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

By our News Team | 2023

As poverty becomes more extreme, the business model starts to collapse, new study done in Kenya and Uganda finds.

Since its emergence in the late 2000s, mobile money has been a game-changer throughout the developing world for people with little savings and no access to formal banking systems.

A recent study co-authored by two researchers from the Leeds School of Business in the US found that the thriving industry is well-positioned to serve those in poverty – but only up to a point.

Mobile Money

Photo credit: Intersect

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.

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    Dr Kin Kariisa

    Group CEO - Next Media

    Dr. Kin Kariisa is an extraordinary force at the helm of Next Media Services, a conglomerate encompassing NBS TV, Nile Post, Sanyuka TV, Next Radio, Salam TV, Next Communication, Next Productions, and an array of other influential enterprises. His dynamic role as Chief Executive Officer exemplifies his unwavering commitment to shaping media, business, and community landscapes.
    With an esteemed academic journey, Dr. Kariisa’s accolades include an Honorary PhD in exemplary community service from the United Graduate College inTexas, an MBA from United States International University in Nairobi, Kenya, a Master’s degree in Computer Engineering from Huazong University in China, and a Bachelor’s degree in Statistics from Makerere University.
    Dr. Kariisa pursued PhD research in Computer Security and Identity Management at Security of Systems Group, Radboud University in Nijmegen, Netherlands. As a dynamic educator, he has shared his expertise as a lecturer of e-Government and Information Security at both Makerere University and Radboud University.

    Dr Kin did his PhD research in Computer Security and Identity Management at Security of Systems Group, Radbond University in Nigmegen, Netherlands. He previously served as a lecturer of e-Government and Information Security at Makerere University in Kampala, Uganda and Radbond University in Netherlands.

    Dr Kin did his postgraduate courses in Strategic Business Management, Strategic Leadership Communication and Strategies for Leading Successful Change Initiatives at Harvard University, Boston USA.

    • Other current and previous roles played by Dr Kin Kariisa:
    • Lecturer of e-Government and Information Security to graduate students at Makerere University, Kampala and Radbond University in the Netherlands
    • Director of Eco Bank Uganda Limited, one of the largest banks in Africa
    • Chairman of the National Association of Broadcasters, an umbrella industry association for all Television, Radio and online broadcasters in Uganda.
    • Chairman of Board of Directors of Nile Hotel International, that owns the leading hotel in Uganda, Kampala Serena Hotel.
    • Chairman of Board of Directors of Soliton Telmec Uganda, the leading telecom company in Optic fibre business managing over 80% of optic fibre in Uganda.