> Posted by Guy Stuart and Monique Cohen
Rose lives in a village about 5km from the provincial town of Murang’a in the Central Province of Kenya. Her husband works in Nairobi. During the time when our diaries study interviewed her, between November 2009 and June 2010, she earned very little, less than $10 per week. But her husband sent her 29 remittances through Safaricom’s M-Pesa mobile money service from Nairobi over a 33-week period. He also brought cash home on visits. Rose contributed about Ksh.270 ($5.70) to a merry-go-round (a type of ROSCA) about 25 times during the course of our study. At the end of February her husband sent her Ksh.10,500 (about $210) in three remittances in one week. She withdrew all but Ksh. 500 in the same week and spent it on construction materials. Her husband came home that week and stayed for two weeks. He then returned to Nairobi, and on his return he sent Rose more money.
Rose is one of the 92 respondents Microfinance Opportunities (MFO) tracked during an eight-month Financial Diaries study in Kenya. This study yielded detailed transactional data that enabled us to better understand the economic lives of low-income individuals and households in two rural areas and one urban area.
The diaries also provide a close look at how low-income Kenyans actually use the now-famous mobile money service, M-PESA. M-PESA is an SMS-based mobile money transfer system owned and run by Safaricom, the leading mobile phone operator in Kenya. There are 30,000 M-PESA agents nationwide through whom people can deposit cash into or withdraw cash from their M-PESA accounts. Once they have cash in their accounts, customers can text their money to anyone in the country who has a mobile phone. The recipient can then either on-send the money to someone else or cash it out at an agent. There are over 13.5 million M-PESA accounts. The adult population of Kenya is 20 million.
As with our other financial diaries study in Malawi, and studies performed by other researchers such as Stuart Rutherford, Daryl Collins, and Orlanda Ruthven, the data from Kenya show that the poor handle a lot of cash, often more than twice their income. Furthermore, they use a wide variety of informal financial services, including intra-family loans and gifts as well as rotating savings and credit associations.
MFO’s diaries methodology captures all the financial transactions of the previous week. For transactions conducted through M-PESA and other mobile money providers, we asked respondents the actual date on which they deposited cash into M-PESA, withdrew cash from their accounts, and sent or received e-money. The data also capture with whom people transacted, and transaction locations. This provides insight into sequences of transactions and how they relate to each other, allowing us to piece together stories like Rose’s. They also allow us to aggregate the data for more comprehensive analyses.
M-PESA and Social Networks
Analysis of the transactions recorded through the diaries gave us powerful insights into how respondents used M-PESA. We found that:
- 53 of the 92 diaries participants used M-PESA at least once.
- 80 percent of M-PESA remittances were within extended families or between friends, and mostly for personal or household use;
- The 20 percent of transactions with “associates” were almost all business transactions;
- A large majority of the remittances crossed distances greater than 20 kilometers.
These findings strongly suggest that Safaricom’s “send money home” marketing of M-PESA has been very effective within the low-income market in Kenya. This is exactly what people appear to be doing. The “send money home” marketing campaign did not create a new behavior, but rather tapped into something people were already doing – giving and receiving money through their social networks. M-PESA just made it easier and cheaper to do this.
M-PESA and Risk Management
We also looked at the role M-PESA played in helping people manage risks like health emergencies. Of the 60 hospital bills paid by our respondents during the study period, more than a third coincided with a cash withdrawal from M-PESA either in the same or preceding week. Furthermore, when we traced the cash withdrawal back to its source, it was common to find that the money had been recently sent from afar (more than 20 kilometers) to the person paying the hospital bill. This suggests that M-PESA supports the ability to rapidly access health services in times of need.
This use of M-PESA in an emergency was consistent with the way people used M-PESA generally. Our data suggest that they did not keep money in M-PESA. Over two-thirds of the time people cleared out any money they had received through M-PESA or deposited onto M-PESA, nearly always on the day it was received and before any new money flowed into their accounts. The median average daily balance of the respondents in our study was about US$3.70 in purchasing power parity (PPP) dollars, or US$2.20 in exchange rate dollars (All other dollar amounts quoted here are PPP).
Beyond ‘Send Money Home’
Despite M-PESA’s popularity in Kenya, it is a long way from replacing cash: Over 95 percent of transactions were still in cash. This is not surprising, given that many transactions in the low-income market segment are very small and the cost of using M-PESA for tiny transactions is prohibitive. But we also found little use of M-PESA for business purposes, where the transactions tended to be larger. We think this phenomenon may be due to a trust issue: People are willing to send money to friends and family because they can call them to verify receipt of the remittance; they are less trusting of long-distance verification with an “associate” with whom they do business but who is not part of their social network.
M-PESA is a great success. Millions of Kenyans use it regularly. Millions of dollars flow through M-PESA each day. It holds out the hope that it can be the platform for the provision of additional formal financial services such as savings, credit and insurance. But that nut has yet to be cracked, especially in the low-income market. Meanwhile it helps low-income Kenyans manage risk and maintain and reinforce their social networks through which cash gifts and loans flow. That is a good start.
Guy Stuart, Ph.D. is an independent consultant, Senior Advisor to Microfinance Opportunities, and Fellow at the Ash Center, Harvard University
Monique Cohen, Ph.D. is Founder and President of Microfinance Opportunities
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