Can mobile phones be used to "bank" the poor?


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The phenomenal success of Kenya’s M-PESA system, which allows people to store and transfer funds via electronic accounts that they access via mobile phones, has raised hopes that mobile money may provide a way for the poor to access basic banking services. In an earlier post, I presented findings from my recent working paper with Aaron Thegeya, showing that a remarkable 73% of Kenyan adults use mobile money, and nearly a quarter use it every day

We also show that savings with a simple M-PESA account is common, with 2/3 of M-PESA users reporting that they save in some form with M-PESA. We see some mild evidence that M-PESA may increase savings: controlling for various characteristics, those who are registered for M-PESA are 32 percent more likely to report some savings activity.

Why do people save with M-PESA when it doesn’t pay interest?  A possible explanation comes from an experimental study on health savings (not involving M-PESA).  

In that study, just providing participants with a simple metal box with a lock and a deposit slit in the top increased savings by 68 percent. The authors conclude that this effect was due to “mental accounting,” meaning that with the funds set aside, it was easier to refuse requests or limit consumption knowing that the funds were mentally allocated to savings. M-PESA may serve a function similar to the box. This matches the results from a focus group study in which Kenyans highlight the value of M-PESA as a place to store funds, safe from the dangers of theft and inaccessible to family members. 

M-PESA’s success has inspired efforts to go beyond simple no-interest money storage and provide more sophisticated “branchless banking” services via mobile phone. In our paper, Aaron and I look at one prominent attempt to launch such a system in Kenya. M-KESHO provides an interest-bearing savings account as its core feature, supplemented by microloans and small-scale personal accident insurance. All of this is accessible through a simple mobile phone, and customers can sign up at agents across the country. M-KESHO was launched in mid-2010 to a barrage of excitement.  

We examine the experience of M-KESHO six months after its launch. We show that actual use of M-KESHO was very low in a national household survey: just 0.6% of Kenyan adults said they saved with M-KESHO, and these savers were concentrated at the high end of the wealth distribution, with almost none among the Kenyan poor.

M-KESHO may not have caught on because the marginal gain to using it versus saving with M-PESA is low. M-KESHO currently pays a maximum interest rate of 3 percent, which is better than zero, but not that impressive when overall inflation in Kenya is over 16 percent

This begs the question of why M-KESHO’s interest rates are so low. We speculate that the answer may lie in part in the complex technical and institutional arrangements the system requires. Bank-integrated savings products such as M-KESHO require two players in order to operate: a mobile phone service provider and a bank. (Mobile survey providers are not licensed by Kenyan law to provide banking services, and similar restrictions are found in other countries.) The cooperation required between the bank and the mobile service provider has two likely outcomes. First, the fact that both organizations must profit out of the arrangement reduces the surplus for consumers and in the case of M-KESHO may explain why the interest rates it offers are so low. Second, the shared arrangement between the two companies may create challenges for the two to work together. Although released to much fanfare, M-KESHO has not been widely promoted subsequently, which may reflect difficulties Equity Bank and Safaricom have had in managing the partnership. The bottom line is that sophisticated “branchless banking” via mobile phone remains an unproven approach in Kenya. This is not to say that such efforts are doomed: other similar experiments are under way, and we may eventually see one succeed.


Gabriel Demombynes

Program Leader for Human Development for Brunei, Malaysia, Philippines and Thailand, World Bank

Join the Conversation

Niti Bhan
April 03, 2012

You mention the use of MPesa by 2/3 of users for some form of saving and reference a study's focus group findings on MPesa as means to store funds - looking that up shows that it was primarily from residents of Kibera in Nairobi.

My recent immersion in three different rural locations focusing on household consumer behaviour (for a different reason/client) rarely brought up mentions of MPesa unaided (and these were questions on how they managed daily expenses, emergencies, planned expenses etc) - most farmers who were banked used Equity or KCB, and finally when I prodded about MPesa, it was simply acknowledged as a convenient way to accept and disburse large sums (from harvests or livestock sales) but the point was clearly made that the funds were then transferred to a bank account, keeping only some float for airtime purchases. Farm input loans are easier to obtain when one has developed a relationship with the local bank by frequent visits and established a track record. Mpesa does not really permit this aspect and its less likely felt to be a need in urban areas.

I suspect that there may be significant differences in usage and perception between rural users and urban users than imagined, and that is where the majority of the lower income demographic reside.

Has anyone mapped the direction of cash transfers and their prevalence?

April 03, 2012

I had heard that Safaricom wanted to be able to pursue m-kesho with other banks in addition to equity. Equity obviously didn't like that idea, and pulled their support from the effort. Is m-kesho still even offered?

Keneth Njako Mapunda
April 04, 2012

The main role of banks is to facilitate servings and channel to lenders, in order to serve it needs discipline, and bureaucracies some time facilitate serving discipline. If we examine the mobile banking system it does not provide this main role. How about money laundering? I don’t see if there is enough mechanism to control. If we look its role in helping the economic growth, I don’t see. May be it help in minimizing transaction time and serve cost, because most of the fees are very low. What I suggest is for central banks to examine this new mechanism and see if it worth for economy growth may be is one way of Mobile phone companies to maximize their profits. Let’s remind ourselves on postage and delivery established by bus service provider, it was difficult for government to control and collect tax.

Kasaija Rogers
April 04, 2012

In Kenya, it is M-PESA. In Uganda, it is Mobile money.

Basing on the multiplier effect of money, a note or amount of money is only as good as the number of times it changes hands. That, is a concept that seems to exist in the subconcience of each and evey consumer, rural or urban, rich or poor. Everyone wants to get money, use it to purchase something and thereby enjoy the value of the money.
This was a need well adressed by mobile money.

Let me illustrate. Before the advent of mobile money, if I had to send money for food to my cousin in the village so many kilometers away from Kampala, two independent things would have to be in place: The person should have had access to a bank so that I can transfer through a banking system, or I would have to look for a relative or friend travelling over to take physical cash and deliver it after some days.
Question: What percentage of the population in a developing country have access to a banking hall (let alone having an account in a bank)? Answer: Low. Question: What percentage of the population would trust relatives or friends to delivery cash promptly? Answer: Limited. Well, that's where the inefficiency lied.

With the coming of mobile money, every mobile phone user was suddenly able to access cash promptly and reliably, thereby solving their problem. At the same time, every mobile phone user was suddenly able to send money promptly, thereby solving the problem.

We are not seing any new users in the banking system. Rather, more people now have access to a formal way of transfering funds.

Inflation is the inevitable consequence.
Why? All of a sudden, my cousin back in the village can buy goods as and when he needs. The trader can pay for goods without first driving to a bank to pick physical cash. In short, every product that is placed on the market is easily bought because everybody has access to cash through the mobile money system promptly.
No surprise that inflation was bound to happen.

Credit is not the original intention of mobile money users. Instead, transaction is. The poor are being banked, but only as far as transactions are involved, primarily because that is their main interest. No wonder therefore, that interventions such as M-KESHO in Kenya failed.

Central banks must now rise to the challenge, and devise ways and means to handle the sudden surge in economic activity, not caused by the traditional paths of increasing notes in circulation or foreign direct investments, but by increasing multiplication of the available currency notes and value. And that, my friend, is the new era of liquidity management.

May 03, 2012

Yes, you can definitely bank the poor and also expose them and their savings to market failures. Good idea. Keep going on it.