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The CGD Podcast
Investing in Financial Inclusion – Podcast with Njuguna Ndung'u
00:15:40
This week's podcast looks at an innovation that helped bring millions of people in Kenya into the financial system. Economist and former governor of the Central Bank of Kenya Njuguna Ndung'u discusses the changes brought to Kenyan society by the...
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- [00:05]
A
Hello, I'm Rajesh Merchandani and thanks for joining me for this edition of the CGD podcast. Now, with the World bank and IMF meetings having just taken place in Lima, Peru, there's been lots of talk of sustainable development, economic growth, financial stability. So we thought it might be a perfect time to look back at an innovation that has been a success in helping many more people access the financial system and as a result, in promoting development. M Pesa is the digital platform where you don't require a personal bank account, but you can transfer money, pay for goods and services using just your mobile phone. When it was introduced in Kenya, the governor of the Central bank of Kenya at that time was Juguna Ndungu. He's also now a member of a CGD high level task force on financial inclusion. Recently he joined me here in the CGD podcast studio to talk about M. Pesa and I started off by asking him to remind us exactly how it works.
- [01:03]
B
MPESA tells you that you can actually, 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, as an account where you can actually use transfer money. Kenyans started transferring airtime to each other. So it is followed the same thing. The British government and Vodafone and Safaricom realized there's something here they can develop. The British government gave a million pounds to develop the product. But what does it do? You don't have to have a bank account since you are registered with your SIM card. You register as your SIM card to actually transfer money and receive money. But that time we argued that it's actually the best way to access financial services because it doesn't matter where you are, anytime, in the night, all day, that's the starting point. But in 2007 I argued that this is going to be a platform of a menu of financial services. And today it is a platform. You can transfer money. You can actually pay for goods and services. You can actually now transfer the money from your SIM card to a direct savings account in a bank in the same platform. You can withdraw in the same way.
- [02:19]
C
Let's go back to 2007 when you were the governor and then this thing took off. It must have represented to the governor of the Central bank of Kenya a disruptive force because it takes control out of money supply and money in the economy out of your hands.
- [02:38]
B
No, that is where the mistake comes in. It actually, let me say Africa. The biggest problem in Africa, two problems. One, we have segmented markets. And two, we have informal markets. So essentially when I went to the central bank, the first thing I realized is that 15% of the currency was outside the banking sector. Now tell me, how can you run monetary policy when 15% of the currency is outside the banking sector? What does it respond to? Well, there are so many other aspects, you can categorize it, but the most important thing is that monetary policy works through signals and it works through money, which is inside the banking system. So essentially the first impact of M? Pesa is to bring money outside the banking system, into the banking system, but.
- [03:19]
C
It'S not regulated in the same way.
- [03:21]
B
As it is, it is regulated. Let's be clear. What has happened is that when you go to the telecom agent with your cash to put it in your SIM card, you're actually bringing cash from outside the banking system into the banking system. Because the moment it enters into the MPESA account, it simultaneously hits a bank account called trust account, where all the money is kept. Now that's where all the money is kept. So all of a sudden, and you can see they provided evidence to this, is that currency outside the banking sector dropped significantly. So essentially it's not issuing money, it's just converting cash into electronic units of money which is stored in the bank account. So in a sense, what happened is the first six months of M? Pesa, the disruption is actually to bring currency into bank, into the banking system very, very swiftly.
- [04:11]
C
So were you in the favor of peso all along? Because I read that you had reservations about it to begin with.
- [04:16]
B
I had no reservations. It is the banks and mostly Kenyan global banks that had reservations that there would be a currency, there would be a crisis because liquidity was shifting away from other banks to the bank that was holding the platform over time. Subsequently, we also made sure that 25% of it, we have to distribute the platforms. And today we have five platforms. So essentially that particular time, the platform there was one platform, but they feared that liquidity would shift to that platform. But it was a cash in, cash out platform, so money was not being there. So what I told some banks is that you are the one punishing your clients, your customers, because they are taking one trip to the bank to withdraw cash and another trip to the telecom agent to transform that cash into electronic units of money. So what was the solution? I told banks, integrate with M? Pesa so that I can use the phone, get into my account, draw down from my account in the bank to my account in the M? Pesa and I don't have to take a trip to the bank. That is what subsequent years everybody came down to. So the reservations was not with me. The reservations was with other banks that didn't have the platform and felt that there was going to be, there was going to be disadvantage. In fact, they told me plainly and openly, even including my staff in the central bank, that I was going to face a banking crisis. So I told the banks, you are the ones who are going to face a crisis because you are punishing your customers, and told my colleagues who are criticizing me that you are the one who is going to face a crisis because of the fear of the unknown.
