Microfinance Focus, May 27, 2011: Studying one of Kenya’s most successful versions of mobile banking - M-PESA, economist from Massachusetts Institute of Technology and Georgetown University report that the increasing co-existence of e-money and fiat cash is raising issues of competition, regulation, and coordination in the financial system of the country.

Published in the Economic Quaterly of Consortium on Financial Systems and Poverty, the paper titled ‘Monetary Theory and Mobile Banking: Lessons from the Kenyan Experience, uses a class of models of money and the payments system to analyse mobile banking in the context of the rapid expansion of M‐PESA.

M-PESA was launched in Kenya in 2007 by Safaricom. It allowed individuals to deposit, send, and withdraw funds from a virtual account on their cell phones and that is separate from the banking system. It is currently reaching more than 7 million users and is used by over 38 percent of Kenyan adults. A large part of M-PESA’s success is attributed to the broad and dense network of over 16,000 agents across Kenya, which provides the retail interface with consumers.

The report highlights that though at the time of launch of M-PESA, it was mostly used for sending cash remittances, it has since then been increasingly used both as a store of value and as a means of exchange, with users able to pay utility bills, make loan repayments, and even pay for taxi rides with it.

The co-existence of essentially two forms of cash, even if closely related and linked, raises certain theoretical modelling issues in itself. The economist argues that when one form of cash is issued by a profit-maximizing entity and the other by the central bank, it calls for greater regulation and coordination in the financial system.

The authors suggest that monetary policy makers need to reduce differences in rate of return on private financial instruments and public fiat money for optimal benefit. They need to accommodate new shortages that are likely to emerge on other margins within the financial system even as e-money helps to complete some markets.

The paper shows that due to the very nature of Kenyan environment which suffers from regular economic shocks, there are instances of shortages of cash and e-money within M-PESA system. Authors believe that these shortages can be overcome through remodelling and policy amendments.

The authors say that understanding the interrelationships among clients, agents, the parent company, and the banking system is essential to realizing fully the promise of mobile banking within economies.