MFS
CENTRAL BANK OF KENYA

A. Problem Analysis

 1. What was the problem before the implementation of the initiative?
The mobile financial services (MFS) were initially meant to cater for person to person money transfer but over time, innovations widened the scope of functions. Business to people and people to business functionality was introduced for payment purposes. Many immigrants from the rural areas went to towns in search of gainful employments to support their relatives back home. However, it was a challenge to send the money back home due to costs and inefficiencies associated with existed channels. These channels included postal banks and hand delivery through public service vehicles or trusted person from the same village. This exposed the sender to risks due to delay in delivery or misappropriation of the money by the carrier.

B. Strategic Approach

 2. What was the solution?
The Central Bank of Kenya Act provides for the Bank to “formulate and implement such policies as best promote the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems.” However, in 2005 the Central Bank of Kenya was overseeing an underdeveloped market which suffered from inefficiencies and an inadequate statutory and legal framework to support the development of digital financial services. Fewer adults had access to financial services than those that were financially excluded. Commercial banks had been closing down rural branches owing to the high operational costs of maintaining them. There was not much latitude within the structures of the Central Bank to deal with new products introduced by non-banks. In the period 2005 and 2007, CBK faced a stark choice between maintaining the status quo by declining to entertain the application by a mobile network operator to offer mobile financial services. This would be based on the premises that the legal framework did not permit the participation of non-banks on the one hand; and, on the other hand, fostering greater financial inclusion by innovatively navigating through the risks in order to find a regulatory solution. In 2007, CBK chose the latter, giving rare audience to Safaricom and therefore stating a ‘snow-ball’ approach to mobile phone money transfer innovations. The impact of mobile money is now widely felt across the financial services industry as well as in the broader digital ecosystem: mobile money has been the on-ramp for Kenyans to use additional financial services such as deposit accounts and has significantly contributed to increased financial capability of previously unserved segments of the population.

 3. How did the initiative solve the problem and improve people’s lives?
Commercial banks have partnered with Mobile Network Operators to offer the customers banking services outside the brick and mortar banks. This has reduced the financially excluded populace and enshrined the culture of saving among the users of such services. Further, the micro finance industry characterized by low income earners uses mobile financial services in disbursing the small value loans which saves the customer’s time spend travelling to and from the institutions. MFS has enabled low-income households, mostly self-employed with irregular incomes, to benefit from health and insurance services. This is through insurance premium payment instruments that ride on mobile money transfer platforms. Policy holders including health insurance can remit as little as KES20 (approximately USD $0.2) premium payment through their cell phones free of charge. Clients also get regular SMS updates on their policies. Through partnership with firms offering mobile financial, bills are paid through mobile phone platforms. This has given small and medium businesses opportunity to operate in a diverse manner. Payments are received via pay bill numbers allocated to each subscriber enabling them to receive payments directly to their phones or account for cervices or goods sold.

C. Execution and Implementation

 4. In which ways is the initiative creative and innovative?
In 2007, the CBK indicated its willingness to stand on the side of innovation rather than consign the market to payments inefficiencies. CBK took calculated risks ensuring it was reasonably satisfied with the mitigants put in place to address the operational, legal and liquidity risks. Kenya today has low levels of financial exclusion owing largely to the implementation of ‘pro-poor’ policies of financial inclusion and certain specific regulatory interventions.

 5. Who implemented the initiative and what is the size of the population affected by this initiative?
The implementation of the mobile phone money transfer had a number of stakeholders considering it was a landscape changing innovation. Central Bank of Kenya as a regulator was involved in the whole process monitoring of the pilot phase. The first challenge to CBK was to ensure that the product design was compatible with the existing legal framework. The CBK had to satisfy itself that Safaricom was not undertaking any intermediation of M-Pesa customer funds which would render it liable under the Banking Act that reserves intermediation activity to licensed banks and thus create a conflict. Communications Authority of Kenya (CAK) participated in ensuring the quality of services were not compromised by Safaricom extending their services to mobile money transfers. CAK was responsible in licensing Safaricom’s systems and services in the communications industry. This was in an effort to facilitating the development of e-commerce in Kenya while protecting consumer rights within the communications environment. CAK was responsible for monitoring the activities of licensees to enforce compliance with the license terms and conditions as well as the law. The subscribers of Safaricom voice and data services played a major role in participating in the pilot phase which ensured the success of the initial stage. The enthusiasm displayed at this stage entrenched the desire for the services provider to make it a success and provide affordable, safe and efficient channel to send and receive money country wide. The Mobile phone money transfer got the backing from the Government when it re-asserted that mobile money was not a banking service but a low value retail money transfer service which had passed the scrutiny of the CBK’s internal legal and risk assessments as well as an external information systems audit. This put to rest questions around the legality of mobile money and reaffirmed government’s strong support for financial inclusion, providing the much needed confidence boost for the industry.
 6. How was the strategy implemented and what resources were mobilized?
This initiative was launched in 2007 by Vodafone for Safaricom, the largest mobile network operators in Kenya. This was a private investment between the two aforementioned entities. However, CBK as the regulator dedicated significant time and human resources in reviewing and monitoring of the product.

