Professor Tavneet Suri
CAMBRIDGE, Mass., Oct. 21, 2009 — In Kenya, a country where 83 percent of adults have a cell phone, but only 22 percent have a bank account, a new mobile payment system is having a transformative effect on people’s household finances, according to research by Tavneet Suri, a professor at MIT’s Sloan School of Management.
Established in 2007, the sms-based service, M-PESA, enables people to deposit, send, and withdraw money using their cell phone with a push of a few buttons. Today about 40 percent of all Kenyan households have at least one M-PESA user.
A new working paper by Suri and William Jack, a professor at Georgetown University, shows that M-PESA has already become an important savings tool for Kenyans: according their research, three-quarters of M-PESA subscribers use the service to save.
“Because people do not need to withdraw or send balances immediately, they are able to accumulate savings on their M-PESA accounts over time,” says Suri. “Whether M-PESA will boost the savings rate of the Kenyan population is an empirical matter, but in an economy in which entrepreneurial activity and growth is often stymied by lack of access to capital, the prospect of such a change is tantalizing.”
The service also “deepens the person-to-person credit market,” helping Kenyans better withstand shocks to their personal finances through informal risk-sharing networks, she says. “Say a person in Kenya breaks his leg, or has a crop failure, or his livestock dies. In the developed world, there is health insurance and unemployment insurance, but in developing countries there are none of these mechanisms.”
Rather, people in developing countries have unofficial risk-sharing systems with a wide network of friends and extended family sometimes separated by large distances. Members of the network lend money to those in need with the expectation that when they find themselves in a similarly dire situation, they, too, will reap the benefits. In the past, this arrangement has been fraught with risk. Because of the poor and bandit-riddled roads, the limited transport system, and the expense of established money transfer services, like Western Union, people wait a long time for their money, and in the meantime, conditions can worsen.
The efficiency of M-PESA, however, greatly accelerates the pace at which the person in need receives money. “M-PESA allows you to fix things before they become bad,” says Suri. “In the past if your child was sick, you might have had to wait a week before you could take them to the hospital because you’d have to wait for your support network to send you enough money. But in a week, your child might have gotten sicker, or even died. Now, with money readily available, you can get the medical attention you need when you need it.”
Suri and Jack’s research indicates that M-PESA allows households to better endure a financial jolt, but further exploration is needed to pinpoint the precise reason. “We don’t yet fully understand why they are better able to smooth shocks: are they able to reach out to more people? Are they drawing from a bigger network—and receiving more, smaller sums? Are they reaching out to the same number of people and because money is mobile, they are getting the same return, but it’s simply faster? Or are they relying on one, wealthy person?”
Mobile banking in Kenya has spread faster than any other technological innovation in that country’s history, faster indeed than the mobile phone itself. Suri and Jack’s findings suggest that, as more people use M-PESA and similar systems to gain access to modern financial services, the effects of deeper, thicker, and more robust financial markets could accrue to a wide range of Kenyans who have, until now, been deprived of their benefits.