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.”
ECONET WIRELESS, Zimbabwe’s largest telecommunications service provider, has introduced Zimbabwe’s first mass attempt to tap into the potentially lucrative unbanked segment. That has been done through launching the EcoCash product. The EcoCash product allows money to be transferred between mobile users across all mobile telephone networks, a mobile phone-based version of MoneyGram or Western Union.
Ecocash potential Eldorado
One would have thought that Econet’s share price would have rallied at the news. It didn’t.
It is reported that Econet learnt the workings of its new offering from Safaricom of Kenya who run a similar service called M-Pesa. The Kenyan experiment has been a runaway economic success, exploding from 20 000 users within a month of its launch in March 2007 to the current 14 million users. That represents over 60% of Kenya’s adult population or 48% of Kenya’s entire population. M-Pesa processes transactions worth US$4,98 billion annually, translating to 17% of Kenya’s Gross Domestic Product (GDP)!
Currently, M-Pesa accounts for 9% of Safaricom’s annual revenues at US$54 million. Using profitability trends established from research on Blue Ocean creations (M-Pesa is a Blue Ocean), the M-Pesa’s contribution to overall profits could be as high as 20%. But what is a Blue Ocean?
A Blue Ocean is an entirely new industry, created by bringing in neglected potential customer segments through offering them compelling buyer utility not currently offered anywhere. In a recent research, four buyer utility values were mentioned by the users of M-Pesa. Ninety-eight per cent (98%) cited speed, 98% picked safety, 96% identified convenience and 96% cited affordability (M-Pesa costs between 0,2% and 0,9% of amount to be transferred). In a Blue Ocean competition is irrelevant. With no competition, profits are sterling.
M-Pesa is branching into other creative product offerings. Some firms are using M-Pesa to collect instalments. M-Pesa is now used to pay Matatus (equivalent of our commuter buses). Safaricom itself recently distributed dividends through M-Pesa to 180 000 shareholders, representing 26% of its shareholder base. Econet can use its well-known capability of innovation to come up with groundbreaking extensions of EcoCash.
Given Econet Wireless’s current subscriber base of around 5 million and its wide network coverage, reaching into our rural enclaves, Econet’s ability to replicate the Kenyan success appears realistic. At about 5 million subscribers, which is almost half of Zimbabwe’s population Econet has a similar profile to Safaricom. Assuming that Econet, like Safaricom, will within the first five years move about US$1,74 billion ( 17% of GDP and assuming a GDP growth of 5% per annum) through EcoCash, EcoCash should be able to generate about US$80 million annually and contribute about 40% to Econet’s overall profitability.
These are conservative figures, given that there is an estimated US$3 billion believed to be circulating outside Zimbabwe’s formal banking system. If Econet manages to coax half of that into the EcoCash pipeline, annual revenues from EcoCash can easily dash past the US$100 million mark.
One of the problems faced by Safaricom agents in remote areas is the issue of float. An agent of M-Pesaneeds to have a daily float which is replenished from a bank designated by Safaricom. Econet’s partnership with Tawanda Nyambirai’s TN Bank should easily solve that potential challenge. TN Bank uses its vast network of furniture retail shops as banking malls. That should provide accessibility to agents in rural areas to a supporting bank. That makes EcoCash a notch ahead of M-Pesa in this regard.
If Econet’s EcoCash, like M-Pesa is a Blue Ocean, then the market is undervaluing Econet.
Mobile cash innovation origins
Mobile banking targeting the unbanked is the brainchild of Nick Hughes, employed at UK telecommunications giant, Vodafone. Hughes was driven by a passion to make banking accessible and affordable to underserved communities who either cannot afford or do not see value in using the formal banking system.
Nick Hughes impressed a UK government representative who at the 2003 World Summit on Sustainable Development had heard him passionately and eloquently argue for private sector organisations to embrace sustainable development in their business plans. The UK government representative from the Department for International Development (DFID) invited Nick Hughes to submit a proposal to secure funding under the Financial Deepening Challenge Funds project. Vodafone secured the funding under a ‘if you put so much I will put so much’ funding partnership. Vodafone chose Safaricom, its Kenyan subsidiary to develop a pilot project.
In March 2007, after almost four years of navigating regulatory hurdles and bringing together project partners with divergent business models in mobile telephony, banking and microfinance, M-Pesa, the mobile micro-lending service was launched in 2007. Pesa means cash in Swahili. Thus M-Pesa simply means Mobile Cash. Within a month of its launch, M-Pesadrew in close to 20 000 users.
The original M-Pesa product was developed for microfinance institutes in Kenya to facilitate the lending and repayments of microloans through Safaricom’s network of airtime distributors.
