Pauline Kimari is a pharmacist in Ndaragwa, Kenya, a small town several hours’ drive north of Nairobi. She moved there from rural Muranga, several hours away, to open a small shop, Ndaragwa Joy Chemist. It is white with blue and green doors and a blue bench inside. She sells medicine and cosmetics. She is 43, devoted to God and her family. Her parents in Muranga still farm coffee, tea, corn, beans and other vegetables. Kimari’s success allows her to send them money regularly. “I’ve been a great help to them,” she said.
She used to have two ways to send money, neither satisfactory. She could buy a money transfer at a bank. Her parents would travel to the nearest town to retrieve it. And transfers were not instant. “There was so much delay,” she said. “It took three days to get the money there.” The other way was to find someone going to Muranga, perhaps a bus driver, and give him an envelope of cash. “This was not efficient for me, and it was not safe at all,” she said. “Maybe that person was not trustworthy. Maybe the money didn’t reach the person you wanted it to, or it was less than the amount you gave.
In 2007, Kenya’s mobile network giant Safaricom started M-Pesa, a money transfer service. That ended up changing how Kimari helps her parents many aspects of her life, and much about Kenya.In Africa the mobile phone is ubiquitous the continent has skipped over landlines and gone straight to mobile. Smartphones are becoming more popular, but a vast majority of phones are basic $25 models. All apps with wide reach in Africa work via SMS.
Nearly all Kenyan households have a mobile phone, and in nearly all those households, at least one person has an M-Pesa account. This has made a difference. Access to M-Pesa “increased per capita consumption levels and lifted 194,000 households, or 2 percent of Kenyan households, out of poverty,” a recent study estimated. Almost all the affected households were female-headed — and therefore, the most vulnerable. M-Pesa is available to any Safaricom customer. But it’s only useful if there’s a nearby agent who can accept or disburse cash.
The network has grown to 150,000 agents. Tavneet Suri and William Jack, researchers who work with Innovations for Poverty Action, took advantage of its uneven growth by tracking Kenyans’ incomes in areas that added agents between 2008 and 2010. They also studied incomes in areas with no agent growth.They followed both groups through 2014. Places that went from zero to six M-Pesa agents ended up with 22 percent fewer female-headed households living in extreme poverty than areas of the same size where no new agents came in.
Since researchers couldn’t randomize the spread of M-Pesa’s agents, the study can’t prove that it was access to M-Pesa that caused incomes to rise. It’s possible that both things were caused by something else. But it’s unlikely. How could mobile money raise incomes?“When bad stuff happens, people reach out to friends and family,” said Suri, a Kenyan who is an associate professor of applied economics at M.I.T.’s Sloan School of Management. “That’s what M-Pesa helps them do.” Before, if a child needed medicine or a bike broke down, people could ask nearby relatives or friends for help. But often, it wasn’t enough. Household consumption dropped by 7 percent to 10 percent after such emergencies.
With M-Pesa, people can reach out anywhere in Kenya. Earlier research by Suri and Jack found that M-Pesa expanded people’s support networks, providing a cushion in emergencies. Their new research shows that M-Pesa has a long-term effect on poverty. It helped women graduate from subsistence agriculture to small business, perhaps because having an M-Pesa account gives a woman her own money, rather than her husband’s or parents’, and a greater sense of agency.
The researchers also note other ways M-Pesa could have made a difference. It provides a secure way to save money, which can then be invested in goods to sell. It facilitates commerce by making payments easier and safer. And when people feel less vulnerable, they take more risks, for example, switching professions. M-Pesa is a commercial service, of course. But it couldn’t have happened without foreign aid. The British aid agency financed small early pilot projects that tested a mobile money service; they also gave Nick Hughes, the head of global payments at Vodafone, a $1.3 million grant to develop the system, which Vodafone then matched. It was one of the most successful foreign aid investments ever.
