks is fighting to retake some of its traditional turf.

George Kabiria, who makes decorative sculptures for this city's lush garden homes, recently sold a small iron frog to a customer through M-Pesa, Kenya's most popular mobile-payments service.

Mr. Kabiria's customer punched in a few numbers and transferred 700 Kenyan shillings, or about $8, to the iron monger. With the money in his M-Pesa wallet, Mr. Kabiria can pay other M-Pesa users or withdraw cash from agents at convenience stores and roadside stands across Kenya.

Fearing theft in crime-rife Nairobi, Mr. Kabiria operates mostly through M-Pesa, owned by Safaricom, the Kenyan subsidiary of global telecom giant Vodafone Group PLC.

"I don't like having cash in the shop," he says.

M-Pesa, launched in 2007, handles $18 billion in transactions annually. They come from cow herders in the country's dusty Rift Valley villages, pedicab drivers in the bustling port of Mombasa and technology entrepreneurs in traffic-clogged Nairobi. Together, they are equivalent to 43% of Kenya's economic output.

Now, a top Kenyan bank is challenging that business. Equity Bank, Kenya's largest in terms of customers, wants a piece of Safaricom's brisk trade in charging mobile customers for financial transactions. It also aims to draw users into traditional banking products such as loans and savings accounts.

Earlier this year, Equity acquired a telecom license and made plans to distribute to its customers SIM cards that would enable them to access all their accounts without visiting a branch. The ultrathin cards are designed to be placed on top of any SIM card already in a user's phone, effectively giving people one phone line linked to Equity's bank service and another for Safaricom's voice and M-Pesa services.

The bank has given the cards to its employees and hopes to distribute a million to current customers within a year.

At the heart of this push: Equity's belief that banks are best positioned to provide banking services. "We have a major problem with the mobile provider also providing financial services," says John Staley, Equity's chief of finance, innovation and technology. "You can't have a freight company controlling the tracks."

Bob Collymore, Safaricom's chief executive, shrugs off any threat. He says his firm isn't competing against Equity but for the 95% of Kenyan transactions that are still done in cash. "The market is massive, it's there to be had," Mr. Collymore says. "I don't worry about [Equity]."

Fewer than a quarter of Africa's 1.4 billion people have a bank account, the World Bank says, but 70% have a mobile phone. That has made the continent particularly fertile ground for mobile-payments businesses.

On average, 4,361 out of 100,000 people globally were using mobile-payments services as of June 2013, according to Groupe Speciale Mobile Association, an international mobile-telecommunications group, and the World Bank. In sub-Saharan African, the figure was six times that -- with nearly a quarter of the population banking on mobile phones. In contrast, for every 100,000 Europeans and Central Asians, just 416 used such services.

Still, Safaricom has taken steps to counter Equity's attempt to enter the market. Just as Equity was about to roll out its new mobile-payments service in July, Safaricom filed a petition with the Kenyan communications regulator, contending that Equity services designed to coexist with Safaricom would expose M-Pesa users to security risks, such as fraud.

Equity's Mr. Staley called the complaint "completely unfounded...obviously a delay tactic."

Before the legal move, the Kenyan bank had been advertising in English and Swahili inviting Equity customers to punch *247# into a phone carrying a new Equity SIM card to activate Hapo Hapo, the Equity mobile-banking account. Safaricom's petition has forced equity to suspend marketing and distribution for its new mobile-payments service.

A spokeswoman for the regulator declined to say when a decision would be reached.

How the Kenyan regulatory body rules could shape the way banks and telecom firms collaborate and compete on mobile transaction services across Africa.

In Zimbabwe, leading mobile company Econet Wireless bought Steward Bank in 2012 for the banking license that would allow it to expand its mobile-money platform, EcoCash. In Tanzania, Millicom's Tigo mobile has joined with with 17 banks to spread its Tigo Pesa system (Pesa means money in Swahili). And in Rwanda, the same company is lobbying the central bank for a license or regulatory change to allow it to expand its mobile-money offering.

Safaricom's dominance in Kenya--the company hosted nearly 70% of mobile connections in the first quarter--helped the growth of M-Pesa. Safaricom has also teamed up with Kenya Commercial Bank to offer more sophisticated financial products such as savings accounts, payroll and microloans.

Such services have helped Mr. Kabiria earn interest on a mobile savings account through a service dubbed M-Shwari that is managed by KCB. The money he saves in the account can also be used as collateral for a home or business loan.

Equity says its edge over Safaricom's suite of products will be lower charges per transaction. Equity plans to charge a 1% transaction fee capped at 25 Kenyan shillings, about 20 U.S. cents. M-Pesa doesn't cap charges, which can be more than 100 shillings on large transactions.

The fight could help customers of both Equity and Safaricom in the long run, says Melissa Cook of African Sunrise, an investment consultancy. Both Equity and KCB, Safaricom's banking partner, have operations across East Africa, meaning both can scale their services well beyond Kenya. "These are flexible services, giving small businesses especially the ability to transact across currencies and borders," Ms. Cook says.

With such high stakes, Equity says it expected Safaricom to try to elbow out fresh competition. "When you've had the sandpit to yourself," says Equity's Mr. Staley, "you don't want to let someone new in to play."

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