The CGD Podcast: "Investing in Financial Inclusion"

Guest: Prof. Njuguna Ndung'u, former Governor, Central Bank of Kenya
Host: Rajesh Merchandani, Center for Global Development
Date: October 14, 2015

Episode Overview

This episode explores the rapid rise and impact of M-Pesa, Kenya’s pioneering mobile money platform, and its wider implications for financial inclusion and economic development. Prof. Njuguna Ndung'u, who served as Governor of the Central Bank of Kenya during M-Pesa’s launch, shares insights into its disruptive innovation, regulatory challenges, and the broader dynamics of digital finance in Africa. The conversation also touches on offshoots like M-Shwari and the link between inclusion, banking intermediation, and poverty reduction.

Key Discussion Points & Insights

1. Origins and Functionality of M-Pesa

• Main Idea: M-Pesa is a mobile-based financial platform that allows users to transfer money, pay for services, and conduct financial transactions without a conventional bank account.
• Notable Points:
  • “You don't have to open a bank account, but you can use your phone as an account where you can… transfer money.” – Prof. Njuguna Ndung'u [01:02]
  • Initially developed through British government and Vodafone/Safaricom support.
  • Registration is tied to a SIM card, providing access anytime, anywhere.

2. Regulatory Perspective and Economic Impact

• Central Bank Concerns: The host probes whether M-Pesa was seen as a threat to monetary control:
  • Ndung'u clarifies this was a misconception:
    “The biggest problem in Africa... we have segmented markets and we have informal markets… 15% of the currency was outside the banking sector… The first impact of M-Pesa is to bring money outside the banking system into the banking system.” [02:37]
• Cash Mobilization: M-Pesa helped formalize cash circulating outside banks, improving monetary policy effectiveness.
• Regulation: M-Pesa funds are held in a safeguarded trust account within the banking system, ensuring full regulatory oversight.
  • “It's not issuing money, it's just converting cash into electronic units of money which is stored in the bank account.” [03:20]

3. Dealing with Banking Sector Resistance

• Bankers’ Reservations: Initial opposition to M-Pesa came mainly from commercial banks, not from the central bank or Ndung’u himself.
  • “You are the one punishing your clients… integrate with M-Pesa so that I can use the phone… and I don’t have to take a trip to the bank.” [04:16]
• Liquidity Concerns: Banks feared a shift in liquidity towards the M-Pesa trust account, but the platform’s cash-in/cash-out design alleviated systemic risks.

4. Platform Dynamics and Customer Experience

• Trust Account Structure: Users transact through a collective trust account, enabling seamless movement of money between SIM cards or into store payments.
  • “[It’s] a payments platform... cash in, cash out… all of a sudden people are using less and less cash.” [06:08]
• Impact on Cash Usage: The convenience and security led to a visible decline in cash transactions and greater digital record-keeping.

5. Technology Investments and Customer Cost

• Sustainability and Fees:
  • M-Pesa isn’t free—the technology and ecosystem require bank and telecom investment, often passed to users in the long run.
  • “[People] were always transacting. It's only that we were using cash or keeping it in unsafe places. But you want to... encourage them to save… to get financial services instant and effective.” [09:19]
• Public Provision: Ndung’u rejects the idea of making such platforms free through government/central bank support, citing sustainability and user trust issues.

6. Second-Generation Digital Finance: M-Shwari

• Beyond Payments: M-Shwari builds on M-Pesa to offer savings and credit products:
  • “You are moving to the next generation... M-Shwari has more than 10 million accounts… welfare-improving.” [11:15]
• Banking Intermediation: Digital savings platforms foster deeper financial engagement, supporting development through improved access to credit and investment.

7. Lessons for Financial Inclusion Policy

• Broader Policy Implications:
  • “Financial inclusion is very good for fighting poverty sustainably. That's a pure developmental idea.” [12:44]
  • Ndung’u links inclusion to stronger banks, more robust deposit bases, and improved ability to withstand shocks.
• Regional Impact: Kenyan banks' regional reach is a testament to the virtuous cycle of inclusion and growth:
  • “In the last eight years, Kenyan banks have covered the East African region. There are 300 branches of Kenyan banks...” [14:20]
• Role of Micro-investors: Access to digital finance empowers smaller investors and accelerates economic growth on a regional scale.

Notable Quotes & Memorable Moments

• “M-Pesa tells you that you don’t have to belong, you don’t have to open a bank account, but you can use your phone as a bank account.” – Njuguna Ndung’u [01:02]
• “The first impact of M-Pesa is to bring money outside the banking system, into the banking system… Very, very swiftly.” – Njuguna Ndung’u [03:19]
• “If we provided this for free, maybe it would not have worked.” – Njuguna Ndung’u [09:39]
• “Financial inclusion is very good for fighting poverty sustainably… Now, when you bring in M-Shwari to bring in affordable credit, you increase the level of investments.” – Njuguna Ndung’u [12:44]

Timestamps for Key Segments

• [00:05] – Introduction and M-Pesa overview
• [01:02] – How M-Pesa works and its foundational benefits
• [02:37] – Monetary policy and the movement of cash into the banking system
• [04:16] – Addressing skepticism and bank integration with M-Pesa
• [06:08] – Platform structure and the transformation of retail payments
• [09:19] – On costs, user trust, and government involvement
• [11:15] – Introduction and impact of M-Shwari digital savings
• [12:44] – Broader impact: financial sector growth, inclusion, and regional development
• [14:57] – Concluding thoughts, the role of financial inclusion in economic resilience

Tone and Takeaways

The conversation is candid and practical, with Ndung’u offering both technical clarity and policy reflections. The tone is optimistic about digital finance as a tool for sustainable development, while realistically addressing the complexities of technology, investment, and regulatory adaptation. The episode serves as a valuable case study for anyone interested in financial innovation, emerging markets, and inclusive growth.