Brookings has released a report on the state of access to finance in developing countries, taking a specific look at the lessons learned from the mobile banking sector in Kenya. The report paints a troubling picture of the state of financial access in many developing countries, but then gives some reasons for optimism.
First, the bad news:
Access to financial services, and indeed overall financial development, is crucial to economic growth and poverty reduction. Yet in Sub-Saharan Africa, only 1 in 5 households have access to financial services. In 2007, over 70 percent of Kenyan households did not have bank accounts or relied on informal sources of finance. In 2006, there were only 35 bank branches in Benin, a country with a population of 7 million. This lack of formal financial services limits market exchanges, increases risk and limits opportunities to save. Without formal financial services, households rely on informal services that are associated with high transaction costs.
Yet this may be changing, thanks to mobile banking and lower barriers to entry. The report cites Kenya as the most successful example of mobile banking leading to increased access to finance:
In Kenya, the last three years have seen dramatic changes in the financial sector landscape. First, commercial banks recognized that lowering barriers to entry (no requirements of minimum balances in opening bank accounts) can increase retail accounts. Second, banks realized that lowering costs of transacting across other bank accounts attracts more customers to open accounts. As a result of these changes, the number of bank accounts has increased from 2.3 million in 2006 to about 6.7 million in July 2009. Equally, deposits increased from Ksh 540bn (US$ 7.2bn) in 2006 to Kshs 950bn (US$12.6bn) in July 2009.
Technological innovations have now made it possible to extend financial services to millions of poor people at relatively low cost. A case in point is mobile telephone money transfer services that allow mobile phone users to make financial transactions or transfers across the country conveniently and at low cost. Kenya’s mobile payment service, known as M-PESA, provided by the main mobile phone company,
Today, millions of Kenyans use M-PESA to make payments, send remittances and store funds for short periods.
This growth in access to fiance, particularly savings accounts, will not only benefit very poor countries such as Kenya and Pakistan. As I noted last week, only 30 percent of Filipinos have bank accounts. Just at Grameen Bank's business model has proven effective in both Bangladesh and the Bronx, mobile banking has the potential to impact a diverse range of clients.