A Plausible Method for Microfinancing


INa struggle to spur economic growth in relatively stagnant economies, African leaders have long been courting foreign investors to inject capital and subsequently jump-start macro level infrastructure projects. Chris Okemo, Kenya’s Minister of Finance from 1999 to 2001, once stated, “Without such infrastructure it is expensive for companies to operate in Kenya or other African countries, [leaving us] unable to compete in the world arena.” After an era of state-controlled economies, he noted that African nations must now create an “enabling business environment” for private-sector investment. Without this, Okemo added, “We are going in circles.” However, this ideal of a top-down macroeconomic environment may not be the only viable solution to Africa’s crisis. Turn to M-Pesa, a mobile based transaction system that has taken off in Kenya.

Founded in 2007 by SafariCom, Kenya’s largest mobile network operator, M-Pesa was originally launched to expedite the transaction of micro-finance loan repayments. After initial trials, the scope of the system was expanded to provide for a broad money-transfer device. M-Pesa‘s success in Kenya represents a huge shift; about 25% of the country’s GNP now flows through it. Furthermore, one study cited an increase of 5-30% in Kenyan household income when M-Pesa was used. In Nairobi, hundreds of new start-ups have been founded on the business model of the micro-financing system, justifying the nickname “Silicon Savannah.” Its establishment provides a relatively risk-free option for the average Kenyan, compared to Micro-Financing Institutions (MFIs) which charge high interest rates and subsequently high risk.

How does it work? First, you would register with an M-Pesa agent, who can be found in the local convenience store and commonplace shop located ubiquitously over Kenya. Second, deposit your money onto your mobile account via any M-Pesa agent, or any individual willing to transfer you some money. And if you need to take money out, not surprisingly, M-Pesa agents can do that for you as well. Even ATMs in Kenya can facilitate your daily usage; no type of card to withdraw or deposit money required. And voila, you’re done in a few easy steps. Such efficiency is the keystone of this remarkable system. No wonder it is used by 17 million Kenyan adults – just above two-thirds of the adult population.

M-Pesa has since expanded to Tanzania, Afghanistan, South Africa, and India, proliferating to other developing markets with a micro-financing need similar to Kenya’s. It has also adopted loans-and-savings products, as well as the ability to pay salaries and bills. This is a reflection of the well-suited nature of the mobile-based system in assisting individuals who have little to no employment experience. As a result, these individuals have a non-existent credit history, limiting the average Kenyan individual from accessing banks. Ironically, M-Pesa has seen so much success that a group of Kenyan banks attempted to lobby the finance minister in an desperate effort to audit the burgeoning system. The audit, which also attempted to seek legal and cyber-attack prone weaknesses, prompted the Treasury and Central Bank of Kenya (CBK) to establish several regulatory measures to quell critics who cite the system’s vulnerability to cyber-attacks. Nevertheless, the flourishing of M-Pesa across Kenya is signaling a “go-ahead” for other developing countries to adopt the system and reap the benefits.

We welcome Rahul to the Atlas Business Journal. This is his first article.