M-Pesa a blue ocean
M-Pesa can be looked at from many angles such as Private Public Sector Partnership, Inclusive Banking and developmental economics. M-Pesa can be analysed from a business strategy viewpoint. M-Pesa is quoted by the Insead business school by Renee Mauborgne, co-author of the two-million-copy best seller Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant as an example of a Blue Ocean. A Blue Ocean is a new industry consciously created by a business strategist through doing two things simultaneously namely providing a leap in value for non-customers and lowering costs.
Traditional strategic thinking, which business academics call structuralism or determinism dictates that industry factors of competition are a given. In the structural determinism classroom, companies can only respond to the fixed rules of a given industry, using the competition mentality. To make profits, firms have to outsmart and outdo each other in responding to these so-called fixed rules. Insead Business School, currently ranked the world’s 4th powerful business school, a position it shares with Stanford, one ranking behind third place Harvard, have challenged the structural determinism approach to strategy thinking popularised by one of Harvard’s most famous sons, Michael Porter. Insead has through the Blue Ocean Strategy argued that smart business strategists can pursue both high value and low cost simultaneously based on the premise that boundaries of industry are not fixed as argued by the proponents of the structural determinism. To do so they suggest that business strategists should look to non-customers and create a leap in value for them. This leap in value can be created by looking for clues outside your own industry and strategic groups and by studying alternatives to your products. Creating a leap in value is costly. To counter this cost increase, the business strategists needs to lower the cost of the value innovation.
Here is how M-Pesa fits as a blue ocean.
- First, M-Pesa looked into potential clients not served by banks. These include semi-illiterate rural dwellers and the poor urbanites who found either the formal banking system prohibitively expensive or inconvenient and inaccessible.
- Second, M-Pesa developers looked to alternatives such as international money transfer. You do not to have a bank account to access money sent overseas through Western Union. All you need is a reference number.
- Third, having created a leap in value for the unbanked customer (convenience and accessibility), cost management became equally important. By challenging accepted practices in banking, M-Pesa developers found opportunities to shave unnecessary costs.
But, is Econet’s EcoCash a Blue Ocean? We will attempt to answer that next week.
By Geoffrey Irungu, Business Daily
Users of mobile money transfer services will soon pay more for the convenience under a proposed law aimed at bringing all payment instruments and systems under one regulation.
If the National Payments System Bill 2011 becomes law, customers will not lose their money if a service provider such as an online or cellphone money transfer company collapses or is declared insolvent.
Service and network providers will incur the cost of compliance that includes risk management, regular reporting, hiring of qualified personnel and upgrading of ICT systems.
“Compliance will see operators dig deeper into their finances to meet the guidelines without necessarily controlling or reducing fraud,” said Mr Robert Nyamu, the forensic and litigation services director at Deloitte East Africa, who has been working with banks and some operators on reducing payment risks.
The operators will be given six months to comply with the law that encompasses all electronic payment systems and instruments such as real time gross settlement (RTGS), cellphone-based and online banking systems.
Safaricom, which runs Kenya’s leading mobile phone money transfer platform M-Pesa however, said operators were already incurring costs on self regulation.
“The cost of complying with these regulations is not expected to be remarkably higher than the current cost of enforcing providers’ self-regulation mechanisms or complying with prevailing law or regulatory practices,” said Mr Nzioka Waita, Safaricom’s corporate affairs director.
He said the Bill proposes to offer better regulation that will enhance services, hold operators to account and increase consumer confidence.
The costs are expected to arise from meeting terms that will be spelt out by the Central Bank of Kenya on a case by case basis.
Once CBK designates a platform as a national payment system, the propriety will formulate a constitution that will guide its operations and be used as basis in its supervisory actions.
The guidelines will be open to public scrutiny and cannot be changed without the approval of the Central Bank.
“There has been a long-running debate about how to regulate the payments systems even those relating to the mobile money transfer,” said Mr Muriuki Mureithi, a telecoms consultant with Summit Strategies.
“It is critical that we have some law even though there are going to be costs because the issue of security of transactions has always arisen.”
Mr Nyamu, however, said the guidelines would need to be more vigilant on risks, adding that some players in cellphone money transfer services had made efforts to reduce fraud, but others were reluctant because of the costs involved.
He said that there had been increased cases of fraud in both banking and money-transfer services, but specific guidelines, including sharing information and collective action, would curb the crime.
“We are currently collecting data and analysing the patterns of fraud and other risks on mobile phone and banking services.
Unfortunately, industry players see adverse reputational risks emerging from disclosure of what is happening,” said Mr Nyamu.
RTGS is the leading payment system in the country with Sh150 billion changing hands daily compared to Sh3 billion daily through mobile phone services.
