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M-PESA; Beyond The Buzz | Blog


This article was originally posted on www.soudhyder.com on November 26th 2011. All regulations mentioned above were accurate at the time of original posting.

I happened to watch a video recording of a panel discussion about technology in Africa and naturally, M-PESA seems to permeate through the discussion in one way or another.

Two points were raised that identified the non-agnostic closed wall nature of M-PESA and other payment platforms as an Achilles heel and the impact of M-PESA as well as its correlation to GDP.

In my opinion putting M-PESA into perspective would probably shed more light into the realities. M-PESA is a Vodafone product licensed to its subsidiaries the glory of which is Safaricom in Kenya. Now Vodafone is a PLC; Public Listed Company that operates in market economies. Meaning its intrinsic nature is to be a profit maximiser, it is not a charity. Hence it develops IP and seeks to monetise its IP through market dominance. If you look through all the successful financial and payment systems in the world, they are walled gardens of sorts and built on locking in critical mass and strategic partnerships. Secondly dismal scaling financial systems in Africa is not the fault of firms but rather the immaturity of economic policy within the regions. The lack of economic integration means that constituent states have different laws, regulations and systems and makes scaling financial systems a pipedream.

The buck lies with the regulator I would say. In the case of Kenya M-PESA’s success can be hugely attributed to the laissez faire approach in regulation that allowed M-PESA and mobile money in general to function under a tiered regulatory framework where M-PESA funds are linked to a series of trust accounts held by several commercial banks. The fact that the electronic (virtual) money is 100% backed by funds in trust accounts which are M1 (currency in circulation + deposits) means that M-PESA associated funds are regulated by the Central Bank of Kenya further implying that the electronic money is indirectly regulated on a tiered level.

But what happens when a little project grows far too big well too soon? When it affects millions of lives (directly affecting at least 33% of your population)? When it grows to turnover between 20% +and 30%+ plus of your GDP in 2010 and 2011 respectively? When the IP owner is a foreign based entity with significant portions of the service housed outside the operational country? Isn’t it a national security issue?

Worse still some serious systemic risks are emerging. It has been argued that the tiered regulatory framework for mobile money that CBK has employed plugs the inherent systemic risk of having a 100% directly unregulated mobile money payment system and Safaricom’s inherent world class internal self regulation as well as trust account modus operandi mitigates the operational risks.

Well for a small system operating within the economy that is acceptable. But when you have an indirectly regulated system growing in significance and amassing significant GDP throughput then there is an inherent systemic risk resulting from the laissez faire approach in regulation. The growth of M-PESA exposes Kenya’s banking system to liquidity shocks. Again it’s not really clear how the supervisory framework CBK has actually works, but logically a tiered scheme delays information flows, meaning that problems cannot be spotted on a real-time basis.

The bigger M-PESA grows, the more money in circulation (M1) it holds, though distributed across several commercial banks, it would take a bit of miscalculation by one of the banks and a significant system outage of M-PESA (which have been rampant of late) to trigger a liquidity deadlock, which could further lead to a shutdown of the banking system and a collapse of small and or risk inclined banks. Furthermore restricting the service to one operator and having no direct regulatory control on the M-PESA framework without any QoS restrictions places the banking/payment system in Kenya in a bit of limbo. The blame lies squarely on CBK for allowing the system to grow to such a scale without facilitating a secure and reliable operational environment.

On the other hand it can be argued that M-PESA has increased the efficiency of the Kenyan economy by catalysing the velocity of money. Which in turn has boosted and strengthened the internal economy. But then again quantity theory economists would argue that it can be linked to inflationary pressure because M.V = P.Q where M is money in circulation, V is velocity of money, P is price and Q is quantity, however this is not a universally agreed upon theory. Nonetheless I do believe that M-PESA has strengthened the dynamics of the local economy but also exposed it to other challenges and risks that do not seem to be addressed.

The lack of direct regulation makes it almost impossible to figure out what really is happening. There is information all over the web with figures and graphs of M-PESA but no centrally available validated information or reports on at least publicly relevant information on the status of the system. M-PESA seems to be more of a black-box, it works really well, nobody really knows how it works and God forbid let it not break before all stakeholders realise the sheer magnitude of the monster they created.


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