- [05:57]
C
So the point is that this is not an individual's bank account, but it's one big account where all the money goes into and is paid out from. So that's why people don't have to have bank accounts to operate mpesa.
- [06:08]
B
Yeah. In fact, you can call it a payments platform if you want, where it is a solution where it's cash in, cash out. So essentially many people, so many people with the MPESA accounts joined into a trust account. That trust account now forms a platform for pay and payout. But because the value is stored in that account and also stored in your SIM card, then you can see that the link is quite clear that you can actually transact. What it will be doing is actually to move your money from your SIM card to somebody's SIM card if you're transferring to somebody else. Because you can transfer money to someone if you know their bank account, if you know their telephone account. Yeah. You go to the shopkeeper and say, how much money do I owe you? Transfer straight. What is your number? How much do I owe you? Transfer straight. So essentially all of a sudden people are using less and less cash.
- [07:02]
C
Why don't all banks operate a similar system? Now, we've seen some banks in America start using it as a way of extra convenience for consumers. But it does represent a threat to traditional banks.
- [07:15]
B
It does not present a threat because essentially it is an investment issue. Don't forget, it's not free.
- [07:22]
C
But if you don't have to have a bank account, you haven't got to have the fixed costs of a bank account. You haven't got to perhaps pay to open a bank account.
- [07:28]
B
Yeah, but that platform has to be paid for, it has to be invested in. It's not free. In fact, subsequently, the second generation, we have seen that the platforms became more expensive because you now want to go into another platform, not necessarily where it is a payment solution, but it's also you want now to pull those people who have now entered the banking sector who did not have bank accounts, can now have a bank account. It's like reverse engineering. They got in through their mobile phone. That mobile phone can be used into a savings account. But there are investments in the bank for you to do that even to, let's say, to get hooked into the MPESA network ecosystem, that is, you have customers who have M? Pesa accounts, but they would like to draw down from their bank account into their MPESA account. So you don't have to have a platform yourself, but they can actually be drawing down. So essentially what you're telling someone is that you don't have to come to the bank, you can actually draw down from wherever you are. So essentially you are inched. So even that was an investment because it's a software. Essentially for those people who could not have the platform, they decided the best thing is not to lose in the ecosystem.
- [08:46]
C
Yeah, but who's paying for that investment? To get passed on to the customers?
- [08:50]
B
In the long run, yes, but in the short term the banks had to pay for that investment.
- [08:56]
C
But if one of the points of M? Pesa and then the applications of M? Pesa, this idea of drawing down from a bank account into the M? Pesa system, if one of the purposes of that is to bring more poor people into the financial system and help them, then if they're being charged to that service, it's not helping them.
- [09:13]
B
Yes, let's look at it. What was the alternative?
- [09:17]
C
Give it to them for free.
- [09:18]
A
How?
- [09:19]
C
Support it through the central bank?
- [09:20]
B
No, no, I don't think that would be feasible. You see the point, what we're really saying is that these people were always transacting. It's only that we were using cash or keeping it in unsafe places. But you want to come up with a public policy how to encourage them to save, how to hook them to get financial services instant and effective and.
- [09:37]
C
How to make money off them doing that.
- [09:40]
B
No, no, you see, any technology must be paid for, isn't it? Any technology must be paid for. Let me say that if we provided this for free, maybe it will not have worked. But over. Yes. How can you. You know, in African countries everybody gets a speaker of the government. But let me say, suppose I'm told.
- [10:01]
C
That people wouldn't have used it because they wouldn't.