Mr Stephen Nduati, the director of the national payments at CBK, said more use of paperless transactions or technology would help mitigate the risks.
The new proposal will make it illegal for companies operating money transfers and online payment systems to use customer balances for their operations.
The law will take precedence over the Companies Act, the Banking Act, the Building Societies Act, the Co-operative Societies Act, 1997, or the Microfinance Act, 2006, with regard to insolvency.
The receiver will be expected to make the settlements to the full as registered in the system before any transactions can be conducted in relation to the insolvent firm.
Investors in securities may also find themselves facing new charges if the intermediaries pass on the cost incurred in compliance.
“This law will reduce the incidence of having counterparties not settling transactions,” said Evans Osano, the manager in charge of Efficient Securities Market Institutional Development at the International Financial Corporation.
He said that the greatest hindrance to the development of the securities markets especially the post-trade bond market settlements has been infrastructure because some of the parties are not electronically connected to ensure seamless payment once a transaction is made. Only banks have such a system due to their linkage with the central bank.
“Parties to the securities transactions have to pay for infrastructure without which the costs are higher in the long term due to sluggish settlement of trade,” said Mr Osano.
By Gary Collins, Memeburn
In a continent where less than 20 percent of Africa’s population has a bank account and where latent demand for money services is so high, why are there no other success stories on the scale of Safaricom’s MPESA service, in Kenya?
Diverse factors such as distribution networks or Kenya’s unique social structure has often been cited as the reasons why MPESA has only worked in Kenya and not elsewhere, the answer lies in the requirement for compliance and regulation obeisance has cemented the role of banks at the core of the mobile money universe. This factor has undoubtedly played a major role in limiting how mobile money solutions can be implemented and rolled out.
The overly-cautious, regulatory driven bank-led approach has all but killed off the possibility of producing an MPESA-like agile, cheap, customer-friendly mobile money application or solution built around the requirements that sub-Saharan African customers so desperately need. This has had profound effects on the pace of mobile money adoption.
To understand how this situation has come about, it is important to view the Kenyan retail banks response to MPESA, and subsequently, how other banks and regulators around the continent responded to the spread of mobile money services.
MPESA launched in 2007 into a vacuum of clear guidelines and precedents that dictated how money could move around a mobile ecosystem. Thanks to a loophole in the banking regulations the service did not, at that time, require a banking license to operate.
The service grew rapidly from inception, and its runaway success caught the retail banking sector in Kenya off-guard. Less than a year after the launch, a cartel of Kenyan banks successfully lobbied the Kenyan Central Bank to investigate SafariCom and MPESA, labeling it “nothing more than a Ponzi Scheme“.
Clearly the established retail banks in Kenya viewed the upstart mobile operator-led service that acted like a bank, as a threat. Their aim was to teach the upstart a lesson, and shut it down or at least bring it to heel by forcing it to play by the rules, and act like a bank.
That strategy did not work out as planned. Under pressure from the central bank, an audit of M-Pesa was launched in 2009 by Consult Hyperion. The audit vindicated the upstart service by certifying that MPESA offered “bank-grade security and controls to its customers”.
At the end of the process MPESA was given a clean bill of health and allowed to continue to operate.
With the threat of alternative products like MPESA entering the market with their potential to disrupt and undermine the retail banking sector, central banks around the continent moved quickly to clarify and entrench the retail banks role as central players in the mobile money value chain.
Since then we have seen a slew of policy documents, directives and legislation, placing mobile money services firmly under the control of banks and banking legislation.
Since 2009, the South African Reserve Bank issued a several directives and papers that govern and regulate the functioning of mobile money within the existing banking framework. Similarly, after much stopping and starting Nigeria produced the “Regulatory Framework for Mobile Services in Nigeria” that sets out three classes of mobile money providers, “bank-led”, “bank-owned” and “non-bank owned” – in which, surprise, surprise, banks play a pivotal role. Central banks across the continent followed suit in a similar vein.
The net effect is that since 2008 we have seen the doors close around the legal and policy loopholes that may have allowed upstart mobile money services, like MPESA, across the continent to flourish and grow.
Today sub-Saharan (and other emerging market countries), banks have positioned themselves firmly at the center of the mobile money value chain, by virtue of their legally mandated status and role in the financial system, they hold a pivotal place in the way money moves in, out and around mobile services.
Arthur Goldstuck hit the nail on the head when he wrote that, the involvement of banks (referring specifically to Mpesa and Nedbank in SA), “immediately increased the complexity and cost of the service”.
“An increase in these two factors”, wrote Arthur Goldstuck, “directly prevents the service from achieving any meaningful market penetration”.
