Fostering Financial Inclusion with Mobile Banking

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The annual growth rates of mobile phone penetration in the developing world have ranged between 30% and 50% or higher, and penetration has been rapidly increasing. In Africa, mobile phone penetration has exploded during the last ten years. Between 1998 and 2009, Africa witnessed an increase from 0.53 per 100 people to 42.82 per 100 people. At the same time, the average price of a 2G handset decreased from USD 150 in 2003 to USD 75 in 2008. Africa is now considered to be the fastest emergent continent for ICT sector growth.

The low financial services penetration compared with the exponential growth of mobile telephony in Sub-Saharan Africa is creating a unique niche for mobile phone banking to develop on the continent. In Africa, the majority of the population has no access to banking services, with only 20% of African families having bank accounts. Sub-Saharan Africa (SSA) has the lowest deposit institution penetration in the world, standing at an average of 16.6% compared with 63.5% in developing countries. In rural areas, which account for 60% of Africa’s total population, the commercial bank branch network is particularly underdeveloped. The limited access to financial services in Africa stems from physical-geographical isolation or inaccessibility, but also deficient infrastructure and financial illiteracy, all of which have culminated in an exceedingly high cost of providing banking services. In some countries, the minimum deposit can be as high as 50% of per capita GDP. Transaction costs are usually quite high.

Taking the Bank to the Client

Financial institutions and mobile phone service providers are introducing resourceful methods of bringing these unserved populations into the formal economy using mobile phones. For commercial banks, the main advantages of the mobile phone technology lie in its capabilities to reach everywhere and be reached from everywhere. Mobile banking is a powerful way to deliver savings services to the billions of people worldwide who have a cell phone but no bank account. It has a number of advantages over traditional banking methods because it breaks down geographical constraints. It also offers other advantages such as immediacy, security and efficiency. Its power is in transforming the economics of service delivery, especially by reducing the costs of financial transactions.

The mobile phone can serve as a virtual bank card where customer and institution information can be securely stored, thereby avoiding the cost of distributing cards to customers. In fact, the subscriber identity module card (SIM card) inside most, if not all GSM phones, is in itself a smartcard (similar to the virtual bank card). Thus, the bank customer’s PIN and account number can be stored on this SIM card to perform the same functions as the bank virtual card.

The mobile phone may also serve as a point of sale (POS) terminal. As such, a mobile phone may be used to transact and communicate with the appropriate financial institution to solicit transaction authorisation. This has the same functions of a POS terminal at malls, retail, or other stores. A mobile phone can duplicate this functionality with ease.

The mobile phone can also be used as an ATM. A POS is used to pay for goods or services at the store. If we consider cash and access to savings as ‘goods and services’, which customers buy at the store, then this POS will also serve as a cash collection and distribution point, which basically is the function of an automatic teller machine (ATM).

The mobile phone may also be used as an Internet banking terminal. This provides two fundamental customer services: instant access to any account, and the ability to make payments and transfers remotely. Consequently, the mobile phone device and wireless connectivity bring the Internet terminal into the hands of otherwise unbanked customers.

Kenya and South Africa, at the forefront of Mobile Banking

Only 19% of the adult population in Kenya has access to a formal bank account, and banking services in Kenya are largely restricted to urban populations. Cellular operators have designed an ingenious way to provide financial services to rural populations in remote areas. In 2007, Safaricom, a national mobile telephony operator, at the time a subsidiary of Vodafone, introduced M-Pesa: ‘M’ standing for Mobile and ‘Pesa’ for money in Swahili. This revolutionary service enables money transfers between mobile phones via SMS, from the most rudimentary mobile phone.

The overwhelming presence of Safaricom in the Kenyan market and the high penetration rate of mobile telephony in the country, especially in remote and rural areas, paved the way for M-Pesa’s great success. By the end of 2008, payment and money transfers via mobile phones were used by 5 million people, and in 2009, by 10 million people. In 2010, the number of M-Pesa clients grew by 61% in one year, a third of which were held by people who were otherwise unbanked. M-Pesa financial services have low value and high volume and generate significant returns. Additionally, the services carry a minimum cost of about USD 0.46 per transaction, less than transaction costs of bank services in Kenya, which range from USD 1 to USD 3.

Another interesting initiative, the M-Kesho account, has been developed in Kenya through the partnership between Equity Bank and Safaricom. It is a bank account linked to the M-Pesa account that enables money transfers from one M-account to another and encourages savings, the M-Kesho account being remunerated. M-Kesho accounts, like the M-Pesa, have no opening fees, and minimum balances or monthly charges. M-Kesho clients can open accounts at either Equity Bank branches or at a subset of some 5,000 M-Pesa agents, at which Equity Bank will place a bank representative and transact at any of the 17,000 M-Pesa retail outlets. The venture into mobile banking and the subsequent partnerships with mobile operators enabled the bank to grow its deposit base at an average compounded growth rate of 40% from 2007 to 2012, without incurring any significant branch network expansion costs and deteriorating its cost to income ratio.

