“It’s baffling to me,” Suri said in a phone interview. “I’m just like, ‘Oh my God, how did we get here?’”
For the past decade, Suri has been studying the development of mobile banking in Kenya and how it is rapidly altering the ways people save money and interact with each other in times of need. In a study published in the journal Science this month, she and her co-author have shown just the potential of the technology, lifting a staggering 194,000 Kenyan households — 2 percent of the country’s population — out of extreme poverty, defined as living on less than $1.25 a day.
This is the first study detailing the decade-old technology’s impact on poverty — specifically how it encourages saving, reduces transaction costs and offers an option to find funds in the case of an emergency. But that doesn’t mean mobile money is the solution to extreme poverty. It’s important that we carefully examine exactly why Kenya’s experiment was so successful to determine how it can benefit other countries.
Development economics is an field of study filled with fool’s gold. Time and time again, programs are introduced to end poverty only to result in, well, about the same amount of poverty. For several countries, mobile money has been no exception; economists have long puzzled over why the model hasn’t been nearly as successful outside Kenya. It seems to have foundered in India, and earlier this year, Vodacom discontinued its mobile money services from South Africa after it failed to attract much growth.
So what did Kenya get right? A couple of important things to consider:
First, Kenya had the right regulatory environment. There were some considerable fears early on that mobile money wouldn’t be secure or that it would offer an outlet for money laundering or fraud. But the country’s central bank kept an open mind back when it was being piloted more than a decade ago. Because transactions are limited and because phones are protected by PIN passwords, fears that the technology would encourage crime never materialized.
Second, Kenya’s mobile market is dominated by a single operator — Safaricom, a subsidiary of the U.K.-based Vodafone. Because so many people already had access to the company’s money-sharing product, called M-PESA, Safaricom was able to scale up mobile banking quickly and effectively. It also put a lot of investment into M-PESA early on and worked on getting the business model right before it took off.
Finally, this is a product Kenyans need. While half of the population has a bank account, banks and other financial institutions are spread out and difficult to access. Mobile money offers financial services Kenyans ordinarily would not have.
Nearby countries experimenting with this technology such as Tanzania, Uganda and Rwanda — as well as comparable countries further away, such as Afghanistan and Bangladesh — could see similar success by replicating M-PESA’s business model.
A major takeaway is that access to financial institutions actually is really, really important. Economists often talk about “financial inclusion,” but the buzzword has lost its luster. After microcredit failed to deliver on its big promises to reduce poverty, the argument that the only thing people need is access to financial tools seems to be discredited.
This latest research offers good evidence that having a place to put money that’s safe and easily accessible can make the lives of poor people considerably more efficient than cash-reliant economies. For many Kenyans, getting to a bank means having to walk kilometers. Before mobile banking took off, some people reportedly began trading airtime on their cellphones as a form of virtual currency to carry out day-to-day transactions. It shouldn’t be too surprising that upward of 96 percent of Kenyan households have quickly embraced the technology.
“You have to look really hard and ask, ‘What problems are being solved?’” said Nick Hughes, who led the team that brought M-PESA from concept to scale. “Unless problems aren’t being solved, it becomes a bit of a hype.”
For Hughes — who no longer works on M-PESA — mobile money is just the beginning. The technology offers opportunities to tackle other problems, such as making it easier for people to access clean energy, make insurance payments or send their children to school. Hughes is now working on another project he launched, called M-KOPA, which uses mobile banking to make solar energy more accessible for Kenyans living off the grid.
Talk of “cashless societies” might be overblown, but societies in which digital transactions can be made seamlessly by all are by no means fiction. This is a good step for economic development and a sign that governments should encourage innovation that can solve problems facing people in extreme poverty.