MICROCAPITAL STORY: Vodafone and Safaricom’s Mobile Cash-Transfer System M-PESA Makes Microfinance Easy for a Growing Number of Kenyan Customers

A recent article in the Christian Science Monitor highlights the growing number of Kenyans using M-PESA, a cellphone to cellphone cash-transfer service. (The M is for “mobile” and pesa is “cash” in Swahili.) Launched earlier this year by Safaricom Limited, the largest cellphone provider in Kenya, M-PESA was developed by Vodafone Group Private Limited Corporation as part of their larger strategy to reach the bottom of the pyramid with new goods and services.

In March 2007, Safaricom had USD 152 million (KES 10.1 billion) in total assets and USD 198 million (KES 13.2 billion) in current liabilities. The company is owned by two other organizations: Telkom Kenya Limited, a government-owned telecommunications operator, and Vodafone, the largest telecommunications company and fourth largest company in the world with over 54 million subscribers in 25 countries. Telkom has 60 percent ownership in Safaricom; Vodafone has 40 percent ownership.

In an April 2006 brief titled “Mobile Phones for Microfinance,” the Consultative Group to Assist the Poor (CGAP) identifies three ways that cellphones can be used for financial services. In Japan and some Nordic countries, cellphones are linked to credit cards or bank accounts and can be used to make micropayments in place of a customer’s existing credit or debit card. This service is called m-commerce and is typically used to pay for small expenditures such as public transportation fare or vending machine items. A second use of cellphones is as a banking channel. Customers deposit money into their bank accounts at local branches or ATMs and then use their mobile phones as the primary means of making payments, transferring money and balancing inquiries. Finally, cellphones can be used as electronic money (e-money). Customers load money onto their phones at accredited outlets and are then able to store, withdraw or transfer funds, or use the virtual money to pay for products at stores and restaurants. Customers can also use their e-money to repay loans or make deposits in microfinance institutions (MFIs). M-PESA is of this third variety, sometimes referred to as a “virtual wallet.”

In Kenya, the lack of conventional bank branches and credit card machines in rural areas leaves people with few options for transferring money. Prior to mobile cash transfer systems, the choice was to send money via the post office or to send money via individuals who were traveling to the desired destination. However, the post office charges high rates, and many people do not have a permanent address. Personal messengers can be both slow and unreliable.

On the other hand, over 450,000 Kenyan customers attest to the speed and reliability of M-PESA through their continued use of the service. The number of customers has surpassed all expectations, according to Gerald Rasugu, manager for all M-PESA agents nationwide. When M-PESA was launched in March 2007, the group predicted that they would have 100,000 customers by October 2007 and 450,000 customers by January 2008. In light of the surprisingly high uptake of this service, Michael Joseph, CEO of Safaricom, now projects that M-PESA will have 1 million customers by January 2008. With the number of African mobile phone subscribers on the rise (From 1999 to 2004, the number of subscribers grew from 7.5 million to 76.8 million, and this is expected to further increase to 250 million by 2008.), it seems likely that Safaricom and M-PESA will continue to expand.

The high uptake of M-PESA services can be largely attributed to its convenience. Using M-PESA to transfer funds is a simple process. First, the customer must turn in money to a registered local agent. Typically, M-PESA agents are employees of Safaricom, but other retailers such as gas station employees or store clerks can register to become agents as well. The agent credits the customer’s virtual account, and then the customer is free to make fund transfers via text message to anyone with a cellphone. The recipient need not have the same mobile network as the sender. The sender can transfer between 100 and 35,000 Kenyan shillings (USD 1.50 to 525). Once the recipient receives the message on his cellphone, he can cash it at a local agent by showing ID and verifying a secret code. A commission of up to 170 shillings (USD 2.55) may be charged to the recipient, but this amount is not considered exorbitant, especially when compared to fees charged by major banks for similar services.

The technology behind M-PESA is nothing new. Similar e-money products have been around for years. In the Philippines, Smart Communications, the leading wireless services provider in the country with 25.5 million customers (pg 1), offers several cash remittance services–Smart Money, Smart Padala and Smart Remit. Smart Money debuted in December 2000, and received two international awards (pg 4) for most innovative service in 2001. Globe Telecom’s G-Cash, launched in 2004, provides similar services to Filipino customers. It has over 1,800 accredited outlets throughout the country.

Because of the convenience of cellphone cash-transfer services, many banks are beginning to adopt such systems, as well as modifying the systems into all-out cellphone banking services, in the hopes that they will minimize administrative costs associated with opening and staffing bank branches or collecting payments door-to-door in rural, isolated areas.

Equity Bank of Kenya, which has been rated third-best microcredit bank in the world, is latching on to mobile phone banking. The Christian Science Monitor quoted Equity Bank’s manager of alternative business channels, Sam Kamiti: “The next phase is microcredit loans via cell phone.”

Equity Bank undoubtedly understands the importance of incorporating new technology into conventional services. The bank began operation in 1984, but, after years of difficulty, shifted its focus from mortgages to microfinance in 1994. Since the implementation of new innovative technologies, such as a computerized management information system, the microcredit bank’s portfolio has expanded significantly. As of December 2005, Equity Bank had USD 172 million (KES 11.5 billion) in total assets and USD 148 million (KES 9.9 billion) in total liabilities.

Despite the possibilities offered by mobile remittance and mobile banking technology, there is growing concern over the question of regulation. Few countries have laws that constrain the activities of non-bank entities which provide bank-like products and services. In such an environment with little regulation and insecure financial infrastructure, an instance of fraud or bankruptcy by a major player could destabilize consumer confidence and inflict long-term economic damage.

Additional Resources:

Christian Science Monitor: “Unserved by Banks, Poor Kenyans Now Just Use a Cellphone.” By Matthew Clark.

CS Monitor: “Serving the Poor Pays Off for One Kenyan Bank”

Consultative Group to Assist the Poor (CGAP): CGAP Brief: “Mobile Phones for Microfinance.” April 2006.

WorldChanging.com: “M-Banking Accelerates, One M-Pesa at a Time.” By Robert Katz.

Safaricom Limited

Safaricom: M-PESA

Safaricom: Financial Results 2006

Safaricom Limited: Ownership

Vodafone Group Private Limited Corporation

Telkom Kenya Limited

Smart Communications, Inc.