 7. Who were the stakeholders involved in the design of the initiative and in its implementation?
The impact of mobile money is widely felt across the financial services industry as well as in the broader digital ecosystem. Mobile phone money transfer service customers can deposit and withdraw money from a network of agents that includes airtime resellers and retail outlets acting as banking agents. Other financial services include;  Transferring money to other users and non-users  paying bills  purchasing airtime and  transfer money between the services and, in some markets like Kenya, a bank account. A partnership of Safaricom with Kenya-based Equity Bank and Commercial Bank of Africa launched M-KESHO and MSHWARI respectively, products using M-PESA’s platform and agent network, to offer expanded banking services like interest-bearing accounts, loans, and insurance.

 8. What were the most successful outputs and why was the initiative effective?
Central Bank has an Oversight section that supports the Bank’s overall objective of financial sector stability by promoting safety and efficiency. It is charged with the responsibility of promoting the objectives of safety and efficiency of payment systems by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change. The section executes this function through the payment system monitoring and payment system risk assessment units. Payment system monitoring conducts data collection summaries analysis and creation of statistical database on payment systems. Risk assessments involve risk identification, monitoring and suggesting strategies and mechanisms to mitigate. Through its oversight function, CBK:- i. Promote Safety and Efficiency of Kenya’s Payments System to ensure the soundness of the National Payment System and hence financial system stability ii. Prevent Market abuse by ensuring anti-trust tendencies are minimized iii. Ensure conditions of fairness, equity and transparency in payment systems - the rights and obligations of parties to funds transfers are allocated in an equitable manner to ensure level field for all payment system participants iv. Promote extension of payment services nationally, regionally and internationally v. Protect payment systems from criminal abuse such as money laundering and fraud vi. Address risks that could jeopardize the soundness of the payment system by promoting risk reduction measures. vii. Reduce and contain the systemic risks inherent in the national payment system viii. Keep abreast with international development in payment system oversight and payment systems in general ix. Monitor the exposures in the NPS

 9. What were the main obstacles encountered and how were they overcome?
The first challenge both Safaricom and the CBK needed to overcome was to ensure that the product design was compatible with the existing legal framework. The CBK had to satisfy itself that Safaricom was not undertaking any intermediation of M-Pesa customer funds which would render it liable under the Banking Act that reserves intermediation activity to licensed banks. This was resolved by engaging all stakeholders and CBK in deliberations which resolved the impasse. Sentiment was growing within the banking association that mobile money which the banks perceived to be in competition with banking services, were receiving favourable treatment from the CBK. The Government through the Treasury after studies on mobile money transfer services released a statement that distinguished between the conversion of cash into mobile money (and vice versa) and the acceptance of deposits from the public, emphasizing that mobile money providers were not accepting deposits from the public or contravening the Banking Act

D. Impact and Sustainability

 10. What were the key benefits resulting from this initiative?
From 2007 when the first mobile money transfer services was launched, Kenya’s financial services landscape has transformed tremendously from a low of 26.4% of adults with access to formal financial services in 2006 to 66.7% in 2013. Banking industry The commercial banks have partnered with Mobile Network Operators to offer the customers banking services outside the brick and mortar banks. Such services include:  Normal account handling services, balance enquiry, cash withdrawal and deposits via e-wallets  ATM withdrawals using funds in e-wallets  Credit access through Mshwari virtual accounts Microfinance Industry This industry is dominated by low income earners who save overtime and take loans. Microfinance industry uses mobile financial services in disbursing the small value loans which saves the customer’s time spend travelling to and from the institutions.  Kenya Women finance Trust which has increased access of financial services to women by disbursing loans through mobile money transfer platforms.  Musoni is a mobile microfinance institution which enables clients to repay their loans and deposit their savings using existing mobile money transfer products, such as M-PESA, Zap and Orange Mobile Money. Health and Insurance industry The beneficiaries of the mobile platform based insurance are low-income households, mostly self-employed with irregular incomes. These are insurance premium payment instruments that ride on mobile money transfer platforms such as M-Pesa, Yu-Cash, and Airtel’s Zap/Airtel Money. Policy holders including health insurance can remit as little as KES20 (approximately USD $0.2) premium payment through their cell phones free of charge. Clients also get regular SMS updates on their policies.  M-BIMA is one of the solutions to the challenges involved in penetrating the low-income market and developing cost-efficient insurance distribution and payment mechanisms.  Linda Jamii is an affordable micro-insurance health by Safaricom, Britam and Changamka. It is a comprehensive medical cover that will provide a family premium cover at an annual subscription of KES12, 000 for a cover valued at KES 290,000.  Kilimo Salama is an insurance designed for Kenyan farmers so they may insure their farm inputs against drought and excess rain. This is a partnership between Syngenta Foundation for Sustainable Agriculture, UAP Insurance, and telecoms operator Safaricom. Water and Energy Industry Through partnership with firms offering these services, the industry has increased revenues through payment of services via mobile phone services. Bills are paid through mobile phone platforms instead queuing for payments at provider offices. Such are payments of water and electricity bills.  LIFELINK WATER is a partnership between Grundfos and Safaricom to provide clean drinking water to rural population. Under the arrangement between M-PESA and, each user is provided with a smart card fitted with a micro-chip. The user is able to buy water by depositing money from their M-PESA account into a Grundfos M-PESA business account under the Pay Bill functionality. The money is then loaded into the user’s smart card. Each time the user needs to buy water, the smart card is inserted into a slot on the tapping point and water automatically starts running until the card is removed and the amount corresponding to the amount of water tapped is deducted from the card.  The M-KOPA payment system based upon a pay-as-you go basis using mobile payments helps low-income consumers purchase products easily M-KOPA provides affordable solar-powered lighting and mobile charging to rural Kenyans. When customers have fully paid for the value of the solar product, they own the product and can continue to use it freely.

