Can mobile money increase investment by businesses?


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Investment is one of the pillars of private sector development. The acquisition of assets enables firms to increase their capacity and improve their efficiency, unlocking avenues of growth. Promoting firms’ growth is especially critical in Sub-Saharan African countries that have predominantly low levels of economic development and high rates of poverty. Against this backdrop, there has been a rapid increase in mobile money use - that is the use of mobile phones for financial transfers. At the end of 2015, mobile money services were available in 93 countries -with a total of over 411 million registered accounts and 134 million active users (GSMA, 2015). Many of these users are firms that increasingly rely on mobile money to pay bills, suppliers, and salaries or to receive payments from customers. While numerous advantages of the permeation of mobile money has been explored,  including lower transaction costs, little research has been done to investigate the far-reaching benefits that lowering transaction costs could entail, such as increasing firm investment. To fill this void, we recently completed a study on the effect of mobile money use on firm investment in three countries – Kenya, Tanzania and Uganda.

Is there a reason to expect such a relationship between mobile money use and investment by firms? One can envision a situation where the expected returns of an investment exceed the costs, however a firm is still unwilling to invest due to a wide range of transaction costs. Such costs are prevalent in developing economies. Mobile money has the potential to considerably reduce them: time and distance for services rendered can be reduced to an instantaneous transmission of information; low-cost and consistent record keeping of transactions can increase trust and nurture better terms and conditions. Beyond transaction costs, mobile money can increase liquidity as less cash is needed for the same transaction. Credit worthiness of a firm may also improve due to better record keeping as well as greater use of trade credit, which can lead to improved reputation that open up more channels of financing. Reduced transaction costs, higher liquidity and improved credit worthiness can free up resources that can be allocated to better uses, potentially increasing investment levels.

To explore the link between mobile money use and firm investment, we take advantage of Enterprise Survey data for Kenya, Tanzania, and Uganda that had a special module on the use of mobile money. The sample used for analysis covers a total of 1,228 manufacturing and services firms (573 firms in Kenya, 289 firms in Tanzania, and 366 in Uganda) with 5 or more employees operating in the formal private sector. Data are nationally representative and follows a standard methodology, allowing for cross-country comparisons.
What does the data show? About half of the firms in the three countries use mobile money. Out of those, 63% of firms use mobile money to receive payments from customers, 42% to pay suppliers, 42% to pay bills, and 16% to pay salaries to their employees. These are not small transactions. On average, about one third of the total labor cost and more than a quarter of utility bills of mobile money user firms are paid through mobile money platforms. Mobile money are also extensively used by firms to pay for raw materials and to receive payments from costumers. Firms that adopt mobile money pay about 18% of the total cost of raw material or intermediate output using mobile money transactions and receive payments from customers via mobile money for about 16% of sales.

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What are our findings in terms of investment? Forty-eight percent of firms that adopted mobile money purchased fixed assets, such as machinery, vehicles, equipment, land or buildings in the fiscal year 2012 as compared to only 34% of firms that did not use mobile money. In our paper, we account for several confounding factors that may influence this relationship including firm size, age, sector, location, technology adoption, outward orientation, as well as access to finance. After accounting for all these factors we find that the adoption of mobile money leads to a 16 percent increase in the probability of investment by the firm.  
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While we have uncovered an important benefit mobile money use to increasing investment by firms in the private sector, there is still much to explore and we would like to direct efforts on two fronts.  First, there are still questions unanswered about the impact of mobile money on firm productivity and research in this direction would be useful. Second, most of the literature is based on small samples that are unrepresentative and cannot be matched with other data or compared across countries. Thus the research community would benefit greatly in undertaking large systematic data collection efforts, incorporating questions on mobile money use through a cross country data collection exercise such as the Enterprise Surveys. It would be great to see if our findings hold beyond the three countries in our study. 


Asif Islam

Senior Economist, Office of the Chief Economist, Middle East and North Africa Region, The World Bank

Silvia Muzi

Economist, Enterprise Analysis Unit, World Bank

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