- [10:03]
B
Suppose I'm told that. Suppose I'm told that this service is free. The first thing is to realize there must be some catch. It is very difficult for central bank to involve itself with payment systems in that way, micro payment, paying for transfers. Because essentially central bank is not really a central bank for the people. It's actually like it's a regulator, isn't it? So the most important thing is to wait for the market to innovate and then obviously see how you can guide the market. If it is now a mass market, maybe what the central bank can do is actually to provide a regulatory environment that reduces the cost of doing business. Now, where were we before that? We had ATMs, but did the central bank really intervene? We had checks. Every bank can give you a check. Those are payment system. But they were not very efficient. And second, they were very costly for people whom we wanted to access the markets.
- [10:59]
C
Let's talk about the other applications. An offshoot of M? Pesa is mshwari, which uses the M? Pesa platform to allow someone to operate a more traditional bank account. They can save and borrow. But that's not been as successful successful as M? Pesa.
- [11:15]
B
No, no. You have to understand that it is now you are moving to the next generation. Let me start from the very beginning. You have invested in a platform called M? Pesa. It's a payment solution. Okay? Everybody brings their money, they can transfer, they can pay for goods and services. But all of a sudden we realize that it is actually not affecting the banking intermediation system. Because the banking intermediation is affected through deposits coming into the bank and which gives the bank capacity to run in the future, isn't it? So all of a sudden then started. I think one of the criticism came from Bill Gates himself. You are doing so well with M? Pesa. But look, you are not affecting the intermediation in the banking sector. So it means that people are not saving. You can transform people's lives through savings. So all of a sudden the bank started developing such a platform. Now it's a platform where you move from the MPESA platform to open your own bank account. Let me say we have, for example, the Mshuwari has more than 10 million accounts since it was started. So the developmental agenda or the developmental dynamics of the Msuwari accounts and the related developments that have taken place in Kenya today are much more beneficial in terms of welfare. Welfare improving.
- [12:34]
C
What do you think your experience with M? Pesa can bring to the work that you're doing here on CGD's task force on Financial Inclusion. What does it tell you?
- [12:44]
B
It's a process. Of course we were impatient and I tried to explain in cgd, I was trying to explain how impatient we were that M. Pesa has come is successful, then move to the next. Please affect the intermediation process. But what did we want? We wanted financial inclusion From a broader policy perspective. Financial inclusion is very good for fighting poverty sustainably. That's a pure developmental idea. The second thing is that we wanted financial inclusion for financial development. Again we have shown, for example in Kenya and Tanzania there are data showing that actually financial sector growth has pulled the economic growth with it. Now when you bring in MTUA to try and shorten the cycle between savings and investment cycle, that cycle by bringing in affordable credit, then you increase the level of investments. Countries in Africa are driven by investment. Growth in Africa is driven by investment. The next question is who supplies that investment? One public sector we know in terms of the broader picture of lowering transactions cost and enhancing private sector profitability. But now the micro investors are the most important. Let me give you some evidence which you can actually try to relate. In the last eight years, Kenyan banks have covered the East African region. There are 300 branches of Kenyan banks covering the whole of East African region. Eac, that is East African Community plus Sudan except one outright branch in Mauritius, but it is East African Community plus Sudan. 300 branch outreach. Now those are about 11 Kenyan banks. That is one of the things that we wanted to show. Financial inclusion encourages banks to become strong because essentially they increase the number of participants in their market, they increase their deposits. Deposits give them capacity for the future, for future growth. And that is what we wanted. Strong banks are going to weather shocks. But what makes banks strong is actually bringing in people to participate in the banking sector.
- [14:57]
C
Professor Juguna Ndogu, former Governor of the bank Central bank of Kenya it's been fascinating to talk with you on the podcast. Thank you very much for joining us today.
- [15:06]
B
Thank you very much. Nice to be here. And I've made those nice points to the CGD and we are going to produce fantastic reports on this issue.
- [15:14]
C
And talking about that report, CGD's work on financial inclusion will probably report at the end of this year, maybe early next year. We'll keep you informed about it. Find out more, as always about all our work on our website, cgdev.org I'm Rajesh Merchandani and join me again with another guest on the CGD podcast next time.