M-pesa – Free Banking in Africa?

A number of my readers have an interest in monetary reform and especially in Free Banking. In that regard developments in Kenya are in fact very interesting, but I guess little known to Free Banking theorists.

Since 2007 a new “currency” has come to live in Kenya. It is the so-called m-pesa. M for mobile and pesa is money in Swahili.

Here is how M-pesa is described on Wikipedia:

“M-PESA is the product name of a mobile-phone based money transfer service for Safaricom, which is a Vodafone affiliate…The initial concept of M-PESA was to create a service which allowed microfinance borrowers to conveniently receive and repay loans using the network of Safaricom airtime resellers. This would enable microfinance institutions (MFIs) to offer more competitive loan rates to their users, as there is a reduced cost of dealing in cash. The users of the service would gain through being able to track their finances more easily. But when the service was trialled, customers adopted the service for a variety of alternative uses; complications arose with Faulu, the partnering microfinance institution (MFI). M-PESA was re-focused and launched with a different value proposition: sending remittances home across the country and making payments.”

Today, it is common to pay for services and goods around Kenya with M-pesa and as such the it has developed in to payment form, which is commonly accepted and trusted – some would say even more than the local currency – Kenyan shilling. In fact the Kenyan government will now even accept taxes paid with M-pesa.

I don’t know enough about M-pesa, but I don’t think it is a real currency at the moment and one cannot say that the M-pesa system is a Free Banking system. However, in my view would it could be developing in that direction.

I would be very interested in hearing what your views are on these developments and whether it can teach us anything in terms of monetary theory.

For more on M-pesa see this interesting NBER Working Paper.

PS for those interested in Kenyan monetary policy should note that the Kenyan central bank hiked its key policy rate by 550bp to 16.50% from 11.50%.

PPS when I started this blog I promised that it would not be US centric – I hope this post confirms this.

Leave a comment


  1. Shahid

     /  November 2, 2011

    Lars, i would agree with you. I doubt if M-Pesa really fits the criteria of ‘free banking’. In Pakistan, we have started something similar under the Benazir Income Support Program (BISP), which is a countrywide Social Safety Net program. Phone-to-Phone banking, a concept similar to M-pesa, has been launched in atleast 5 districts of Pakistan since December 2010. The methodology revolves around the distribution of a free mobile handset to the selected beneficiary (selected through a Poverty Scorecard Survey), who receives her (no ‘he’. only women are eligible for this program) mobile handset at a designated center. She recieves a SMS every month, informing her that her monthly financial assiatnce has been credited. She then goes to a bank or a franchisee, where she recieves her money.
    Is this monetary reform? yes, in the sense that this a movement away from traditional means of delivering and receiving payments, and also it has off-shoots (like paying for other stuff through M-pesa). Is it free banking? I would suspect that the answer is no. Take Pakistan’s example. While the mobile handset may be delivered free to the beneficiary, the government has to buy it from Telco’s and deliver it to the beneficiary (dont forget to factor in the delivery costs). Also, banks charge a fee (or a certain percentage per installment) for disbursal of money. Further,dont forget that the transaction costs may be reduced, but they are not zero. What i am trying to get over here is that M-pesa or methods like it are a welcome addition since they tend to reduce transaction costs by the use of technology, but there are costs! The big question is: who will bear those costs, and how to come up with an estimate of these costs?
    I want to add something here. This point may be important or unimportant, but nonetheless worth mentioning and pondering about. Quiet a substantial cost (both in terms of transaction cost or otherwise) has to be borne just because of a influential cultural phenomenon: the preference for hard cash (or printed note bills). To receive these notes, one can imagine the lengthy process and associated costs. For example, cost of printing bills, cost of clearing and disbursing them, cost of insuring these against counterfeits, cost of receiving the notes (opening an account, paying a fee, travelling to bank to recieve money, etc). I and some of my colleagues once carried out an interesting experiment in this regard (it was informal, and we never gave it a serious thought of publishing it). We asked two set of individuals (one educated, urban individuals and the other rural, less educated ones) that if offered an opportunity to receive their payments in the form of electronic credit (say 10,000 points) instead of 10,000 hard cash, would they be willing to accept it? Not surprisingly, the answer was largely ‘No’ from both sets of individuals. We then jacked up the offer of crediting 15,000 points if the individuals would let go 10,000 in hard cash. Still, not surprisingly, there was little variation from the previous result. But what was astonishing for us was that the group of well-educated, urban folks (who are adept at using technology) also did not take up the offer, and stuck with the option of receiving hard cash.
    Crux of my argument: if we have to move towards some sort of free banking with little or no transaction costs, we need a cultural change too.
    And oh, for those who claim that this is some sort of free banking, wel who’s printing the money?

  2. Shahid, Thank you very much for your input. I find it highly interesting that quasi-monetary reform and technological development goes hand in hand in many developing countries/Emerging Markets.

  3. JP Koning

     /  November 2, 2011

    This is very interesting, Lars. Thanks.

    Maybe I am wrong, but M-PESA seems like a legitimate enough currency. It seems to me that it is a hybrid of a commodity currency and a 100% backed credit currency (what Mises would call a money substitute), the commodity being “air time” and the backing being cash. Each minute is indexed in Kenyan shillings, its price fixed via the promise of redemption at retail stores. Purchases and sales via M-PESA are really just transfers of minutes. When you cash out of M-PESA, you are just selling air-time for Keynan shillings at the fixed peg. Alternatively, just consume your air-time by talking on the phone.

    The next step is for M-PESA to begin issuing air-time loans, and you have a fractionally-backed currency.

  4. JPK, there is now as far as I understand M-pesa loans, but I am not entire sure how it works. What is, however, interesting is that there has been a loophole in the Kenyan banking regulation, which have made this set-up possible. Other places m-money have not had the same kind of success.

    I will try to blog on this topic in the future and I hope some of my readers with more insight into Free Banking theory will get involved in the discussion.

    Here is for example a story of m-money competition. This is much more interesting than bitcoin if you ask me…

  5. JP Koning

     /  November 2, 2011

    Far more interesting than bitcoin, agreed. I look forward to learning more.

  6. Shahid

     /  November 3, 2011

    JPK! Agreed that its an interesting and a creative idea, something that would probably reduce transaction costs susbtantially. Traditional banking is expected to face tough competition with the introduction of these kinds of technologies. Just a word of caution. I am stating this from the bitcoin experience. Its a wonderful idea, just like M-Pesa, but black marketers were smart enough to realize that its also a good (and easy)way of converting their illegal money into legal money. The Govt. was caught unaware because tracking these transactions is difficult. But once Govt’s realized what was going on, they started to restrict bitcoin transactions. For example, government in China cracked down on bitcoin transactions about a year ago.
    Unlike traditional banking, M-Pesa or Bitcoin operations do not require extensive documentation. It makes it easy for trasacting money across borders. I would say that some sort of check/regulation may become necessary incase M-Pesa goes the bitcoin way.

  7. Njambi

     /  January 5, 2012

    Hi Lars – thanks, this is interesting. Mpesa is actually not a free service but the costs are very competitive and have given the banking sector in Kenya and East African countries a run for their money. The fact that financial inclusion is now being observed and felt in the remote areas of E.Africa is really great. Mpesa which is a money transfer service have been introduced in the US and England and now funds are sent to people in remote areas in Kenya and the East African regions

  8. Jct: M-PESA is the future. Sure, right now, they’re only using minutes of cell-phone time as base of their interest-free medium of exchange but it’s only a matter of time until they also use Hours of human labor time as base too. All that means is letting them go in the negative promising to work it off like at any LETS timebank.

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