MOMBASA, Kenya (MarketWatch) — Agnes Ngooro, a small trader in the bustling central market of Mombasa, spends her days sitting behind a wooden table selling trousers for a few dollars a piece, and while it may not look like it at first glance, she is an international businesswoman.
The clothes displayed on her table are manufactured in China and Thailand, and they arrive in East Africa in the region’s major cities including Nairobi, Kenya and Kampala, Uganda.
“If I want to buy something from Nairobi, I send money to the wholesaler. When he receives it he sends me the goods,” Ngooro said on a recent day while tending her goods.
This may seem like a perfectly normal 21st century retail operation. But not so long ago, it was very difficult, if not impossible, for Ngooro to pull off. Like millions of people in Kenya, she has no bank account and, until recently, no easy way to pay distant suppliers.
But now, thanks to an innovative, inexpensive mobile phone-based financial network, she can use her hand-held to pay her suppliers in faraway cities with money stored in her wireless account. Ngooro is one of the millions of East Africans long considered too poor or isolated for traditional banking services who has used the mobile money system to take a big step up the economic ladder.
The system she uses is called M-Pesa, a play on the Swahili word for money, and over the past five years it has transformed businesses and lives across East Africa. Introduced in 2007 by Safaricom, a Kenyan telecommunications company, M-Pesa now boasts around 15 million active users, over a third of Kenya’s population.
Before M-Pesa, Ngooro said, the only way small traders like her could obtain their merchandise was to pick it up in person, spending days on long, arduous bus rides. “It was very difficult,” she said. “Sometimes they rob you on the bus, they take your money.” Plus, traveling increased the cost of doing business significantly.
Simple and easy
The M-Pesa concept is simple — accounts are easy to set up, and subscribers can deposit money into them through thousands of M-Pesa agents scattered throughout the country. People can then send this money to other mobile phones, pay bills and even buy groceries, all from their handsets. It costs from 10 to 250 shillings ($0.12-3.00) to send money, depending on the amount and whether or not the recipient also has M-Pesa. Account information is stored in each phone’s SIM card, and can only be accessed by entering a PIN code.
The system was intended to be a “payment service for the un-banked,” said Betty Mwangi, General Manager of Financial Services at Safaricom, in an email. “M-PESA allows customers to use their phone like a bank account and debit card.”
According to Mwangi, people like Ngooro are exactly the demographic M-Pesa was originally designed to reach. But it wasn’t long before M-Pesa took on a life of its own, as Kenyans of all socio-economic levels began signing up by the millions.
Mwangi said the idea came from U.K.-based Vodafone which owns a controlling stake in Safaricom and was looking for a way to boost the efficiency and security of microfinance programs that make small loans to help the poor set up businesses. The platform was originally developed with funding from the UK’s Department for International Development, in partnership with a microfinance company called Faulu.
“M-Pesa was designed to be used by the BOP [bottom of the pyramid] customers. However, early adopters of M-Pesa were the middle to high class,” said Mwangi. They began using the service to pay salaries to employees without bank accounts, and, of course, to send money to poorer relatives.
Sending money home
This is how Jackson Anunda said he uses it. A security guard at a swanky beach side Mombasa hotel, Anunda doesn’t earn much, but he still manages to send around 2,500 shillings ($30) every month to his parents and wife in a village in western Kenya.
“Before M-Pesa, people were using big buses” to send money home, he said. “You give the money to the driver, and you tell them that when they arrive someone will be waiting for them.” Money was sent in bundles of cash, with each delivery priced by the weight of the package.
Not only was this system more expensive and much less secure, Anunda said, it was also very slow. It takes two days to reach his village by bus. “Maybe someone is sick and needs the money immediately. They could die,” he said. “But with M-Pesa it’s there in a minute.”
When it comes to sending money home, mobile phone transfers are fast outstripping more traditional services. In 2009 Western Union jumped on board, partnering with Safaricom to make it possible to send money directly to Kenyan phones from the U.K. Since then the service has been expanded to 45 countries.
M-Pesa’s growth has been staggering. The African Development Bank (AfDB) reports that over 70 percent of Kenya’s adult population now uses the service. This compares with the approximately 38% of Kenyan adults who have traditional savings accounts, according to the World Economic Forum.
Safaricom stated in its half-yearly report that over 314 billion shillings ($3.8 billion) were moved between April and September 2011. M-Pesa now accounts for around 12% of the company’s total revenue.
Nor is mobile phone banking limited to Kenya — the service has been introduced by telecom providers across East Africa, including MTN n Uganda and Zantel, a unit of United Arab Emirates’ Etisalat, in Tanzania. Similar services have been launched in other countries as well.
Tough to copy
But Olga Morawczynski of Applab Money, who tests mobile banking products in Uganda, said most countries have been unable to replicate M-Pesa’s success.
“Operationally, it’s a little more difficult than they anticipated,” she said. “Kenya is an extremely powerful local remittance market,” which isn’t the case everywhere.
But where it works, mobile banking is creating real opportunities for economic development, according to observers.
“It’s an infrastructure that really gets down to the village much more easily than any other technology,” Morawczynski said. “Money can flow more easily. It can get into areas where it wasn’t before.”
A 2009 study by CGAP, an independent policy and research center, found that mobile money systems increased household incomes by five to 30 percent for over half of rural families surveyed.
Still, not everyone thinks the effects of mobile money networks have been entirely positive. An AfDB brief from earlier this year, “Inflation Dynamics in Selected East African Countries: Ethiopia, Kenya, Tanzania and Uganda,” said the growth of M-Pesa may have contributed to inflation in Kenya, as it increases the number and speed of transactions in the economy.
The Central Bank of Kenya should take note, the AfDB report said. “The increase in the velocity of money induced by these activities may have in turn propagated self-fulfilling inflation expectations and complicate monetary policy implementation,” the report said. “The monetary authorities may inadvertently follow looser monetary policy if the stock of e-money grows more rapidly than projected.”
But not all economists buy into this theory. Bruno Yawe, Senior Lecturer in Economics at Makerere University in Kampala, Uganda, said he doesn’t think mobile banking can explain inflation. “Mobile money platforms are not any different from traditional banking systems. The difference is only in the speed,” he said.
“If anything, mobile money is cutting costs of getting money across. There would be more inflation if we didn’t have it,” he said.
In any case, you won’t hear many Kenyans complaining. M-Pesa agents are now about 16 times more widespread than ATMs in Kenya, according to the World Economic Forum, and they’re doing a roaring trade.
“It’s like a merry-go-round,” said Jamila Yusuf, an M-Pesa agent in Mombasa. “People coming and going, coming and going.”