 11. Did the initiative improve integrity and/or accountability in public service? (If applicable)
Regulators can be agents of change in driving financial inclusion: in permitting a non-bank to launch mobile money transfer services, encouraged other innovations by not consigning the market to payments inefficiencies. When regulators become agents of change, innovative regulatory solutions are borne and become critical enablers of development. This approach has been adopted in other markets like Tanzania which equally has shown remarkable success in mobile money through the test and learn approach. Mobile money is a catalyst for financial inclusion and development of the digital ecosystem: in 2006, only 18.9% of the Kenyan adult population had access to a bank account while 7.5% of the adult population had access to other formal means of saving totaling to a mere 26.4%. After 2007, this percentage grew significantly and this can be attributed to the usage of mobile phone money transfers. Mobile Money has also contributed to the development of the digital ecosystem by providing a readily available payment method for many start-ups, becoming a popular payment method. Many small medium enterprises have adopted pay bill till numbers for accepting payments of goods and services from their customers. This has reduced their cash handling costs considerably.

 12. Were special measures put in place to ensure that the initiative benefits women and girls and improves the situation of the poorest and most vulnerable? (If applicable)
During the period from inception of mobile money transfer services in 2007 to current, experience has ingrained the following:  Regulators can be agents of change in driving financial inclusion: CBK took calculated risks when it issued a ‘letter of no objection’ to Safaricom after it was reasonably satisfied with the mitigants put in place to address the operational, legal and liquidity risks. Kenya today has low levels of financial exclusion owing largely to the implementation of ‘pro-poor’ policies of financial inclusion and certain specific regulatory interventions. When regulators become agents of change, innovative regulatory solutions are borne and become critical enablers of development.  Mobile money is a catalyst for financial inclusion and development of the digital payments. Time has proved that mobile money issuers are not intermediaries nor do they take risks with customer funds in the custody of the trustee. To the contrary, the many partnerships between mobile money issuers and commercial banks suggest that mobile money complements banking by helping to deliver deposits to the banks.  Collaboration between regulatory authorities is necessary to preserve financial inclusion gains: The oversight and regulatory mandates should be aimed at ensuring safety and efficiency in the services being provided without reversing the financial inclusion gains made. Tax authorities should also consult widely with the industry and relevant regulatory authorities to avoid policy reversal.  Mobile money does not introduce systemic risk: as mobile money continues to change the financial services landscape, it is important to examine the impact of mobile money on the financial system and to debunk theories that suggest that mobile money can be a cause of systemic failure. The values processed through mobile money transfer platforms account for a small percentage in the national payment systems throughput compared to Real Time Gross Settlement Systems. This can be attributed to several interconnected measures that the CBK adopted to lower the risk profile of mobile money, restricting it to low value retail transfers. Kenya’s experience has shown that the entry of mobile operators and other non-bank entities does not, ipso facto, introduce systemic risk and therefore calls for a regulatory approach that is proportionate.

Contact Information

Institution Name:   CENTRAL BANK OF KENYA
Institution Type:   Government Agency  
Contact Person:   Matu Mugo
Title:   BANK SUPERVISION  
Telephone/ Fax:   +2540202863012/0202250783
Institution's / Project's Website:  
E-mail:   mugom@centralbank.go.ke  
Address:   P.O. Box 60000
Postal Code:   00200
City:   NAIROBI
State/Province:   NAIROBI
Country:  

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