[mobile money africa] Before 2008, analysts lamented that Kenya was performing poorly in financial inclusion.
But that was before M-Pesa became appreciated as a popular money transfer technology.
Research done in 2009 noted that such inclusion had risen by about six per cent in terms of people holding bank accounts, but at the same time millions had been recruited into Safaricom’s M-Pesa mobile money transfer service.
Recently, Central Bank of Kenya governor Njuguna Ndung’u celebrated the coming of age of the service saying: “Mobile phone technology has in a few years of its existence demonstrated how financial inclusion can be leapfrogged on a major scale and in a short-time span using appropriate technological platforms.”
He noted that in only three years of the existence of the mobile phone money transfer service, three phone operators had launched the service and enrolled over 9.5 million customers and recruited over 27,000 agents.
He said the total transactions had reached Sh1.8 billion per day and Sh56 billion per month.
Beyond expectations
The cumulative amount transferred through M-Pesa since its inception stood at Sh405.5 billion by March, or 18 per cent of Kenya’s GDP — equivalent to 15 times the amount expected to be spent in rebuilding Thika Road.
This figure must have risen considerably since March 31 given the more vibrant economic activity as seen in higher projected growth rate of 5.2 per cent for this year.
The government had previously projected that growth would probably peak at 4.5 per cent before revising it upwards recently.
Experts now say that M-Pesa has resulted in higher remittances to rural areas leading to higher economic activity.
In a survey CGAP, an independent policy and research centre that seeks to improve poor people’s access to financial services, found that incomes of the rural recipients increased by five to 30 per cent since they started using M-Pesa.
By bypassing banking and other financial institutions that charge a premium for transfers, or having to travel long distances to deliver money, the system saves cash that can be directed to other areas of economic activity.
The World Bank estimates that reducing remittance commission charges by two to five per cent could increase the flow of formal remittances by 50 to 70 per cent, boosting local economies.
The system has drawn the interest of academics and technologists, including the world-famous Massachusetts Institute of Technology (MIT) which is conducting studies on it.
Currently, Tavneet Suri, an assistant lecturer at the MIT Sloan School of Management, along with Georgetown University economist William Jack, have been leading a research project on M-Pesa since early this year and have published Mobile Money: The Economics of M-Pesa.
The economists are in agreement that growth of M-Pesa is driven by the fast adoption of mobile phone technology noting that it “has occurred at perhaps the fastest rate and to the deepest level of any consumer-level technology in history.”
They explain that the system had been successful way beyond initial expectations.
“I don’t think anybody thought it would take off quite as fast as it did or be as popular as it’s been… The adoption has been very quick compared to almost any other technology we’ve seen,” Mr Suri said in an article on the MIT website.
The M-Pesa system has in a sense served to supplement the role of the creaky infrastructure in many parts of Kenya.
Kenyans can avoid travelling to deliver cash or make payments and having to send parcels by the largely unreliable public transport, which may not reach the targeted recipient.
Thus from that standpoint, the development may be seen as a negative indication of the failure of Kenya’s banking system to be inclusive as well as the avoidance of the hassles of travelling to deliver money.
But some analysts disagree. They see the existence of both bank accounts and money transfer services.
Neil Davidson, formerly at K-Rep Bank and now a manager of the Mobile Money for the Unbanked (MMU) Programme at the GSM Association, is of the opinion that complementality is the key in the relationship between banks and mobile banking, noting that M-Kesho, the mobile banking product launched by Equity Bank and Safaricom in May, had grew by 176,000 people within three months of its launch.
Mr Davidson said: “I’ve come to believe that mobile money services can increase, rather than dampen, demand for traditional banking services.”
He explained that in his conversation with an M-Pesa user, the service emerged as “one of a portfolio of financial tools that he uses to manage his money, and that his bank is an indispensable part of that portfolio.”
Security issues are paramount in that the user cannot keep much money in the money transfer system lest a criminal forces him to transfer the cash. At the same time, he will need banks when it comes to borrowing cash.
The mobile phone’s quick penetration is an indication of the ubiquity of wireless penetration rates in developing countries.
In Africa, wireless penetration was only 4.75 per cent but this increased to 30.6 per cent by 2008 and is expected to rise to 50.13 per cent by year 2012.
This contrasts sharply with the situation in, for example, Eastern Europe where penetration of wireless technology was 102.79 per cent in 2008 and is expected to reach 134.72 per cent by 2012.
Researchers Jack and Suri note that since its introduction in 2007, 38 per cent of Kenyan households have at least one M-Pesa user and yet by contrast, only 22 per cent of adults have bank accounts.
There are many interested parties in the operations and success of the M-Pesa product and some have been trying to replicate it.
The situation can only get more interesting as the operators link up with banks that can handle the transactions as well as allow customers to borrow and deposit cash at some interest rate.
Several banks, including the fast-growing Equity Bank, have been linking up with M-Pesa as they try to exploit mobile phone banking solutions.
The International Telecommunications Union, a United Nations agency, says there are four billion cellphone subscriptions worldwide up from just one billion in 2002.
About two-thirds of the subscriptions are in developing countries.
Analysts say that the growth represents the potential for commercial banking related opportunities if the Kenyan case is anything to go by.
Since the launch of M-Kesho, it is reported that the accounts on this product have been growing at the pace of 20,000 accounts a day, at least in the initial stages of registration.
Jack and Suri research data also shows that 41 per cent of M-Pesa money transfers are sent to parents, and only eight per cent to children, strongly suggesting that working children may be sending money back to help their parents whose purchasing power consequently increases boosting economic activity.
Monetary management
But for monetary management purposes, the scholars see some unchartered waters.
They note that as M-Pesa deposits enter the banking system, they reduce cash in circulation to the extent that banks comply with or exceed official reserve requirements.
They note: “But as e-float becomes more widely acceptable as an easily transferable store of value, it will adopt the features of money. The practical implication of this is that M-Pesa could increase the money supply, with possible impacts on inflation and or output.”
The essence of the argument is that the money is cellphone accounts amounts to part of that currency under circulation and has the potential to affect prices of goods and services.
As that e-float increases, it will become increasingly important for the monetary authorities to consider the service in an attempt to manage inflation and even interest rates.
Taking into account that there are corporate users with large balances, if an average of Sh500 was held in e-float by just 10 million subscribers in the money transfer system, it would amount to Sh5 billion cash, which inevitably increases money supply available for transactions.
Therefore, if the central bank were to have some leeway in the control of this money, it can tweak it in order to discourage or encourage retention of the cash in the system in a manner that would impact on inflation.
The other important finding by researchers is that money transfer services in Kenya are not insured the way bank deposits are — to the tune of Sh100,000.
In short, there are serious limitations to the system on account of that, necessitating the continued importance of the banking industry.
This is not to mention that the system has in-built transaction limits and insurance is a possible frontier for expansion of the system going forward.
Benefits of mobile money transfer trickle down to rural folk
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