The flip side of Kenya’s mobile money revolution

One of the most talked about issues within the international development community and many governments in Africa today is that of fintech (financial technology). Defined as “computer programs and other technology used to support or enable banking and financial services,” Africa has become a hot-spot for the global fintech industry, with massive amounts of foreign investment flowing into the continent for a whole range of new fintech institutions and initiatives. Much of this excitement stems from the proliferating claims that, in a number of important ways, fintech will significantly improve the lives of poor people.

Africa’s new role in spearheading the rise of the global fintech industry can be attributed to one supposedly “best practice” example: M-Pesa, Kenya’s agent-assisted, mobile-phone-based, person-to-person payment and money transfer system. M-Pesa is both widely revered in the global business community for its demonstrated ability to make considerable profits, and in the international development community for its perceived ability to drive development and poverty reduction across the Global South.

The growing excitement surrounding M-Pesa has undoubtedly been stimulated by the work of the high-profile US-based economists Tavneet Suri and William Jack. Based on their long-running work, Suri and Jack suggest that the M-Pesa model of fintech has the potential to make a major contribution to resolving poverty and promoting sustainable local economic development in Kenya. They have specifically claimed in the prestigious journal Science that “access to the Kenyan mobile money system M-Pesa increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty.” This dramatic assertion went viral, and fueled the perception of M-Pesa as a developmental miracle. M-Pesa is now widely seen as a model to be emulated, and has even been honored by the US-based Project Management Institute as one of the ten most influential projects to have emerged around the world in the last 50 years.

Although it is patently clear why the global investment community has such a great appreciation for M-Pesa’s profit-generating potential (more on this below), we argue that the accompanying poverty reduction and development claims attributed to M-Pesa are questionable.

There is no doubt that M-Pesa has played a role in stimulating petty microentrepreneurship in Kenya—especially microenterprises run by women—but much, if not most, of this activity has been woefully unproductive and largely unsustainable. In a business environment where one-person street stalls, retail units, fast food ventures, and shuttle traders have been operating in abundance for many years, it is not surprising that the microenterprise failure rate is very high, with half of new businesses failing in the first year. Promoting the establishment of even more such units is therefore seriously questionable. It is only likely to negatively impact the functioning of the local economy, as well as the livelihoods of micro-entrepreneurs.

For example, many of those helped into business with the assistance of M-Pesa will fail, or else begin the descent into deeper debt as they desperately attempt to keep an unprofitable business going. Moreover, the extra competition created in the local economy will inevitably contribute to forcing down profits and wages in existing microenterprises, thus increasing poverty. Finally, creating new informal microenterprises leads to a form of destructive competition with the ultimately far more productive small and medium enterprise (SME) sector. Using the “advantages” of informality (paying little tax, abiding by fewer health and safety and environmental regulations, paying lower wages, etc.), informal microenterprises can often outcompete formal SMEs (even if just temporarily). Like the quick growing weeds that absorb the sunlight and nutrition needed by the slower-growing crops around them, a growing informal microenterprise sector typically stunts the growth of the much more valuable formal SME sector.

Another worrying issue that M-Pesa has contributed to is massive individual over-indebtedness. Now increasingly recognized by many analysts as a major problem, the current dangerously high levels of over-indebtedness in Kenya, as across East Africa, were an entirely predictable development. Access to informal finance from one’s M-Pesa network of family and friends is very easy indeed. With the recent introduction of its partner lending application, M-Shwari, M-Pesa now also facilitates access to formal loans at the touch of just a few buttons. Combined, this creates a significant additional impetus for individual over-indebtedness in the country.

Moreover, there is particular concern because of the dramatic rise in sports betting facilitated by M-Pesa and through which its parent company, Safaricom, has for a long time been able to generate a very sizeable proportion of its huge profits. M-Pesa acts as an efficient “on-ramp” into gambling, ultimately helping to create a gambling problem in Kenya of epidemic proportions, especially among the youth. Indeed, the problem is so dire that the Kenyan government was forced to ban M-Pesa from working with the biggest gambling platforms in Kenya, almost all of which have now closed down. With many one-time dedicated advocates of M-Pesa now scrambling to mitigate the inevitable damage they have helped create, there is a growing acceptance that linking debt to deregulated markets and profit-seeking will all too often do great damage to the poor and society as a whole.

Potentially the most damaging feature of M-Pesa specifically, and fintech in general, however, is its quiet propensity to facilitate a longer-term wealth extraction process that we call “digital mining.” M-Pesa has essentially perfected a process that captures and extracts a small tribute from almost all of the tiny financial transactions made by the poor. Even if one wants to, it is becoming harder by the day to avoid getting trapped by the fintech “net” that is gradually enveloping all aspects of daily life. One of the obvious indications of just how much value is being extracted from the poorest communities in Kenya is represented by Safaricom’s profits in recent years: in 2018 a record Sh63.4 billion (US$620 million) in profit was registered by Safaricom, which would be an impressive result in even the richest countries of the Global North.

With Safaricom being majority-owned by the UK multinational Vodafone (including through its 60 per cent stake in South Africa’s Vodacom), much of the value generated by M-Pesa is immediately channeled abroad as dividends and royalty payments. This outflow effectively denies Kenya’s local economies an extremely valuable aggregate amount of local spending power, which is instead mainly appropriated by wealthy individuals and institutions located in London and Johannesburg, with some also going to “tax-efficient” locations registered in the Caribbean. Since it has long been known that steadily rising local demand provides the initial impetus for local enterprises to emerge, cooperate, diversify, and grow, an important endogenous local growth trajectory is therefore undermined in Kenya thanks to M-Pesa.

In fact, we might better view M-Pesa, and the current organization of the fintech industry as a whole, as a revised version of the natural resource extraction paradigm that was largely responsible for under-developing Africa and other colonized countries over the last four centuries. While in this case the “resource” extracted from Africa is not a physical one—e.g. diamonds, gold, platinum, or silver—and it does not require slavery, the employment of ultra-exploitative waged labor, or involve horrendous working conditions; the eventual negative outcome could very well be a continuation of under-development on the continent. M-Pesa thus provides us with a valuable case study of how the current fintech model operates under the seductive cover of assisting with its short-term development and growth.

M-Pesa and the current setup of the fintech industry in Kenya not only fails to reduce poverty as advertised, but also has the potential to actively undermine more sustainable forms of development. There is growing evidence pointing to the fact that Kenya’s fintech model creates a large number of worrying developments and downsides for the country’s poor, especially rising over-indebtedness and the embedding of a primitive “no-growth” informal economy, all of which overshadow the convenience and individual benefits associated with the rapid shift to digital finance.

This is not to say that the development of technology to facilitate financial transactions is inherently detrimental or should be avoided, but rather that the current extractive fintech model needs to be fundamentally reimagined if there is any hope for it to be beneficial to the poor.