When it comes to personal finances, many developing countries (Kenya in this example) still make use of their informal networks to send remittances to one another (Jack & Suri, 2014). In other words, if someone wants to send money to their cousin in a city 200km away, one has to take a 10$ bus (roundtrip) or use friends who are coincidentally going to this city to take care of the money transfer (Jack & Suri, 2014). Transaction costs, can therefore, be considered very high – as these kinds of transfer possess high risks.
Without a stable financial system in place, M-Pesa was launched by Safaricom in 2007 and turned out to be a huge success; mobile money was invented. M-Pesa allowed individuals to do several personal financing tasks just by sending SMS messages on basic mobile phones. In just four years after launching M-Pesa, already 70% of the Kenyan population adopted M-Pesa – mainly for sending P2P remittances or saving money (Jack & Suri, 2014).
The effects on the Kenyan economy have been strong, and for M-Pesa users: average consumption increased (+18.5%), extreme poverty (-22%) and general poverty was reduced (Jack & Suri, 2016). But not only did it impact the wealth of users, it changed the way economy functioned on three levels:
1. Household level: a survey found that M-Pesa users feel more safe keeping funds in their accounts for a longer time, and they finally have cheap way of sending money.
2. Community level: it allowed for economic expansion within communities and strengthened the local business environment.
3. National level: Gencer (2011) argues that a 10% increase in adoption rate, can increase the GDP with 0.6% to 1.2%. Moreover, it completely alters the way the supply of the national currency is managed by its central bank.
To conclude, not only is the concept of M-Pesa’s mobile money technologically very interesting – its economical consequences might be even more interesting. Being such a big success in Kenya, throughout the years it expanded to Tanzania, South Africa, Afghanistan and India. I’m personally very curious to see how this technology will impact other developing countries, what do you think?
Gencer, M. (2011). The mobile money movement: catalyst to jumpstart emerging markets. Retrieved on 11-09-2018, from: https://www.slideshare.net/mpayconnect/the-mobile-money-movement-by-mpay-connect-dec-2010-innovations-publication-winter-2011
Jack, W., and Suri, T. (2014). Risk sharing and transactions costs: Evidence from Kenya’s mobile money revolution. American Economic Review 104, pp. 183-223.
Jack & Suri (2016) The long-run poverty and gender impacts of mobile money, Science. 1288-1292.
Hi Maarten,
Very interesting post, I had never heard about M-Pesa before. Especially the impact the adoption of this technology had on the Kenyan GDP is astonishing. However, after reading your post and doing some quick research on Google, my pessimistic mind led me to the dangers and risks of using such a technology in developing countries, where a lot of people have nothing to lose, and a new technology provides a new means to acquire illegitimate money. Although I’m sure Safaricom has taken high measures to protect the privacy and data of M-Pesa’s users, I feel that hackers are bound to take advantage of bugs, loopholes, or just common inattentiveness by users.
For example, on the Techweez forum I read this:
“Sure the formatting of android phones is pretty easy considering that most are ‘Hard Reset’ in the same way and with this he could erase the phones security pattern and he was also able to access the SIM card as it was PIN-less.”
(http://forums.techweez.com/t/hacking-mpesa-pins/1077)
The ‘hacker’ in question had easily hacked her sim card, and was able to transfer Ksh 4.000 from her M-Pesa wallet. And this is just one of many stories I found online.
Especially with M-Pesa’s expansion into countries like India, the Walhalla of software engineers and hackers, I’m very curious how Safaricom is aiming to reduce the risks of using M-Pesa.
Nevertheless, it’s always great to see how technology can positively impact developing countries!
Hi Maarten,
Interesting post, for me my brain immediately started to think about crypto currencies and how these also filter out ‘the middle man’. I see that most of your sources are from 2014-2016. Back then, the crypto currencies were not that much adopted, until last years september when they became the hottest topic on the planet.
After having read Ben’s comment, regarding all the security risks, Do you believe blockchain based crypto currencies could be the next step for the civilians of Kenya to further develop their country and economy? Or is M-pesa so widely adopted that it is unlikely to be replaced by the fluctuating value of the crypto coins? Or might the lack of internet access be a barrier for the inhabitants of Kenya? I would like to hear your opinion on the topic.
Hi Ton, thanks for your thoughtful comment. M-Pesa is indeed a solution before cryptocurrencies became a hot topic. I do agree that the blockchain might offer much more security benefits compared to M-Pesa, as the Proof of Work is not easily hacked.
As you pointed out yourself, I believe crypto adoption is very dependent on price stability – which is not yet the case. A second dependency on crypto adoption is the acceptance by businesses as a legal tender. Furthermore, the lack of internet access is indeed a problem. M-Pesa currently functions with normal text messages, not requiring internet. So even though I don’t see crypto adoption in the next year or two, in five to ten years from now it definitely might replace M-Pesa!