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.