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Suyash Raj Bhandari considers some of the ways in which the rapid expansion and adoption of mobile technology in Africa can act as a spur to growth and development on the continent. We link also to some useful background video resources on this issue.
For many years Africa has been the poorest and most underdeveloped continent in the world. High levels of poverty, low life expectancy, disease, and famine: not much has changed. Time and again governments have come and gone but the situation stays the same. The failure of foreign aid and global trade in helping Africa escape the poverty trap has led to an innovative transformation in micro finance – mobile money. Mobile technology in Africa has become one of the fastest growing markets.
Despite only 10% of Africans having access to the Internet and a severe lack of financial inclusion in Africa, companies such as M-PESA have been able to transform the way a simple mobile device can be used to carry out financial transactions. Given that over 50% of Africans own mobile phones, the revolutionary idea has been a huge success. Further investment in mobile technology can contribute to economic growth in African countries in various ways.
Increasing Incomes and reducing costs
It is difficult and costly for the poor to access financial services in Africa due to the scarce infrastructure, physical-geographical isolation and financial illiteracy. Consequently, this has led to the exceedingly high costs of providing banking services. The minimum deposit can be as high as 50% of per capita GDP in some countries and since most people cannot afford this they are excluded by the formal banking sector. Furthermore, Internet banking is not a suitable alternative as broadband subscription is still low.
However, the development of mobile banking has greatly reduced transaction costs and made banking far more affordable for the poor. Mobile banking allows people without a bank account to use the service to send money to relatives, to pay for shopping/utility bills, or even a taxi ride home. In the absence of a minimum deposit people now have a far greater financial incentive to save money and carefully plan how they wish to spend their disposable income.
Moreover, experts estimate that the costs of the services M-PESA offers for each transaction is US $0.46 compared to a bank’s transaction costs that may be as high as US $3 per transaction. This statistic is profound when considering that the average per capita GDP in Kenya is $868 (even lower in some other African countries). In fact, with the assistance of mobile banking studies have found that in rural Kenyan households (ones that use M-Pesa), incomes increased by 5-30% (according to a CGAP survey). As disposable incomes rise in rural areas people will be able to spend more money on the consumption of goods and services, providing a boost to the local economy and raising the average standard of living. A 5% rise in incomes can have a far greater effect on the economy through the multiplier effect, given that the marginal propensity to save is low. Conversely, if people tend to save rather than spend their higher incomes, the effects of the multiplier will be reduced (the alternative advantages of saving the money will be discussed later).
The lower transaction costs can also drive growth and development in developing countries by decreasing remittance commissions. A study by the World Bank estimates that a 2-5% reduction in remittance commissions could increase the flow of formal remittances by 50-70%, boosting local economies. This represents a significant boost for rural recipients, for whom remittances can represent up to 70 percent of their household income. Decreasing the cost of each individual remittance would allow people to transfer lower value remittances than the current average of US$200.
During the 2010 G8 summit, it was noted that if the average consumer transaction costs could be reduced from 10% to 5% in five years, then an additional $15 billion per year would be available for potential inflows into emerging markets. Since the founding of M-PESA, there has been higher remittance and hence greater economic activity leading to economic growth. Private and public investment in mobile banking is crucial given that remittance in countries such as Liberia and Senegal account for 23.3% and 10.2% of GDP. By simply providing the basic infrastructure and support for companies such as M-PESA, the whole economy can benefit from the increased transfer of remittances.
Advantages for firms and individual workers
Before becoming a general money-transfer scheme, M-PESA was created as a system to allow microfinance-loan repayments to be made electronically by phone, reducing the costs of handling cash and thus making possible lower interest rates. Consequently, the emergence of a trustworthy mobile-payments platform has spawned a host of start-ups in Nairobi. Furthermore, with mobile banking these smaller businesses are now able to easily save, budget and control their cash flow ensuring that they can plan for the future. By enabling firms to easily save money, mobile banking companies are able to encourage greater investments in the long run. Even in the case of an individual farmer mobile banking can lead to overall productivity gains.
Consider a subsistence farmer who works long hours in his field with his family. As he adopts M- PESA and its technology he is able to quickly and easily save what little money he may make. As a result, in the long term he may choose to use the money to buy pesticides, fertilizers or better farming equipment allowing him to increase the output from his field. Consequently, he can then sell the surplus output at the local market for a much needed extra profit.
In Kenya 47% of people indicate that due to M-PESA, they now save 3 hours or $3 per transaction. For many workers, the time spent traveling to receive their payments/salaries means they have less time to carry on with other productive activities.
Additionally, investing and aiding the development of mobile banking will also lead to greater employment opportunities for the local people. Countries such as Ethiopia, Uganda and Tanzania have less than one bank branch per every 100,000 people. Kenya only has 840 bank branches and 1,500 ATMs for its 38 million people and as a result there is a huge market for mobile banking in Africa. M-PESA has over 15000 agents in Kenya and in February 2013 it was reported that the sector had over 88,000 outlets. The increasing employment levels and corporate profits from a booming market also result in the government receiving greater tax revenues. Moreover, the government is more likely to invest in rural areas that adopt mobile technology as they become more advanced and have a greater contribution to the economy as a whole.
In most developing African countries the majority of citizens live in rural areas. Professions such as subsistence farming dominate these areas and fishing and a very small percentage of people are involved in human services. By embracing modern mobile technology people become more receptive to new ideas and are more willing to adopt new practices.
For example, M-KOPA Solar provide rural Kenyans with affordable solar-powered lighting and mobile charging on a pay-as-you-go basis (payments made via M-PESA). M-KOPA Solar is now actively providing affordable solar power to over 15,000 Kenyan households and adding close to 1,000 more every week. Although basic lighting and charging a mobile phone may seem as though would have little impact, they do in fact have a huge effect on those living in absolute poverty. By simple being able to charge ones mobile phone, someone in rural Kenya is now able to use services such as M-PESA for their own benefit. Similarly, Angaza design, a company based in Palo Alto, provides the same service in Tanzania, Kenya and Zambia.
Additionally, mobile banking also provided people with greater security. Economists Tavneet Suri and William Jack report that 77% of Kenyans stored their money informally around their homes prior to M-PESA. This was a significant problem since crime is usually rampant in Africa. Being able to storing assets and transacting electronically can mean the difference between not only loss of wealth but also loss of life in some cases. In Menekse Gencer’s paper she states that 11% of Kenyans storing money have had it stolen whereas only 2% have had issues with M- PESA (sending it to the wrong recipient).
Menekse Gencer also argues in her paper titled “The Mobile Money Movement: Catalyst to Jumpstart Emerging Markets”, that there is a link between mobile money and GDP. “She points out that studies have shown that a 10% rise in mobile phone subscriptions in emerging markets, leads to .6% to 1.2% increase in GDP because of the productivity gains associated with mobile phone communications.” Moreover, economists Robin Burgess’ and Rohini Pande’s first published study about India indicated that every “1 percent increase in the number of rural locations banked per capita reduced rural poverty by 0.42 percent.” According to CGAP research, over 1.8 billion people will have mobile phones in the developing world by 2013 but no bank accounts. Thus, the opportunities for phone operators and banks in Africa are endless.
Financial Times Update: June 2014
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