The experts have been telling us for years now that Africa is the new frontier and ripe for mobile money adoption. However it is abundantly clear that retail banks and financial institutions are not in a hurry to trade away the pivotal role they enjoy in the financial system, (and the vast long-term mobile banking opportunities that may result), and so free up the space for new entrants, innovations and entrepreneurs.
While there appears to be some glimmer of hope that retail banks recognise the need to change their outdated and irrelevant business models, they have been slow to do so.
While many sub-Saharan banks with an eye on mobile money, are not quite as bad as the vampire squids a la Rolling Stone magazine, wrapped around the face of mobile money solutions, they will have to look critically at the role they play in enabling mobile banking systems, if the vast un-banked populations of sub-saharan Africa are to get the kind of mobile money service products and services they deserve at the prices they can afford.
By Hilton Tarrant, Memeburn
It’s the runaway success story: From a standing start just four years ago, over 15-million Kenyans now use the M-Pesa mobile money service to transact. Billions of Kenyan shillings have been moved through the system. It’s this success which leads to M-Pesa being held up as a case study of mobile payments in emerging markets (try researching mobile payments without reference to M-Pesa!). It’s also made financial services companies and rival operators salivate.
True, the growth rates are staggering. There are only 40-million people in Kenya, which illustrates just how many economically active adults in that country use M-Pesa (practically all of them).
This success has led to Vodafone (majority owners of Safaricom) launching M-Pesa in other markets. To date, it has been rolled out in neighbouring Tanzania, Afghanistan as well as South Africa, with pilots in other countries including India. Try as it might (with millions of dollars of advertising and promotion), Vodafone simply cannot replicate M-Pesa’s success in any other market.
Its high-profile launch by Vodafone group-company Vodacom in South Africa, in partnership with Nedbank, has faltered to the degree that it has had to completely reinvent its offering.
M-Pesa flourished in Kenya due to conditions which aren’t easy to replicate simply with just a management team and a budget.
M-Pesa got traction as a means for workers in urban areas to send money home to their family. (Originally the service was designed for microfinance borrowers to receive and repay loans using Safaricom’s airtime reseller network.) “Sending money home” was a killer use case — creating a user base that grew exponentially.
The distribution network makes it all work — it’s far easier to find one of 25 000-odd agents, than it is to find one of 1 000 bank branches. Add to this the fact that Safaricom’s airtime resellers are agents — real people — not faceless banks. Safaricom also managed to successfully leverage its trusted brand. The low transaction fees for using M-Pesa was a further attraction.
None of the reasons why M-Pesa is unbelievably successful are technology-related. Sending money via a mobile platform is not particularly difficult. That explains the hundreds (thousands?) of competing services in every market worldwide.
Rival operators in Kenya have launched similar services (Airtel Money, Orange Money, and Essar yuCash), with dozens of other players also active in the market. With all the attention, nearly every operator on the continent has some sort of mobile money offering.
M-Pesa’s success will not, however, be repeated in other markets, and definitely not in South Africa.
Interestingly, Vodafone understands the competitive advantage it needs in order to launch M-Pesa. Executives have, in private conversations, been clear that it’s all about distribution. While it aims to blanket new markets with agents, distribution costs money and it takes time to build.
We’ve seen this first hand in South Africa, where it only has 3 000 outlets, almost entirely comprised of Vodacom shops, Nedbank ATMs and Pep stores. Fairly steep transaction fees aren’t exactly causing customers to rush to the service either. Vodacom is shifting focus to higher LSM groups, hoping to broaden its appeal, but tough regulatory hurdles make the service far less seamless than it ought to be.
Banking legislation isn’t unique to SA — all operators and banks on the continent will continue to grapple with complex regulations as they aim to convert the unbanked into banked.
It’s time for new services to emerge, instead of a template-style rollout by multi-nationals. In South Africa, we’re seeing competing offerings attract users. For example, since launch over R800-million has been sent via FNB’s eWallet. On average, R2-million is being sent daily, and over 500 000 eWallets have been created. Other unexpected players are also capturing market share. Shoprite Holdings has seen a 52 percent increase in money transfers at its Money Market counters in the past year, and is quietly eyeing the financial services space.
Distribution remains king. And that also means scale, something hardly ever understood by new entrants.
Bring on true innovation.
From TradeInvest Africa
Competition among financial institutions is intensifying in Africa as more governments relax barriers to entry and open their countries’ banking sectors to new players. The flurry of fresh entrants in some countries is credited with helping to drive down banking charges, improve access to banking services and spark off a wave of new products and services.
However, in most countries it is still far easier for companies to gain access to banking services and credit than it is for ordinary consumers, according to members of Lex Africa, a network of leading law firms in 30 African countries.
‘When it comes to banking access, it is important to distinguish between corporate transactions and services for the man in the street. There is often a vast difference between the two,’ says Richard Roothman, banking and finance specialist and director at South Africa-based Werksmans Attorneys.