This new initiative is the perfect showcase of convergence between the mobile phone and banking. This tool is a powerful lever to increase the banking penetration rate, going beyond what M-Pesa was able to. M-Pesa could ease and increase access to financial services in the formal sector, but it could not directly foster any increase in deposits. M-Kesho, in itself, has the potential of bringing over 18 million Kenyans into formal banking services. It shows that mobile banking has to be driven by the banking sector itself, and adapt to local customers’ needs and expectations.

In 2010, the Central Bank of Kenya issued new agent banking regulations, which for the first time allowed banks to engage a wide range of retail outlets for transaction handling and product promotion. This paved the way for banks to begin utilising the M-Pesa platform and the associated network of M-Pesa outlets as a channel. It prompted a growing number of banks into mobile banking partnerships with local mobile operators. In October 2010, Safaricom and Barclays Bank of Kenya signed a partnership that allows Barclays account holders to deposit and withdraw to and from their M-Pesa accounts. The M-Pesa agents who bank with Barclays Bank will also be able to purchase an e-float for their daily operations. This constitutes the eighth bank, after Family Bank and Kenya Commercial Bank among others, to partner with M-Pesa, either as an agent or a super agent, denoting the growing opportunities offered by the synergies between mobile telephony and banking activities. The agency banking model is thus becoming a key axis of Kenyan-based commercial banks’ expansion strategy, as it provides a powerful way to increase their presence, visibility and network without increasing their operational costs. As of September 2011, there were 70,000 agents in Kenya, licensed by only ten banks.

South Africa provides some further examples of mobile banking success stories. With a high mobile penetration rate, South Africa is by far the country where mobile banking is most widely used on the continent and the most important emerging market in terms of mobile banking potential. An illustrative example of this potential can be provided by MTN and its Mobile Money Account. This Account provides access to a client account from anywhere in the world, and at any time, through a secure connection using an MTN cell phone. South Africa’s MTN in 2010 announced plans for a fully-fledged bank account on mobile phones, with an optional credit card. The service will be extended to the 20 countries where MTN operates, including Uganda, Nigeria, Cameroon and Côte d’Ivoire, which combined have over 90 million mobile phone users.

Extending the M-Banking frontier

The cases of Kenya and South Africa clearly demonstrate that there are colossal opportunities in Africa to increase affordable and cost-effective means of bringing on board the large numbers of the population who has been excluded from formal financial services for decades. The development of mobile banking will contribute to boosting domestic savings. It will also participate to increase money transfers from the Diaspora at low costs. It will reduce financial transactions costs, leading to lowering the cost of doing business, which will benefit SMEs and overall private sector development. Hence, the mobile phone is becoming much more than a phone to the poor and the unbanked populations of Africa. It is transforming people’s handsets into ‘banks’ in their hands or pockets.

To go further, the next challenges will be, in some cases, to lower costs and to deepen mobile telephony penetration on the continent. Penetration rates vary a lot, from under 10% in Ethiopia to nearly 100% in Gabon, with an average of about 33% for the whole continent. The mobile phone revolution continues to leave large parts of the continent behind. Low incomes, illiteracy and ‘large signal black spots’ are key obstacles to the acquisition and use of mobile phones. These obstacles are further aggravated by high taxes, which in some countries such as Tanzania and Uganda can be as high as 30% of overall charges. These challenges can be addressed by the authorities through policy reforms and scaling up investment in the ICT sector.

Furthermore, partnerships between banks, financial institutions, MFIs and the mobile industry players should be sought out and encouraged. In order to sustain the growth of these mobile banking success stories, there is a need to support a single integrated framework (between financial institutions and the mobile industry) to cut costs, in order to provide consumers with the convenience of banking from home, the farm or other remote areas. MFIs should also upgrade their technology to be able to adopt the new mobile banking emerging technology and should seek solutions that are user-friendly and easy to implement. The increased access to cell phones by the unbanked Africans would be the most cost-effective and economically efficient method of providing financial services to a wide segment of the African populations in the very near future.


Peter Ondiege, PhD,
Chief Research Economist, African Development Bank, Tunis, Tunisia
Professor Peter Ondiege is Chief Research Economist at the Development Research Department of the African Development Bank where he is responsible for Investment Climate Assessment, African Competitiveness Reports and ICT innovations studies. Previously, he was a Director of the Housing and Building Research Institute and an Associate Professor at the University of Nairobi, Kenya. He holds a Master and a PhD degree in Economics from the University of Tsukuba, Japan


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