Celebrations of financial inclusion are premature
What you need to know:
If Kenyans are using M-Pesa to pay back loans at 10 per cent per month, then policy is solving the wrong problem.
Quite a few people I have met are genuinely interested in positive policy news from Kenya.
In fact, in the last year, I have recorded at least seven conversations with visiting businesspeople and researchers who wonder about the convergence between technology and financial inclusion.
Invariably the conversation wanders into what contributions M-Pesa particularly, and mobile money transfers generally, have played in reducing poverty and in development overall.
For many policy commentators, M-Pesa and mobile money transfers are irrefutable proof that Kenya’s regulatory model is top class, and that the scale and scope of financial services in Kenya have improved in tandem.
However, based on a cursory review of what the agreed functions of finance are, I have revised my view that Kenya has made great steps in financial inclusion.
This position takes for granted that Kenya has achieved remarkable levels of financial inclusion, owing to the fact that nearly 75 per cent of adult Kenyans with a mobile phone are able to transact in some way from their devices.
But just because many Kenyans use mobile phones to transfer and store cash does not warrant claims that Kenya has attained financial inclusion. If that is all it took to achieve financial inclusion, it would signal a very rudimentary economic structure.
While the convenience of transferring money between people is an important factor in commerce, to state that this is a huge milestone in financial inclusion is to aim really low and to overstate the reach and effects of mobile money transfer services.
We should remember the financial system also exists to facilitate the matching of borrowers and savers, and a number of financial institutions now provide lending and borrowing through mobile telephone devices. This innovation may have expanded avenues for lending to individual savers, but it depends on having a credit history.
EXTORTIONIST LENDER
In many cases, people who use mobile phones to make withdrawals and take out small loans also have accounts with banking institutions. So this is not about bringing in new people but expanding access lines for existing clients.
There is more evidence that confirms the inaccuracy of claims about financial inclusion. Last week, I watched a news item which confirmed that extortionate lending by informal lenders is pervasive.
A victim narrated how an initial loan of Sh10,000 had grown because of a monthly interest rate of more than 10 per cent.
The existence of the mobile phone and money transfer worked to the advantage of this extortionist lender because the phone made it easier to reach more clients and to transfer larger sums.
This situation highlights that policymakers who claim that financial inclusion is growing either don’t live in Kenya or don’t understand the real financial needs of Kenyans.
Another basic function of the finance system is to manage risks for individuals. If Kenyans are using M-Pesa to pay back loans at 10 per cent per month, then policy is solving the wrong problem.
It matters little that Kenyans can pay for insurance premiums by mobile phone if they are borrowing money at extortionate rates because banks will only lend at some thresholds and for at least a year or more.
We are mistaking the use of sophisticated technology for inclusion when the real problems lie unresolved.
SUCCESS OF M-PESA
The financial system also helps with managing finances by increasing flexibility in transacting and storing property.
The number of adult Kenyans who hold bank accounts grew rapidly in the last decade, in the main because innovation by banks enabled many more Kenyans to afford savings accounts. This action expanded the number of personal accounts held by Kenyans, but it did not change the share of adult Kenyans with banking accounts because the number of accounts grew at about the same rate as did adults.
On this score, financial inclusion did not expand greatly.
The argument about financial inclusion is overwhelmingly anchored on the success of M-Pesa, a facility that vastly improved payments. Financial inclusion requires the expansion of not just access, but also options to manage risk, transfer property, aggregate savers and borrowers and facilitate capital allocation.
Against these functions Kenya has had modest success, and to anchor all inclusion on mobile payment capability is disingenuous.
Making those extortionists who lend money at more than 10 per cent per month extinct through competition in the formal market would be a giant step towards real financial inclusion.
That we equate M-Pesa with all financial inclusion is a mere obsession with the thinking that all solutions must derive from the mobile phone.
Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi. Twitter: @IEAKwame
