One of the many effects of globalization on lesser-developed countries (LDCs) has been the rise of cash payments in traditionally barter economies. However, with 70% of the world’s poor living in rural areas, accessibility to cash and the financial institutions that manage currency can be challenging. New innovations have emerged in areas where the formal banking sector has failed to provide financial services to low-income and rural populations. One of these new technologies arose in the years following the boom in mobile phone infrastructure: mobile money transfers. Mobile money transfers yield positive results in macro economies since low-income people are able to participate in their local financial markets and avoid bank corruption. However the fee structure of these transfers, along with the potentially corrupt deals of private phone companies require us to remain vigilant in our analysis and critical approach to this innovation in development economics.
According to the World Bank, the mobile banking platform M-PESA represents a classic case for mobile money transfer in an LDC. M-PESA was developed by Vodafone and launched in 2007 by its Kenyan affiliate Safaricom. Safaricom is the largest mobile provider in Kenya, and its M-PESA pilot program proved successful in its ability to deliver accessible mobile money transfer to low-income Kenyans. M-PESA is now ubiquitous in Kenya, and has spread all over the Global South, most notably in Tanzania, Afghanistan, and India. A survey-based study by William Jack and Tavneet Suri of MIT states that users deem it be “faster, cheaper, more reliable, and safer” than other financial institutions. But how did M-PESA initially become widely used among poor populations?
An article in the Economist attributes M-PESA’s success to two major factors: the “send money home” campaign and the political atmosphere in Kenya after M-PESA’s introduction. With a large rural population, strong family ties, and the high cost of travel, remittances given between family members living away from home is an important part of the domestic economy. M-PESA’s marketing strategy, called the Send Money Home campaign, was widely effective. It encouraged Kenyans to employ M-PESA to pay remittances. In 2014, remittances in Kenya totaled $1,440,846,022 dollars, which was a $506,696,865 dollar increase since just 2011 The year M-PESA launched coincided with the famous 2007 election that resulted in severe post-election violence and Kenya’s temporary coalition government. This intense violence lasted for a number of months, and much of the nation’s poor population (especially those located in Nairobi slums) were unable to work or travel due to the danger. Those affected used M-PESA as the safest way to send money to family and lessen the economic pressures of those in isolation. As a result, there was a network effect that introduced many new users to M-PESA’s services.
Numerous scholars have proclaimed mobile money such as M-PESA as an innovation that provides financial services to rural and low-income populations. But what are the development implications of more Kenyans using M-PESA accounts than debit cards? And what are the effects of M-PESA on Kenya’s macro economy?
Some economists fear that mobile money could reduce countries’ monetary policy autonomy since transactions can be made more readily than cash transfers. However a study by Isaac Mbiti and David Weil has found that, contrary to popular belief, the velocity of M-PESA transfers does not exceed the velocity of cash. They also found that previous estimates of M-PESA’s percentage control of GDP were inflated. Mobile money is still “small relative to other monetary aggregates,” and so yields minimal impact on monetary policy autonomy. This being said, a continued increase in users and rise in the maximum transfer cap could drastically challenge the study’s findings. It is also assumed that putting money into a company rather than a bank would result in a lower multiplier effect for the macro economy. However, Safaricom does not manage M-PESA funds. According to the Consultative Group to Assist the Poor, the “funds are held by a trust which is owned by Vodafone, deposited in several commercial banks, and cannot be accessed by Safaricom.” M-PESA money then has the same multiplier effect as other currency held by banks. The interest earned on these accounts is also put into the “M-PESA Foundation,” which works on development projects all over Kenya. In consideration of its development implications, M-PESA appears to have a positive impact on Kenya’s macro economy.