Roothman says that in the business markets of the continent, an influx of foreign banks is behind the proliferation of corporate banking services such as project finance. ‘Many African countries have a huge desire for big mining, power, roads and water projects, and project finance is the only way to finance these transactions. Almost all of them are financed by foreign banks, which are why a lot more international banks are busy looking at Africa.’
Another reason for their interest is that banks are hungry for business in the aftermath of the global financial crisis. ‘Africa is not a safe haven but other avenues have dried up or are in limbo,’ he says. ‘Foreign banks see that they can make more money by taking a little bit more risk in Africa.’
While corporate banking services are growing strongly, many African consumers are turning to microfinance, mobile phone and retail companies rather than banks for access to financial services. Says Roothman: ‘Micro financiers and other non-banking lenders tend to be more accessible to the man on the street, who is often not seen as bankable. Still, as the purchasing power of Africans grows, there will be more scope and opportunities for banks to service them.’
Kenyan banks galvanised into action
In Kenya, where less than a quarter of the population has bank accounts, banks have been spurred into action in the consumer market by the success of the mobile money transfer services.
Money transfer services were first launched by Kenyan mobile operator Safaricom in 2007 via M-Pesa and other mobile operators now provide similar services. This is one of the main catalysts that have triggered far-reaching change in the country’s banking and financial services landscape, according to Binti Shah, partner at Kenya-based Kaplan & Stratton.
According to studies by Enhancing Financial Innovation and Access (EFInA), a non-profit organisation that promotes financial inclusion, around 20% of Kenyans had bank accounts and about 8% had access to other forms of formal financial services in 2006. By 2009, the percentage of people with bank accounts had crept up to 23% but those using other formal services, particularly M-Pesa, had shot up to 17%. Today’s figure is likely to be even higher because the number of M-Pesa subscribers using the service to deposit and withdraw cash and do money transfers has reportedly increased to 10 million.
This success has galvanised the banks into action. ‘Banks now have much lower entry fees, which means that less wealthy individuals can now afford to open accounts,’ says Shah.
According to Shah, the recent changes in legislation have also made it possible to introduce agency banking, which means banks no longer need to follow the traditional ‘bricks and mortar’ model. Banks are now allowed to recruit other businesses – notably telecommunications companies and retailers with a nationwide presence – to offer banking services on their behalf on an agency basis.
Shah notes that one of the latest boosts for financial access in Kenya is the partnership between mobile operators and commercial banks which, over and above doing away with account-opening fees and monthly charges, pays interest and offers account holders access to emergency credit and insurance facilities.
‘As a result of all these changes, the sector has become very competitive. Access to banking and financial services has improved greatly and charges are coming down. The greater circulation of money also means more businesses are coming up and helps investors feel a little bit more comfortable about investment prospects,’ says Shah.
Nigerian uptake on the increase
Although Nigeria lags behind Kenya in consumer access to financial services, there is “abundant proof of increased access to banking and other financial services “. Osayaba Giwa-Osagie, managing partner at Nigeria-based firm Giwa-Osagie & Co. points to Enhancing Financial Innovation and Access (EFinA) surveys showing significant increases in access between 2008 and 2010.
When EFinA released the results of its first Nigerian financial access survey in 2008, it found that only 21% of Nigerians were banked, while 2% were using micro financiers as banks and 24% were using informal facilities such as savings clubs. That left about 46 million Nigerians, or 53% of the population, without any access at all to formal or informal financial services.
Two years on, the percentage of banked Nigerians has increased from 21% to 30%, according to EFInA’s 2010 financial access study. Overall, the proportion of Nigerians without access to formal or informal financial services has dropped from 53% two years ago to 47% currently.
Citing reasons for the improvements, Giwa-Osagie says: ‘The new generation banks have brought some level of competition into the banking industry, with the introduction of new banking technology and better and faster service delivery.’ He says banks have also branched out from their traditional strongholds in centres such as Lagos into other geographical areas.
Interestingly, basic savings accounts and ATM cards are by far the most popular banking services in Nigeria. Only 1.5 million Nigerians have credit cards, according to EFInA’s studies, and fewer than two million people have overdraft, mortgage loan or vehicle finance facilities. Furthermore, despite the high level of mobile phone penetration in Nigeria, the country has yet to introduce a mobile money transfer service such as M-Pesa, which is proving so popular in Kenya.
A long road to travel in Angola
In Angola, most banking activity is concentrated in the capital Luanda, says Natacha Sofia Barrados, an associate specialising in banking law at FBL Advogados. ‘Outside Luanda, there is only one or two banks and people still keep their money at home.’