M-Pesa is a beginning. Mobile money is spreading — 100 countries have it, although nowhere else is it as widespread and successful as in Kenya. It’s also a platform for other innovations that lead to other ways to help people live better. One of those is pay-as-you-go. Most rural Africans light their homes at night with kerosene lamps. Kerosene is dangerous, expensive and unhealthy. It doesn’t even provide much light. Solar power is clean, healthy and bright, and once you have the equipment, it’s free. But even where solar lighting is available, many people stay with kerosene because they can buy a day’s worth. They can’t pay the upfront cost of a solar lighting system.
M-Pesa makes it possible to sell a day’s worth of solar power. A company that does this is M-Kopa. For a basic solar home system — which supplies energy for includes five phone chargers, three lights, a flashlight and a radio — the customer makes a $30 down payment (still too much for many people), then pays 50 cents per day for a year through M-Pesa, which is less than the daily cost of kerosene. If the customer falls behind, M-Kopa turns off the system until the account is up to date. After a year, the customer owns the system; the energy is free after that.
M-Kopa manufactures its equipment, but “kopa” doesn’t mean “solar.” It means “loan” — and that’s the innovation. When the system is paid off, M-Kopa offers the customer other pay-as-you-go products: a rainwater tank to save time and money on water, an efficient stove that saves on fuel, a smartphone. Angaza takes this further. The company doesn’t make consumer products. Instead, it works with other manufacturers to put pay-as-you-go technology into theirs. That paves the way for more innovation — for example, a solar battery stick that can power a pesticide sprayer for a small farm.
Another huge advance: M-Pesa has brought millions of people into the formal banking system. If you don’t have a bank account, it’s hard to save money and impossible to get reasonable credit. Before M-Pesa, very few Kenyans had bank accounts, for many reasons. Formal financial transactions involve paperwork and bureaucracy. Rural people don’t live near banks. The poor lack credit histories and traditional collateral.
M-Pesa has given rise to an alternative. Customers who go to M-Pesa on their phones now find an option called M-Shwari. It’s a bank that offers two types of savings accounts; deposits are held by the Commercial Bank of Africa, pay high rates of interest and are insured. Savers can also get small 30-day loans in seconds, starting at $10. Kimari has taken more than a dozen loans so far. Her repayment record helps increase her loan limit — now at $380 — as do her savings with M-Shwari.
What about credit scores? Know-your-customer due diligence? Normal banks find this to be too much work for small accounts or loans. But M-Shwari can use M-Pesa’s data, which reveals, for example, whether a customer paid utility bills on time. M-Shwari evaluates new customers’ credit by examining their M-Pesa purchases of small advances of airtime.M-Shwari began its service in November 2012 and acquired 12 million customers in its first three years — in a country with 10 million households.
Safaricom says that most M-Shwari users have no other bank account. All over the world, poverty experts wrestle with how to bring the poor into the formal banking system. Kenya has done it practically overnight.But danger lurks when credit is hassle free and tempting. Loans are so easy to get that the reason most often cited for getting the first one was “no reason.” The most common use of the money after that was for household expenses, which indicates that customers are using M-Shwari to get through the month, a dangerous strategy. M-Shwari charges a 7.5 percent “facilitation fee” — an astronomical interest rate on a 30-day loan (but lower than what is charged by the loan sharks who are often the alternative). And many customers do not understand the consequences of default, which include extra charges, loss of their M-Shwari savings up to the loan amount or a negative listing by the credit bureau.
In March, Kenya’s government began selling government bonds (paying 10 percent interest, tax free) exclusively over mobile phones. Before, bond buyers needed a bank account; the minimum investment was $5,000. Now anyone can invest as little as $30 — and then trade the bond on the Nairobi Securities Exchange. The bonds raise money for the government, of course, but they also promote savings in a country with one of the lowest savings rates in the world. A $1.5 million test offering sold out and closed early, and a major offering is scheduled for June.