Another implication of M-PESA for Kenya’s macro economy has been increased public trust in financial institutions. During the 2007 election, corruption was rampant in Kenyan banks. The emergence of M-PESA allowed citizens to put their money in a safer environment, while giving banks competition that would force them to abide by established laws. At the same time, Safaricom itself has been involved in a number of corruption scandals. In 2013, Safaricom adopted a strategy to report employee fraud in yearly reports. Financial crimes have since gone down by two-thirds, but corrupt practices are still present. In late February of this year, a prominent Nairobi lawyer revealed a $30 billion scandal between the Kenyan government and Safaricom deemed “Safaricomgate.” While investigations are still underway, rumors of these corrupt practices cloud M-PESA’s transparent reputation. In 2014, Safaricom allowed its vendors to simultaneously sell airtime for its rival, Airtel, before the Competition Authority of Kenya forced it to do so. The increase in competition of the mobile money market has helped to curb corruption, since customers can now switch companies if they are unsatisfied with Safaricom.
M-PESA has also contributed to structural changes in Kenya’s economic culture. For example, Hughes et al discuss Safaricom’s “Jipange KuSave” program, which allows low-income people to save money through their M-PESA accounts. Since lower-income people have less money to save, savings accounts are not feasible for them in formal banks, which have minimum deposit requirements. However, by putting aside small amounts through their M-PESA account, Jipange KuSave has the goal of “reinventing the microfinance market” by giving low-income users autonomy over their savings. Olga Morawczynski’s study also found that M-PESA has improved women’s rights since M-PESA “decreased the risk of the money being stolen by their husbands.” He also found that urban migrants have had more estranged relationships with their families, since M-PESA allows them to make fewer trips back to their villages. Menekse Gencer contends that mobile money has revolutionized food security, since lower-income families that use mobile money are less vulnerable to shocks that may prevent them from accessing food.
While M-PESA has not delegitimized formal banking structures, scholars do call for more action by governments and researchers. Isaac Mbiti and David Weil call for a common regulation of all mobile money platforms at the East African Community (EAC) as the utilization of this financial tool continues to increase. Every company creates their own regulations, so having common laws to regulate the market would be beneficial. These laws would require all companies to play by the same rules while increasing governmental authority, since the state would regulate this market. They also call for more research to be done on mobile money’s effect on money supply and inflation, especially as this method increases in popularity. The European Investment Bank also encourages banks to innovate and gain the capability to incorporate mobile money in with their formal banking operations.
A number of economic development challenges still exist in regard to mobile money transfer programs such as M-PESA. Kenya’s 40,000 M-PESA agents are always at risk of theft, and Safaricom has attempted to implement security measures for these workers, but to little avail. M-PESA carries transaction fees with every transfer and, while relatively affordable, these fees are still inefficient from a macroeconomic perspective. Rather than gaining revenue from advertisements or only charging for certain transactions (such as, for example, Venmo does with credit cards), M-PESA charges for every transaction, depending on the size of the transfer. However these charges are disproportionately more expensive for low-income people, who tend to transfer small amounts at a time. For example, sending the minimum of 10 shillings would result in a 30% transfer fee (3 shillings), while sending the maximum of 25,000 shillings would result in a fee of less than half of a percent (75 shillings). This fee structure creates incentives for higher volume transfers, which is positive for the macro economy, but not conducive to low-income families. While M-PESA offers financial inclusion for low-income people, the ethics of charging these rates for lower quantity transactions should be critically considered, especially in regard to M-PESA’s target population.
Mobile money like Kenya’s M-PESA has undoubtedly increased low-income people’s accessibility to financial institutions and currency markets. Developmental economists have rightly praised M-PESA as a new tool that includes Kenya’s poorer population in the country’s rapidly growing macro economy. However, like any new innovation, the excitement of the opportunity mobile money provides should not mask the potential downfalls it may present in the future. It is imperative that we continue to analyze mobile money’s impact on the macro economy and its implications for development.
Deborah Carey is a student in the School of International Service class of 2017. She can be contacted at email@example.com.
All views expressed are solely those of the author, and do not necessarily reflect the views of the World Mind or of Clocks and Clouds.