INTERVIEW

Claudia McKay, Microfinance Specialist, Consultative Group to Assist the Poor(CGAP)

Q) How has the mobile banking system facilitated microfinance operations in Africa?

A) Africa is the birthplace of the most successful mobile banking (m-banking) service in the world – M-PESA in Kenya. In just three years, M-PESA has attracted nearly 10 million customers, about half of Kenya’s adult population. The success of M-PESA has inspired more than 70 imitator mobile banking systems across the globe. However, m banking to date has largely been driven by mobile network operators (MNOs) and to a lesser extent, by some large banks. Microfinance institutions have by and large not played a

significant role in this exciting new industry. The MFI world uses human-driven methodology to provide mostly credit while the m-banking world uses very sophisticated backend systems to provide transfers and payments.

However, in recent months MFIs located in countries like Kenya where there are widespread m-banking services have started linking into these services to offer their customers more convenient ways to repay loans and make deposits, where applicable. Customers report that paying loans with M-PESA is easier, faster and much less risky than the traditional method of collecting payments at a group meeting and then sending group members to a bank branch. Other MFIs are learning about m-banking services and earning additional revenue by acting as agents on behalf of the service. For example, four MFI networks in Mali use their branches as agent outlets for Orange Mali.

Unfortunately, many MFIs are located in countries where there is no existing m-banking service. Developing an m-banking service is expensive, time consuming and complex and very few MFIs have significant financial, technical and managerial capacity that is required. MFIs in these contexts can experiment with other ways to use mobile phones to increase customer convenience (such as automatic loan reminders) and strengthen the institution and its management information systems (MIS) so it will be ready to link to a system once it is developed.

Q) How safe is mobile banking and is it accessible to the target group of microfinance?

A) Mobile banking transactions are securely processed and settled between the agent and the customer in real-time so there is minimal risk for the customer. Many African countries are in the midst of drafting regulations to ensure mobile banking customer funds are protected. Regulators are understandably concerned since non-banks (like mobile network operators) are not subject to the same prudential regulation that applies to banks. For this reason, most regulatory approaches include provisions for ‘fund safeguarding’ – requiring non-banks to maintain liquid assets equal to the amount of issued electronic value and other measures to ensure that customers have access to their funds whenever they need it.

There are currently more than three billion unbanked people in the world. One billion of these unbanked people do have mobile phones. In fact, according to Vodafone, a parent company of Safaricom, at least 50% of current M-PESA users are unbanked, meaning that they are using money transfer services to help manage their financial lives even if they do not have bank accounts. CGAP looked at the outreach of 8 providers across the world and found that 37% of clients were unbanked. Somewhat less data is available about the income levels of mobile banking clients. In Brazil, low-income people comprise a clear majority of branchless banking clients. In three other mobile banking services (including WIZZIT in South Africa) low-income consumers comprised just one-quarter of active clients. So, while the majority of mobile banking customers today are not low-income and unbanked, there are enough low-income, unbanked users to bring confidence that mobile banking is accessible for this group.

Q) What segments do you think need special technical attention to mobilise microfinance system in the continent?

A) As m-banking services expand across Africa, MFIs with strong management teams, stable management information systems and effective internal controls will be the best placed to take advantage of these services and benefit the most. Strengthening these areas are good for the core mission of an MFI anyway, and they will make the MFI that much more ready to adopt m-banking when it does become available.

Q) How many African microfinance institutions are you linked with at present and what are the major problems they face at present?

A)The Technology Program at CGAP funds a small number of projects around the world that are designed to demonstrate technology-based models that will dramatically expand the reach of financial services to low-income people. This program is co-funded by the Bill & Melinda Gates Foundation and the UK Department for International Development. Currently, we are funding 14 projects, including 4 in Africa. Since most MFIs do not have the technical or financial resources to lead large-scale implementations in this sector, most of our grants are to banks, mobile network operators and payment system providers. For example, one of our projects is with Equity Bank which is offering an interest-bearing savings account via M-PESA. However, we hope to support the involvement of MFIs in this sector through technical support to our donors, publications, conferences and other relevant avenues.

MFIs in countries with existing m-banking services face some technical challenges. MFIs with weak MIS sometimes resort to manual reconciliation between their MIS and that of the mobile network operator. There is also concern that individual repayments via mobile phone may have a negative impact on group cohesion, which is a critical element of traditional microfinance. Finally, MFIs will need to educate customers about the new processes and overcome potential customer reticence in using new technology. Those MFIs in countries without any existing m-banking services face greater challenges and have fewer options available.

