Mobile money in Africa is helping to reduce poverty – to a point

David Drake and Gloria Urrea, along with co-author Karthik Balasubramanian of the Howard University School of Business in Washington, DC, analysed data from thousands of mobile money operators in Kenya and Uganda, two countries with robust mobile money markets.

“We wanted to understand how this business model was impacted by the pervasiveness of poverty in an area to test its fundamental purpose: to help those at the base of the pyramid,” said Drake.

“We found that the business model does very well up to a point. Demand for the service initially increases as the pervasiveness of poverty increases. This is what you hope to see in a base-of-the-pyramid business model. However, we also found that, as poverty becomes more extreme, the business model starts to collapse.”

Mobile money platforms were first proposed in 2002 at the World Summit for Sustainable Development to address the “failure of formal financial institutions to serve the developing world’s poor”.

Local agents trained by the telecoms networks

Local agents, who could be anyone from a shop owner to someone running a dedicated mobile money kiosk, are trained by telecommunications firms like Airtel and Safaricom to conduct transactions as independent contractors. Customers give agents cash to convert into ‘e-float’ credits that they can transfer instantly via pin-secured SMS text messages on flip-top mobile phones, and agents earn a commission.

In areas of extreme poverty, however, demand for these services decreases along with the number of operating agents, the study found. This could be because people have less access to cellphones or reliable cell service, or lack trust in financial institutions, Drake said.

Agents carry more cash and digital currency because demand comes in spurts – when a harvest pays off, for example – and that increased inventory comes with increased carrying costs.

“Taken all together – higher costs, less demand – it is definitely a degradation of the business case,” Drake said. 

“The takeaway is: How do you support mobile money agents in these areas where, arguably, the business model is needed most? How do you incentivise agents to open a business there, and when they do that, how do you support them?”

To better support agents, the authors suggest enabling inventory pooling among agents for e-float, providing insurance services to mitigate theft risk, and paying higher commissions or other incentives.

“We are really encouraged that mobile money works well; demand is increasing up to a point and that’s good news. But it is succeeding until it gets over-stressed by the poverty itself, and arguably that is where it is needed the most,” Drake said.

You can read more about the research here.