Article sent by our contributor: Laura Kirchner
The Information and Communication Technology revolution has reached nearly every corner of the world including developing countries, which have jumped over land telephone lines and moved straight to using mobile phones. Specifically, Africa has overtaken Latin America to become the second largest mobile market in the world after Asia. Mobile penetration in Africa has increased from a 2% in 2000 to a 57% in 2010, and is expected to grow further reaching a 84% penetration rate by 2015 (Africa Mobile Observatory 2011, GSMA).
This ICT revolution has a potential impact upon quality of life in low-income countries, ranging from a macro level such as market development and inclusion, to a more micro level making possible the delivery of health, financial, agricultural and educational services and risk reduction. The restricted idea of mobile phones simply reducing communications and coordination costs has evolved to one that could transform lives through innovative applications and services.
A unique characteristic of this ICT revolution in some developing countries is the introduction and widespread of Mobile Money, a payment service performed via a mobile device and linked to a banking system. Safaricom’s M-PESA product in Kenya is the most successful example of Mobile Money services (m-banking) in the developing world. Since M-PESA’s launch in 2007, its customer base has grown to 23% of the Kenyan population and the transactions amount to 11% of Kenya’s GDP (The Economist, 2010).
Developing countries lack of a decent financial system where limited access to any formal financial services and the presence of an important informal system leave a high proportion of the population unbanked. For instance, less than 30% of the population in East and Southern Africa has a formal bank account. We can detect five common problems of the developing world’s financial systems:
- Low savings rate
- Small size of economies and isolation and great distances to point of service. This creates a problem of high unit costs and even unaffordability of certain services
- Informality in the financial system, reducing the confidence and efficiency of the banking system
- Bad governance at the level of public and private institutions, reducing the credibility and stability of government policy.
- Relatively strong and frequent shocks, which have a higher impact for individual households near or below the poverty line and for small farms and firms.
A new wave of market based intermediaries are entering the scene with appealing products and services, that could assess the challenges that confront financial development in low-income countries or regions. Mobile Money services are seen as a new basic financial product which will make possible the extension of financial services to this community known as the “unbanked”. Notice that that m-banking appears the highest where the physical presence of well-functioning banking is the weakest, covering the gap left by many commercial banks specially in rural areas. It facilitates the remittance of money or payments to users in distant areas and allows the storage of savings. NGOs and Development programs also use Mobile Money as a platform for financial aid transfers. Some other benefits of m-banking use are an increased security of funds and the empowerment of women.
Several studies have proved the relation between financial development, economic growth and poverty reduction. For instance, the World Bank states in its book Finance for All, a broader financial access can solve financial market imperfections, thus reducing income inequalities. The more equal the income distribution, the stronger will be the effect of growth on poverty alleviation. Given the opportunity that Mobile Money offers to improve financial development, could there be a link between the use of Mobile Money and poverty reduction?