Even in Luanda, banking services are out of reach of many consumers. ‘To open an account, you must typically have $200, which is too much for most ordinary people,’ she says, estimating that between 10% and 20% of Angolans have bank accounts. ‘It is getting easier now because a lot of new banks are opening and some do not require a minimum amount.’
Barrados says competition in the commercial banking market is accelerating and that the Angolan Central Bank has made it relatively easy, theoretically at least, for international banks to start operating. ‘The minimum capital requirement is $6-million, there must be a local shareholder and if you are non-resident, you must have authorisation from the Council of Members.’
Far more arduous than applying for a banking license are Angola’s exchange control regulations, particularly around the expatriation of capital. ‘It takes a long time to issue a license to export capital out of the country. In fact, this is very difficult,’ she says.
‘For a new bank to succeed, it is very important to comply with all the rules and to be aware of the exchange control regulations. It is also most important to understand the Angolan environment and to realise that this is not a normal business environment,’ she says. ‘It is not at all like operating in America or Europe.’
How to be successful
Says Pieter Steyn, the chairman of Lex Africa and a director at Werksmans Attorneys: ‘This is the age of African Lions and increasing interest in the millions of African consumers. African demand for financial services will increase in future and although banks with an established African presence have an inherent advantage, they will face increasing competition not only from their traditional competitors but also from novel and innovative ways of providing financial services.’
Lex Africa, is a corporate legal network that comprises of law firms in 30 African countries.
Banking regulators come in two varieties: consumer advocates and prudential regulators. The former worry about exploitation of poor people through unfair contracts, fraud and excessive prices and interest rates, and propose strong rules to protect them. Thus, they urge caps on interest rates, low or no bank charges and prudential regulation – akin to that of banks – of specialised financial service providers like microfinance providers.
Prudential regulators, on the other hand, worry about the integrity of individual institutions and of financial system as a whole. They ask financial institutions to be conservative, go for good credits and maintain a strong capital base. This limits banks’ incentives to seek business among the poor.
So, a combination of well-meaning efforts to protect the poor and ensure stability of the financial system may lead to an outcome where the poor cannot get the services they are willing to pay for because no one is willing to supply them. Is there a best-fit solution? What kind of regulation is appropriate if we wish to achieve the benefits of financial inclusion without sacrificing financial stability?
A recent BIS paper argues regulation should be designed according to the type of service and attendant risks. A reliable legal framework with enforceable contracts is the foundation on which all financial services are built. Better financial services help poor people cope better with the everyday risks of fraud and theft.
At the same time, new services such as mobile payment systems can also give rise to fraud. If a modern system like M-Pesa were to be plagued by systematic fraud, the political fallout could be significant. Hence, from that perspective as well adequate conduct, regulation is important.
Prudential regulation has an important role, and comes into play if the services generate a float that is invested. It should be focused on this functional building block. In doing so, it is advisable to try and remain technology-neutral to leave space for further innovation. The key is to regulate the service provided, not the institution. Second, regulation should take systemic dimensions into account.
In calibrating the regulatory framework for basic financial services to the poor, regulation should be calibrated according to the risks incurred for the financial system. In the case of systemically-important financial institutions whose failure can lead to large economic costs within a country or even beyond, regulation that seems costly from a short-term perspective may easily pay for itself by staving off costly financial crises.
In the case of basic financial services for the poor, the danger seems not so much systemic repercussions that might impose large financial costs; the danger is more that such services do not emerge in the first place, and financial inclusion simply does not happen. In that perspective, it may be advisable to experiment and to encourage the emergence of a wide range of specialised, ‘unbundled’ financial services for the poor – like the no-frills account that we have tried in India? – and consider a stronger regulatory response if and when particular bundles of service emerge and grow towards a size and importance that could pose risks for financial stability.
The success of M-Pesa in Kenya seems to indicate that basic payment services are perhaps the most important financial service for poor people. Luckily, such systems can be developed at a low risk because, even if successful, the absolute amounts remain small. And provided the objectives are clear, regulation targeted directly on the type of service is appropriate from the viewpoint of the overall financial system.
This is what the Central Bank of Kenya has done. By allowing M-Pesa to experiment, it has helped provide useful insights into new possibilities for financial services. The problem is that regulatory measures are themselves subject to the influence of particular interests.
Therefore, possible market failure needs to be weighed against possible regulatory failure: regulatory efforts may be captured by commercial interests or affected by political considerations – an additional reason not to stifle promising approaches through regulatory responses to innovation and new business models that can help poor people.
By David Mugwe, Business Daily Africa
The Central Bank of Kenya (CBK) has warned against a proposal to harmonise money transfer systems currently offered by mobile phone operators, saying the move would kill innovation in a sector that has been a godsend to the bank’s efforts to bring more Kenyans into the formal economy.
