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.