In Kenya, new banking technology is paying dividends

Warren Coats writes in the Daily Caller, that some years ago, DFID—the UK Department for International Development — partnered with Vodafone to develop a secure software platform for performing a number of basic payment functions on mobile phones. These included transferring “E-Money” to anyone with a mobile phone and paying for call time on mobile phones (few people in developing countries can afford monthly plans).

This and similar payment applications have dramatically changed life for the better in Africa, where very few people had access to banking services until very recently:

  • By the end of 2008, half of Kenya’s population had mobile phones.

  • By the end of 2009, over one-fifth of the population had mobile phone e-money accounts (over 9 million from zero three years ago).

    As a result, the use of cash in Kenya has fallen rapidly. In less than three years, the share of the central bank’s monetary liabilities held as cash by the public fell sharply from 64 per cent to 56 per cent. As the number of e-money account holders continues to grow and the uses of e-money expand to cover a wider range of payments, the currency ratio will fall further. Mobile phone payments are now cheap enough for even the very poor to use.

    But the development and spread of mobile phone payments would not have been possible without the proliferation of mobile phones and their transmitting towers across the African countryside. And that would not have happened in our lifetimes at the hands of the state-run monopoly phone companies that have provided phone service in most countries for decades.

    Mobile phones are the most dramatic and interesting recent innovation in payment technology. They provide an extremely low-cost technology for issuing and executing payment messages. One of the most interesting innovations is the extension of the teller window — the cash in cash out point — from your bank or an ATM machine to an authorised agent of the provider of the mobile phone payment service.

    This new payment technology is having a material, positive impact on life in Kenya, especially for the low-income population. It has implications for monetary policy as well. The use of cash has fallen rapidly. In less than three years, the share of central bank money (currency held by the non bank public and central bank money held by banks—cash in bank vaults and bank clearing deposits with the central bank) held as cash by the public fell from 64% to 56%, a 12.5% drop. This shift of cash to bank deposits allows the banking system to create more deposits (also a part of the country’s money supply) from the same amount of central bank money (so-called “reserve” or “base” money). To prevent this very positive development in payment technology from being inflationary, the central bank must slow the rate at which it creates central bank money.

    The Central Bank of Kenya has adopted an enlightened supervisory attitude of putting primary responsibility for the development of services and their safeguards with the service providers, but has insisted that new uses be tested in a gradual, careful, and market-driven process. Kenya has become a leader in an exciting new technology primarily of benefit to the poor and middle class.

    Source: Warren Coats In Kenya, new banking technology is paying dividends The Daily Caller, April 10 ,2010-04-15

    For text:

    FMF Policy Bulletin/ 13 April 2010
  • Help FMF promote the rule of law, personal liberty, and economic freedom become an individual member / donor HERE ... become a corporate member / donor HERE