Published on Africa Can End Poverty

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

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ImageThe 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

Manager of the Human Capital Project at the World Bank

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