Microfinance Horizon

Author(s): William Jack (Georgetown University) and Tavneet Suri (MIT Sloan)

Conclusions:

As  the  developed  world  begins  to  rebuild  the  recently  collapsed  global financial  system,  the  financial  architecture  in  parts  of  the  developing  world  is  being  rapidly  transformed.   As  the  costs  of  mobile  phone  technology  have  fallen,  and  as  the  technology  has  been  adapted  to  support  financial  services,  mobile  banking  innovations  have  begun  to  spread  across  and  within  poor  countries.   The  low -cost,  and  the  widespread  unmet  demand  for  financial  services,  as  captured  by  low  rates  of  bank  access,  means  that  mobile  banking  has  the potential  to  reach  remote  corners  of  the  socio‐economic,  as  well  as  geographic,  spectrum.

That  potential  appears  to  be  being  realized  in  Kenya,  through  M‐PESA,  a  mobile  banking  system  operated  by Safaricom.   We  estimate  that  M‐PESA  has  reached  nearly  40  percent  of  the  adult  population  after  a  little  more than  2  years  of  operation.   Part  of  this  success  is  due  to  a  rapidly  expanding  network  of  M‐PESA  agents,  who now  number  over  12,000.

M‐PESA  is  an  innovation  that  clearly  dominates  its  money‐transfer  predecessors  on  virtually  all  dimensions.  Users  say  it  is  faster,  cheaper,  more  reliable,  and  safer,  and  a  very  large  majority  report  that  they  would   suffer  significant  negative  consequences  if  it  were  to  be  shut  down.

These  expressed  preferences  suggest  that  M‐PESA  is  valued  more  by  individuals  than  it  costs.  On  the  other hand,  the  precise  source  of  these  benefits  –  i.e.,  the  specific  economic  impacts  of  M‐PESA  –  are  not  easy  to calculate.   We  have  identified  a  number  of  potential  economic  effects  of  M‐PESA  at  the household  level  –  for example  from  impacts  on  saving  and  investment,  to  risk  spreading  and  insurance.   At  the  macroeconomic  level, there  could  be  important  impacts  on  the  money  supply  and  inflation,  with  implications  for  the  extent  of  Central  Bank  regulation  and  the  conduct  of  monetary  policy.   We hope to explore these issues empirically in future work.

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