Microfinance and Mobile banking in Africa

Ross Levine, economist at Brown University, once wrote in his book Finance and Growth, “The quality and reach of a country's financial services are crucial determinants of economic growth.” In Africa, mobile or m-banking has been the latest trend explored by microfinance institutions (MFI) to provide more affordable, accessible, convenient and secure banking services.

Kenya

In 2007, it introduced the concept of m-banking in microfinance and has been the most successful African country in this regard. MFIs like Kenya Woman’s Finance Trust (KWFT) and Faulu allow clients loan repayments and deposits with advantages like SMS alert for payments, low operating charges and unlimited banking hours. The platform has helped MFIs reduce high operational costs and increase focus on core functions. A 2008 survey found that the m-banking service as a system was five times safer than traditional methods. More than 95 % users found the services not only safer but also faster, more convenient, easier to use, and cheaper.

At the Africa-Middle East Regional Micro-Credit Summit in Nairobi in April this year, Kenyan President Mwai Kibaki praised the MFIs’ initiative to extend m-banking to a massive 62% of the population who have no access to traditional banking. Mobile bankers use their mobile accounts as de facto savings accounts by keeping cash credit.

Some Kenyan MFIs have developed close partnerships with technology provider companies like PesaPot, Red Could and Safaricom through schemes like M- Pesa (m for mobile and pesa is Swahili for money) and M Keso.

In M-Pesa, microfinance borrowers can conveniently receive and repay loans using the network of Safaricom airtime resellers which enable MFIs to offer more competitive loan rates to their users as there is a reduced cost of dealing in cash. M Kesho is an improvised m-banking system from Safaricom and Equity Bank of Kenya. The scheme facilitates easier banking transactions like deposits, withdrawals and loan applications through mobile phones. According to Michael Asola, CEO PesaPot, “Mobile banking has fast become an important part of microfinance institutions in Kenya. Today, M-Pesa has roughly 10 million customers in Kenya, 40%t of the adult population.”

The economic outcome has been striking. This year Safaricom’s projects contributed to 20 % of Kenya's GDP through M-Pesa. Olga Morawczynski of the University of Edinburgh estimates that rural households that are mobile money subscribers saw their incomes increase 5 to 30%.


Uganda

In Uganda, The Microfinance Deposit Taking Institutions (MDI) Act of 2005 regulates deposit mobilising MFI (called MDIs) and provides a legal framework for savings mobilisation of those MFIs. Like its neighbouring Kenya, Uganda introduced similar banking technologies where m-banking especially the M-Pesa schemes has been a success in scaling-up microfinance.

Malawi

The Opportunity Bank of Malawi also initiated m-banking earlier this year to reach out to 80% Malawians who live in rural and semi-urban areas. Around 60% of these already have mobile phones. Prior to this, the bank had introduced biometric ATMs, POS devices with cash-back services at agent shops and trucks that brought banking services to remote areas.


Drawbacks

Despite the immense potential for m-banking, the MFIs are still struggling to take full advantage of it. Till date, a large share of m-banking is regulated by Mobile Network Operators (MNOs) rather than MFIs.

Another major problem is that the MFIs tend to apply the strategies blindly without modifying them. Kabir Kumar, a microfinance analyst, says, “MFIs, while dealing with the local payments through mobile phones tend to copy the method, which has been recommended for large banking institutions. In most cases, MFIs probably should not be getting
into setting up these mobile payments and thereby ending in a mess.”

He feels microfinance lenders will gain from allowing m-banking
to spread because of the better access and care given to borrowers. He explained,” As we’ve seen in Kenya, where in the absence of a widely available retail payment environment, mobile payment infrastructure provides a lot of convenience to microfinance borrowers.”

Potential of m-banking in India

Seeing the success of the Kenyan model, many Indian MFIs like Sahitya in Rajasthan are starting mobile banking services. According to economists Robin Burgess and Rohini Pande, 1 % increase in the number of rural locations banked per capita reduce rural poverty by 0.42 % and the economic productivity is increased by 0.34%. The high
potential of the system, however, is yet to be explored fully as the Indian model is still agent-based.