Kenya is a developing nation. Regardless of this, it is the leading nation in mobile banking. A number of companies provide mobile financial services in the country. They include Airtel and Yu. However, Safaricom leads the competition. The company is well known for its money transfer service, M-Pesa. It was introduced in 2007. Currently, over 17 million Kenyans subscribe to the service. The number is approximately two thirds of the Kenyan adult population. The widespread adoption of the service in Kenya has made M-Pesa the most successful mobile money transfer system in the world (Mbiti and Weil 81).
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In this paper, the author will analyze a story on M-Pesa from the perspective of two economic principles. The story selected is by Mbiti and Weil. Two of Mankiw’s economic principles will be used. They are principles four and six. The fourth one states that people respond to incentives. The sixth explains that markets are important in the organization of economic activities.
The M-Pesa Story
According to Mbiti and Weil, the money transfer service has recorded tremendous success in the Kenyan financial market (81). Following this success, the service has been rolled out in other countries in the world, such as Afghanistan, South Africa, Tanzania, and India. In spite of the fact that Kenya is an underdeveloped country, it has managed to lead the world in mobile banking (Gewald 42). Mankiw’s 10 principles of economics can be used to understand the rather extraordinary situation presented in the story by Mbiti and Weil (Gans and Mankiw 63).
Understanding the M-Pesa Story from the Perspective of Mankiw’s Economic Principles
Consumer’s Response to Incentives
Across the world, mobile banking services are mostly provided by well established financial institutions. In Kenya, the service is provided by the country’s ‘telecommunication giant’, Safaricom. Consumers seem to be responding to the incentives of this company (Gans and Mankiw 63). That can explain the reason why the service has gained widespread popularity across the country. Prior to the introduction of the system, a large portion of the country’s population did not have access to formal banking services (Mbiti and Weil 81).
According to statistics released by the authorities, 75% of the people reside in rural areas. Majority of them engage in agricultural activities where returns are often low. As a result, banks were not willing to penetrate these areas for fear that such ventures are not economically viable. The introduction of the mobile banking system by Safaricom allowed the rural population and low income earners in urban areas to gain access to formal banking services. Following its rapid adoption, more people were willing to try it out (Mbiti and Weil 81).
Safaricom has a larger number of subscribers compared to its competitors. Currently, it controls over 90 percent of the market. M-Pesa services are only accessible to Safaricom subscribers. As such, the company’s large market share has been instrumental to the success of the mobile money transfer system. The introduction of the network also attracted more subscribers who saw it as an opportunity to access cheap formal financial services.
By 2010, M-Pesa was no longer viewed as a service for the poor or the rural population (Mbiti and Weil 81). Persons living in urban centers view the service as an opportunity to financially support their families and relatives back in the rural areas. In addition, the service is easily accessible compared to those from conventional financial systems. Currently, there are over 40,000 M-Pesa agents in the country. No single financial institution has penetrated the Kenyan financial market in such a manner. The incentives of easy access, affordability, and convenience have paid off.
Markets and Economics
Markets are important in economics. They are used to manage economic activities (Gewald 42). According to Mbiti and Weil, the M-Pesa financial system has redefined the manner in which transactions take place in the country (81). Today, Kenyans can pay for goods and services from the comfort of their homes thanks to the system (Demombynes and Thegeya 12). The ‘coinless’ arrangement has become the country’s most preferred financial system. For example, in 2014, M-Pesa transactions amounted to over 2.1 trillion Kenyan Shillings. The amount is approximately half the country’s GDP.
Banks and other credit facilities are the most affected by Safaricom’s activities in the mobile banking sector. With over 17 million subscribers, the company caters for the banking needs of over two thirds of the country’s adult population (Demombynes and Thegeya 12). Going by its rapid expansion, virtually all adults in the country will become subscribers in the next few years. The situation would have been different if Kenya was a developed country. In such a case, most individuals would be living in urban areas where they can easily access formal financial institutions, such as banks (Demombynes and Thegeya 14).
A relatively large number of the country’s population would also have bank accounts. As such, the mobile banking services would have been rolled out more effectively by the banks than by telecommunication companies. In this case, customers would be the most affected. The reason is that most mobile banking systems used by banks depend on applications. The applications can only be supported by smart phones and tablets, which are not available to every person. In this case, some of the customers would be locked out of the system.
Demombynes, Gabriel, and Aaron Thegeya. Kenya’s Mobile Revolution and the Promise of Mobile Savings, Washington, D.C.: World Bank, 2012. Print.
Gans, Joshua, and Gregory Mankiw. Principles of Microeconomics, South Melbourne: Thomson, 2003. Print.
Gewald, Jan. Transforming Innovations in Africa: Explorative Studies on Appropriation in African Societies, Leiden: Brill, 2012. Print.
Mbiti, Isaac, and David Weil. Mobile Banking: The Impact of M-Pesa in Kenya, Cambridge, Mass.: National Bureau of Economic Research, 2011. Print.