In Kenya, a so-called “mobile money” system allows those without access to conventional bank accounts to deposit, withdraw, and transfer cash using nothing more than a text message.
It turns out that using cell phones to manage money is doing more than just making life more convenient for the Kenyans who no longer have to carry paper notes. It’s also helping pull large numbers of them out of poverty.
That’s the central finding of a new study published in Science Thursday, which estimated that access to M-PESA, the country’s most popular mobile money system, lifted hundreds of thousands of Kenyans above the poverty line.
By allowing people to expand the networks they draw from during emergencies, manage their money better, and take more risks, the mobile phone service provides a substantial boost to many of the most socioeconomically vulnerable members of society.
Kenya has a revolutionary way for moving money
The M-PESA network was introduced in Kenya in 2007 by Safaricom, the country’s largest mobile service provider, and it swiftly became part of the fabric of economic life. It’s now used by at least one individual in 96 percent of Kenyan households, according to the study.
There are only a few thousand ATMs in Kenya, but there are more than 120,000 M-PESA agents. They’re set up in little kiosks and shops across the country, and Kenyans go to them to exchange cash for virtual currency. With money in a M-PESA account, you can essentially use your mobile phone as a wallet. For a small fee, you can pay for services and transfer money to others through the account. Some people even receive their salaries over it.
Many Kenyans use M-PESA to pay school fees, utilities, and, somewhat ironically, for airtime on their mobile phones. But the most important and frequent way it’s used is for person-to-person transfers — breadwinners in cities sending money back home to their families in rural areas, or people sending money to help a friend or family member in need due to some kind of financial or health crisis.
Because Kenya’s banking infrastructure is so weak, these transfers used to be done by carrying significant quantities of cash everywhere, making long-distance transfers either extremely costly in terms of time and money or simply impossible. Others would entrust the money to couriers, but this method is very vulnerable to theft. With M-PESA, these costs have been dramatically reduced.
The most striking effect of this has been the way M-PESA has enhanced the social safety net. The Kenyan government has little to offer in the way of health and unemployment insurance, and private sector insurance is only accessible to those who are well-off.
So what many Kenyans do during a financial emergency is turn to their social network for help. By virtually eliminating the barriers of geographic distance, M-PESA makes those networks far larger, and thus far more effective. In 2008, when the country descended into chaos after evidence of vote-rigging delegitimized the country’s presidential elections, M-PESA became the primary way to get money to people trapped in cities.
What’s fascinating is that the new Science study shows that making transfers easier isn’t just helping cushion people during emergencies — it’s actually helping boost their financial status.
Using cell phones as mobile banks is reducing Kenya’s poverty
The new study, authored by MIT’s Tavneet Suri and Georgetown University’s William Jack and conducted with the research and policy nonprofit Innovations for Poverty Action, has some extraordinary findings about how M-PESA has improved the lives of many destitute Kenyans.
Between 2008 and 2014, Suri and Jack conducted extensive surveys of households on their occupational choices and consumption patterns — how people in a house spent all of their money. They also mapped out how many M-PESA agents were within 1 kilometer of any given household.
What they found was that people with greater improvements in access to M-PESA agents over time were doing better by 2014. They estimate that 194,000 households, or 2 percent of the country’s households, were lifted out of poverty (defined as spending less than $1.25 a day per capita) as a result of their enhanced ability to use the service. They also found that women, more than men, benefited from greater access to M-PESA agents. Additionally, access to M-PESA prompted occupational shifts: 185,000 women moved into the retail sector from agriculture, which in many cases means climbing up the socioeconomic ladder.
So what explains it? The study doesn’t prove what the mechanisms were, but the authors have a few hypotheses about the factors that are likely at play.
M-PESA acts as a place for people who aren’t served by banks to save cash outside of the house, and that changes spending patterns. “Imagine if you had $1,000 dollars lying in front of you on your desk every day — you’d probably spend it,” Suri explains.
By keeping the cash out of the home, the household money is spent more carefully and less prone to being nibbled away at in an ad hoc way by every member of the house.
It also improves financial management by making it easier for small-business owners to keep track of transactions with suppliers and to pay them more efficiently.
The increased financial stability of households, in turn, helps encourage Kenyans to undertake more high-risk but high-return activities like entrepreneurialism. If you have more of a social safety net, you’re more likely to be willing to gamble on an idea.
M-PESA isn’t a replacement for the benefits that accompany proper access to banks, like credit and savings accounts. But it’s a quick and simple way to make people’s personal financial lives more stable when there’s no better option.