CBK governor Njuguna Ndung’u said players in the mobile money sector should focus on increasing the number of agencies and customers they have before such a proposal to harmonise the systems be considered.
He pegged 24 million Kenyans using the systems as an acceptable threshold.
“Interoperability will help to reduce costs but if you reduce costs without following the rules of the game you will kill the innovation. There are proprietary rights that you have to respect,” said Prof Njuguna at the AITEC Banking and Mobile Money Comesa conference last Thursday.
Business Daily had a day earlier exclusively reported on a proposal presented to the Prime Minister’s office by Airtel that aimed at building a seamless money transfer platform that would allow rivals of Safaricom’s M-Pesa to merge their functions with M-Pesa.
It would mean that cash transfers could be sent between networks, as well as allow Safaricom’s rivals to use its agency network to extend their reach, a move aimed at diluting the market leader’s dominance.
Safaricom’s rivals had said that such a platform would remove the high cost that is preventing consumers from moving money across networks, but Safaricom argued that the move would infringe on its proprietary rights.
The development threatened to open a new front in the battle to win subscribers, as some service providers said the establishment of a central clearing house would offer them headroom to significantly cut costs as they had done in the calls market.
Safaricom’s rivals reckoned that a seamless platform would loosen each operator’s grip on the mobile money platform, pulling down the cost barriers and allowing free movement of money.
Though it is currently possible to send money across networks, the transfer process remains complex and costs 10 times more than the price of sending money within a network, adding new dimensions to the factors preventing consumers from changing mobile phone service providers.
Prof Ndung’u said CBK would be keen to see the number of unbanked Kenyans reduced before it can impose new regulations.
“If you do not have the numbers you cannot bring costs down. Let’s have the numbers then start debating how interoperability will reduce costs further but we should respect proprietary rights.”
He said that though the initiative would reduce costs, deposit accounts and access to financial services had grown over time because of innovation by mobile operators, agent banking and licensing of deposit taking microfinance institutions.
According to the CBK, the number of micro-accounts increased over five times to about 11.2 million last September from about 2.1 million in 2005.
In a presentation done in November, the CBK said that the number of deposit accounts had also increased to nearly 12 million from 2.55 million over the same period.
The CBK attributed the growth to reduced costs of maintaining micro accounts and introduction of innovative instruments such as mobile money transfer.
Prof Njuguna said that these numbers could improve further, a move that would see costs go down as more individuals use the existing structures.
“We have to follow the rules of the game but what we want is numbers on the table. Let’s not go for simple choices,” he said, adding that the deposit accounts could be increased to over 24 million.
M-Pesa remains a major attraction for Safaricom subscribers and is seen as one of the main reasons why consumers do not change from the network.
Safaricom has 13.5 million subscribers on the service with over 22,000 M-Pesa agents while Airtel, its main rival which operates a mobile money network dubbed Zap has about four million subscribers.
Orange, which runs a mobile money network dubbed Orange Money, has about 100,000 users and 1,500 agents, while Yu runs a mobile money network dubbed Yu Cash.
According to the CBK, as at the end of September last year, M-Pesa had transferred Sh68.02 billion with 28.45 million transactions since 2007.
Banks which have largely been left behind by the telecommunication firms in mobile money innovations have partnered with the providers so as to grow their customers.
CBK data shows that since the launch of a partnership between Safaricom and Equity Bank, 700,000 M-Kesho accounts had been opened as at the end of September last year with approximately Sh400 million mobilised.
By Nick Smith, The New Zealand Herald -
The word for mobile cash in Swahili is “M-Pesa,” says Chris Jones, the tech-entrepreneur with a chequered history who owns the country’s fourth-fastest growing company, Mobilis.
“M” stands for mobile phone and “pesa” is the Swahili word for money. Using phones as cash accounts was first developed as a means of disseminating funding from micro-finance banks, the financial institutions that lend to the world’s poorest.
M-Pesa is also the name of the mobile money product offered by Kenyan mobile phone company Safaricom and the system used by a taxi driver who took Jones’ fare in Nairobi recently.
“I asked him how often he used it and he said, ‘a couple of times a week, I transfer money to my mother’,” Jones remembers. “He gets money as a taxi driver, deposits it in his mobile cash account and disburses it to his family [by phone], who aren’t in the city and can’t get cash because there’s no bank. He used to carry it physically; now he does it electronically, it’s mobile Eftpos.”
But it is an account managed by a telco or network operator functioning as an unregulated retail commercial bank.
“Regulators in most [African] countries are now trying to determine how to license the mobile operators because they’re capturing a massive population base,” Jones says of the fluid Africa scene, where mobile money first started. “For the operators it’s great because it keeps the subscribers sticky to your mobile network.”
