John the General met my friend, the writer Suzanne Skees, in Nairobi’s sprawling Kibera slum after he torched its outdoor Toi market in January 2008 and then later, a changed man, watched over its rebuilding and expansion. John Oyoo once commanded a violent gang, yet his life had turned around by the time Suzanne talked to him. He spoke proudly to her about his new wife and young daughter and about his job providing nighttime security for Toi market’s two thousand-plus stalls.
However, I won’t tell any more of John’s story because Suzanne has already done that, beautifully, in a piece which appeared this past Wednesday in The Huffington Post (http://www.huffingtonpost.com/suzanne-skees/to-end-poverty-put-a-crim_b_614959.html). Suzanne, who wears her achievements as a writer lightly, mentioned her article only in passing, in the course of our discussion of the needs of sub-Saharan African countries like Kenya. Her story alludes to the Kibera slum’s “unimaginable lack of food, shelter, water, and air,” but not to the trouble John and his neighbors must take to find a bank. Aware of my working relationship with two Tanzanian villages and of my slight experience of Rwanda, Suzanne asked me whether I knew anything about mobile banking and, if so, whether I knew if any microfinance institutions had made use of mobile banking.
I had to admit I knew little about mobile banking and even less about a possible connection to microfinance. But I realized that, given the likelihood Karimu will introduce microlending to Bacho and Dareda within a couple of years, I needed to learn. And so far I’ve found out that until now, microfinance institutions have tended to encourage poor people to assume debt but not to accumulate savings. Whether or not one should facilitate debt assumption by the poor, practical barriers, which I’ll describe later, have stood in the way of encouraging poor people to save. Because mobile banking offers a way around these barriers, it looks like microfinance institutions will soon make a big move into mobile banking.
The appeal of mobile banking rests partly on the fact that half of African adults use cellphones today–though as recently as seven or eight years ago one rarely saw an African with a cellphone–and cellphone use continues to spread rapidly. Mobile banking offers the advantage of authorizing and settling transactions in a few seconds; this elimination of credit risk from transactions becomes particularly important where people own so few assets and so can earn trust only with great difficulty, if at all. In Kenya forty percent of adults use M-Pesa mobile banking, introduced only three years ago, and M-PESA now processes more transactions there than Western Union does in the entire world.
Mobile banking also lures bankers into poor communities, which they would otherwise avoid, with the promise of guaranteed profits. Unlike a bricks-and-mortar bank, a mobile banker does not incur the cost of an employee’s time dealing with a poor customer whose deposits contribute negligibly to the bank’s investment capabilities. The unprofitableness of traditional banking in poor communities explains why just ten percent of people living on less than two dollars a day have access to formal savings services. Few banks locate in or near poor neighborhoods and poor people can’t easily spare the time and money needed to travel to prosperous communities to visit banks. But mobile bankers can profit from every single transaction with poor customers and therefore eagerly reach out to them.
But mobile banking also benefits the poor. One can store money in a cellphone far more safely than one can carry cash. This holds true especially in high-crime areas, like John Oyoo’s Kibera neighborhood, where many urban poor live. So users of cellphone banking can keep money around for emergencies, encouraging a habit of saving which produces other benefits. Studies indicate that poor families who maintain savings accounts—probably because they can more easily imagine improvements in their lives—tend to work more, earn more, and spend more money on education than non-saving poor families. This lowers their vulnerability to illness and other unexpected setbacks.
Last month the Bill and Melinda Gates Foundation took several microfinance experts to Kenya to study M-Pesa’s mobile banking success story. The microfinance community can benefit from knowledge of M-Pesa’s methods because in January the Gates Foundation announced thirty-eight million dollars in grants to help a handful of leading microfinance institutions provide the poor with savings accounts. The grants will go to institutions in Bolivia, Colombia, Ecuador, Uganda, the Democratic Republic of Congo, Ethiopia, Kenya, India, Pakistan, Bangladesh, the Philippines, and the Dominican Republic.
Also last month the Consultative Group to Assist the Poor, or CGAP, released a study of sixteen providers of mobile banking to unbanked and underbanked poor people in ten countries (http://technology.cgap.org/2010/05/24/for-the-unbanked-is-mobile-money-cheap-enough-cgap-releases-pricing-study-across-16-providers-in-10-countries/). The study showed that, on average, the poor spend nineteen percent less for mobile banking than they spend for doing business with traditional banks—$3.90 monthly for the average mobile banking user compared to $4.80 monthly for the average traditional bank user. Breaking CGAP’s numbers down, we see a wide gulf between mobile banking and traditional banks at low transaction values: on average, mobile banking costs thirty-eight percent less for a twenty-dollar transaction. But mobile banking quickly becomes very expensive for customers such as shopkeepers who deal with high volumes or high values.
Why isn’t mobile banking even cheaper? For one thing, creating an efficient, large-scale mobile banking service may well cost more than evangelists for the new technology had predicted. And it would surprise nobody if, in general, mobile money providers had chosen higher profits over passing their savings relative to traditional banking along to their customers in the form of lower charges. Of course, mobile banking charges should drop as more competitors enter the market.
Hearing discussion of excessive profit, or even of the profit motive, might disturb many of us, at Karimu and elsewhere, with an interest in microfinance. This kind of talk certainly appears to disturb the great microfinance pioneer Muhammad Yunus. But more CGAP research by Richard Rosenberg and Christoph Kneiding (http://microfinance.cgap.org/2010/03/16/how-to-tell-good-mfis-from-bad-mfis/) shows that in 2008, for-profit microfinance institutions were less likely than NGOs to fall into Yunus’ “red zone” for loan sharks, whom Yunus identifies as lenders charging interest above fifteen percent. This suggests that the high cost of administering small loans might drive interest rates more decisively than thirst for profit maximization since Rosenberg, who wrote up the research results, also notes that the average size of microloans granted by NGOs is one third the size of microloans granted by for-profit microfinance institutions.
No doubt some—perhaps many—microlenders are no better than loan sharks. But the apparently extortionate interest rates charged by some microlenders may simply reflect the high cost of providing such loans. On the other hand, however well-intended such high-interest loans might be, the question remains whether poor people ought to take on high-interest debt; I’ll return to this point momentarily.
Likewise, it is reasonable to exercise vigilance against unnecessarily high mobile banking charges. Yet insistence that mobile banking reap negligible profits might discourage mobile banking outreach to poorer clients. As mobile banking spreads across Africa, the villagers of Bacho and Dareda will find it easier to retain and thus to accumulate wealth. That should make the microlending planned by Karimu easier by increasing the likelihood of repayment. Rosenberg and Kneiding looked at about fifteen small microfinance institutions receiving support from Yunus’ Grameen Foundation which charged interest ranging between thirty and fifty-five percent on microloans! Having to this point never made a microloan, I can’t say whether administering one in Bacho or Dareda would cost Karimu enough to justify such exorbitant interest in order to prevent the loan from losing money. But if so, Karimu will simply have to accept losses on its microloans since we surely would do no villager a favor by enabling the assumption of such a crippling debt.–Don Stoll