MIT Sloan’s Tavneet Suri Shows How M-PESA, a Cell Phone-ased Payment System, is Helping Kenyans Save Money and Weather Shocks to Their Personal Finances

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Research finds more than two‐thirds of households in the country use the technology

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In 2008, about 75 percent of users said they used M-PESA for saving, and by 2009 this increased to 81 percent. By that year, half of all households said M-PESA was one of their two most important savings instruments

As the developed world begins its recovery from the global economic meltdown, the financial architecture in parts of the developing world is being rapidly transformed by a mobile payment system that enables people to deposit, send, and withdraw money with a push of a few buttons.

Established in 2007, the sms-based service, known as M-PESA, has enabled Kenyans to both save money and better withstand serious blows to their personal finances, according to new research by Tavneet Suri, a professor at MIT’s Sloan School of Management. Suri and her colleague William Jack, a professor at Georgetown University, conducted two surveys of 3,000 households in Kenya: the first was in 2008, the second in 2009. They found that nearly 60 percent of Kenyan households now use M-PESA for person-to-person transfers, as well as to pay for everything from school fees to mobile phone credit to electricity bills.

“Kenyans find using M-PESA faster, more reliable, and more convenient than a traditional bank,” says Suri. “There are nearly 25,000 M-PESA agents in the country compared with 850 bank branches. In Kenya, if you want to transfer money from your bank, you need to travel long distances, stand in line with a fistful of cash, and fill out a bunch of paperwork. M-PESA agents, on the other hand, are often found at gas stations and grocery stores, and some are open 24-hours a day. Although M-PESA balances do not earn interest, the service has some of the functions of a bank account but is much easier to access, and much easier to manage.”

According to their survey, the vast majority of Kenyans – over 80 percent - stash some of their
money “under the mattress,” but M-PESA is fast becoming an important savings tool. In 2008, about 75 percent of users said they used M-PESA for saving, and by 2009 this increased to 81 percent. By that year, half of all households said M-PESA was one of their two most important savings instruments. “People are able to amass savings on their M-PESA accounts over time,” says Suri. “By providing a safe storage mechanism, the service could increase net household savings over the entire population.”

Most important, the expanded ability to make interpersonal transfers deepens the person-to-person credit market, which helps Kenyans withstand shocks to their household finances through risk-sharing networks. In the developing world, a poor harvest or an illness can quickly portend financial ruin. Because mechanisms like unemployment insurance and health insurance are limited, people in Kenya have created informal risk-sharing systems whereby wide networks of friends and extended family give money to those in need with the implicit understanding that when they one day find themselves in grim circumstances, the favor will be returned.

This arrangement in the past has been fraught with risk. Poor roads, an inadequate transport system, and expensive money transfer services, like Western Union, mean that people wait a long time for their money, and often, conditions worsen. “In the US, if you lose your job you may well be eligible to receive unemployment insurance, in which case you would continue to be able to eat three meals a day,” says Suri. “But in developing countries, when you lose your job, there are often no formal safety nets. People don’t have a lot of savings or other ways to smooth these shocks so their food consumption drops.”

But this is not as true for users of M-PESA. According to Jack and Suri's research, the consumption of M-PESA users falls about 6 percent less during a crisis because they are able to receive money from a network of family and friends. “It appears that M‐PESA facilitates efficient risk sharing and enables support networks to keep negative shocks manageable,” says Suri. “For example, a household head with access to M‐PESA who suffers a mild health shock might quickly receive a small amount of money via M‐PESA that allows him to keep his children in school. If this money was delayed, the children might have quit school, the effects of which are hard to reverse.

“The way M-PESA improves the ability of households to manage risk is dramatic and has important implications for the welfare of virtually all Kenyans,” she adds. “M-PESA has helped households overcome some of the most impenetrable barriers to financial services, and has provided real value to Kenyans, especially during a time of need.”

*The Risk Sharing Benefits of Mobile Money By Tavneet Suri, MIT Sloan School of Management and William Jack, Georgetown University; January 2011


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