Safaricom may have been first out of the blocks but the race is now on for other providers, including Jones’ Mobilis, which has developed a system and is about to deploy in Africa, the Middle East and Asia.
Mobilis’ application duplicates a cash account number from a mobile phone number and users can make withdrawals, automatic payments and send money to third parties, just like a real bank account. Cash deposits and withdrawals are handled by authorised agents, who might be a corner store retailer in small towns outside the big urban centres, he says.
The global potential for this product is huge, Jones argues. He’s back doing what he does best: selling software applications to emerging markets, places where danger is sometimes a little too close for comfort.
“I’ve done an evacuation [from Lebanon] and a full e-vac out of Guinea-Conakry [formerly French Guinea] when the president died,” he says from his Auckland headquarters in Freemans Bay. “We’re very careful about the risk, more so the health side [than war, which is rare].”
Business is booming, like Israeli cannons in 2006 during the second invasion of Lebanon, necessitating quick logistics to get staff out of the Mobilis Beirut office.
“I pulled people out and got them across the border to Syria and then to Dubai,” he remembers. “I understand what some expats are going through in Egypt now.”
Jones founded Mobilis in 2006 after leaving Argent, which also sold software to emerging markets. In 2008, receivers divided Argent up and sold its billing platform to Jones, sparking bitter comments from former backers who blamed him for Argent’s demise.
The company had been founded by Jones two years after the collapse of his listed company Telemedia, once worth $680 million before its spectacular 2001 crash into receivership.
Jones, 90 per cent owner of Mobilis, pre-fers to concentrate on the positive signs of revenue growth, which are as stunning as the swift end to his former companies.
Mobilis was the fourth-fastest growing company in New Zealand in the three years to 2010, as measured by the Deloitte Fast 50, with 1079 per cent growth.
Nearly all that revenue is earned overseas, mainly in East and West Africa, the Middle East and Asia. Emerging markets don’t have the “legacy infrastructure” of developed economies making them quick adopters of new technology, Jones explains.
Middle Eastern money is accelerating the pace of change in the form of network owners, telcos, microfinance and air travel. Emirates and others have opened up Africa to the global economy and, he says, the nature of mobile phone technology means even the continent’s poor can be customers.
The bread-and-butter business is providing what Jones calls “the core functionality of communications networks”, such as billing information, point-of-sale platforms and a number management system, all developed in New Zealand.
But mobile money is a game-changer, he argues. Pre-pay mobile phones, developed in South Africa for its legion of dispossessed, were once considered only fit for ne’er-do-wells and are now a First World necessity. Mobile money is technology of a similar ilk, he says.
By Oluwaseun Ayantokun, Nigerian Tribune -
Efforts are on to enable the Nigeria Postal Service (NIPOST) play significant role in deployment of mobile banking service in the country.
Players in the mobile banking industry have expressed their happiness at the news, stating that NIPOST had the experience to make it happen.
Nigeria will, therefore, be joining the postal services like Mpesa in Kenya and GCASH in Phillipines, where the mobile banking has leveraged on the post to deliver basic financial services.
Post Master General, Mallam Ibrahim Mori Baba, has been scheduled to deliver a keynote address to a gathering of financial institutions, mobile network operators, technology providers, agent networks and other stakeholders at the Mobile Remittance West Africa summit which started yesterday (Tuesday) and ends today.
Mobile financial services are significantly improving access to formal financial services all across Africa where bank penetration is concentrated in urban and semi urban areas, with millions of people excluded from formal financial services in the rural areas.
NIPOST presents ready and well-networked branches across Nigeria for delivering formal financial services to unbanked populations in Nigeria.
The Central Bank of Nigeria is actively licencing mobile financial service providers in Nigeria, a country with over 140 million people, 70 million bank accounts and about 70 million mobile subscribers.
According to the organiser of the sunnit and principal associate at Mobile Money Africa, Mr Emmanuel Okoewale, “Mobile payment presents a safe and convenient channel to take banking and payment services to millions of Nigerians cost effectively.”
Delegates from approved providers will be presenting their solutions and exploring opportunities in the new ecosystem with the aim of bringing formal financial services and remittances to Nigerians in a cost effective manner in a country with over $10billion in formal remittances.
Leading players in the Nigerian financial ecosystem will evaluate present obstacles to providing efficient services and will proffer sustainable solutions.
Speakers from Ecobank, Fortis MobileMoney, TxtPay Ghana, eTranzact, MoneyGram, Medallion communications, Roamware, UTIBA, GTS infotel, MMIT, Hendomark, SugarAnts, UBA Uganda and a host of others are expected to speak at event.