In Africa, Don’t Reach For Your Wallet, Grab Your Mobile Instead (video)

Video Clip: https://www.voanews.com/covid-19-pandemic/coronavirus-pandemic-fuels-mobile-money-transactions-nigeria (Time: 3:04)

Abstract: As the COVID-19 pandemic continues to disrupt business and lives across the world, one industry that is still growing is Africa’s mobile money business. In sub-Saharan Africa, digital cash, or mobile money as it is known locally, is rapidly becoming the most common, and indeed in some places, only way to conduct monetary transactions. However, unlike in the developed world where digital cash is linked to banks, in Africa, financial services are being provided by telecom companies. Many Africans have poor or no access to traditional banking services and instead, conduct their monetary transactions via their mobile phones. For some, the services provided by the telecom companies have become essential to survival. Telecom companies have been making emergency loans through mobile money and some governments have used mobile money to provide financial assistance to those in danger of starvation. The popularity of mobile money is expected to continue to grow and attract further investment. Once the pandemic is brought under control, it is anticipated that many Africans will turn to their telecom companies for small loans to jumpstart their businesses, businesses that will be essential to the future economic development of sub-Saharan Africa.

Discussion/Questions:

1. Reliable money flows are essential to a well-functioning economy. Discuss the banking industry in the developing world. What challenges do Third World countries face that limit their ability to use the same banking practices used in developed countries?   
2. Telecom company Safaricom expects mobile money to be its fastest growing source of income over the next few years. Reflect on the economics of mobile money. Why is it profitable for telecom companies to engage in financial services, but not traditional banks?
3. Consider the importance of micro loans to economic development. What are micro loans and how are these loans used in developing countries?  How are telecom companies like Orange facilitating the growth of micro finance?     

Notes: In an era of social distancing, banking electronically has become the norm in many parts of the world. In Africa, instead of reaching for their wallets, most people are now reaching for their mobile phones as conducting financial transactions electronically is all but replacing traditional banking. Indeed, a mobile phone is now required for even the most basic financial transaction. At the Washme laundry in Abuja, Nigeria, for example, cash payments are not accepted. Instead, customers use their mobile phones to access digital cash, or mobile money as it is known in Africa, to pay for their laundry services. This scene is playing out across the region. Indeed, the mobile money industry is booming in sub-Saharan Africa, where more people have access to a mobile phone than to a physical bank or ATM machine. The electronic movement of funds is not unique to Africa, but unlike in developed countries where mobile money might refer to products like Pay Pal that are connected to a bank, mobile money in sub-Saharan Africa is linked to mobile phone carriers like France’s Orange which are then connected with banks. Moreover, as the COVID-19 pandemic continues to disrupt economies and lives, many African are turning to the telecom companies rather than to banks or governments for financial assistance.

Using mobile phones to handle money matters has become a way of life for many Africans. Prior to the pandemic, the use of mobile phones and mobile money was already growing. In fact, more people in sub-Saharan Africa have mobile money accounts than traditional bank accounts. Since the start of the pandemic the industry has surged. Today, as governments encourage people to stay home, some 1.6 million more households are using mobile money, and in Kenya, the value of mobile money transactions is equal to about half the country’s GDP. With its relatively low transaction costs, the mobile money industry is attractive borrowers and lenders. Newly increased balance and transaction limits together with looser access requirements have made banking by mobile phone easier than ever and for those especially hard-hit by the pandemic, a lifeline to the assistance they need. Some governments are using mobile money as a means of sending monetary assistance to citizens at risk of starvation. Telecom companies are also providing much-needed assistance. In Madagascar for example, one borrower received the equivalent of $16, a much-needed loan that was used to purchase rice.

The mobile money industry is expected to continue to expand in Africa and in other parts of the developing world including parts of South and East Asia as more individuals turn to their mobile phones for monetary transactions rather than cash. Many Africans hope that in a post-COVID world, they will once again be able to rely on the tiny mobile money loans that helped them finance their businesses in better times. These loans, which offer opportunities to borrow that are unavailable in a traditional banking setting, could be the key to jumpstarting the economy in sub-Saharan Africa. Before the pandemic, for example, a single mother in Madagascar’s capital used a tiny mobile money loan to build her samosa business from 30 -50 units sold per day to 200. She is hopeful that she will be able to get another loan to when things return to normal. Going forward, it is anticipated that in sub-Saharan Africa, the line between traditional banking and telecom financial services will continue to blur. French telecom giant Orange has already opened a physical location in Ivory Coast called Orange Money and sees its business in Africa as just the start of its foray in financial services. The company plans to expand into Europe in the future. Another telecom giant, Britain’s Vodaphone, has taken an ownership position in Kenya’s Safaricom, one of the biggest players in Africa’s mobile money industry. Other companies are expected to join what promises to be a huge market opportunity.  

Additional Sources: https://www.wsj.com/articles/african-borrowers-turn-on-cellphones-for-covid-19-financial-lifelines-11606914000; https://www.bloomberg.com/news/articles/2019-08-13/mobile-phones-are-replacing-bank-accounts-in-africa. Photo: https://unsplash.com/photos/XH2JFgT4Abc.