When Barack Obama visited Kenya last year, he lectured its leaders on human rights failings – and applauded them for creating M-Pesa.
Mobile money – phones replacing banks – is a “great idea that started here in Kenya,” America’s president enthused.
Well, get ready for another another world first. While Obama marveled at the system that has enabled millions more Kenyans to save by depositing the equivalent of just a few cents, the truth is that – until now – most would earn only paltry interest. In a country where government bonds yield double digits, savers are lucky to earn above 2% from a deposit account.
So – to the consternation of many in the financial industry – Kenya is cutting out the middle man. This will become the first Treasury market globally where the masses can buy their government’s bonds using only a mobile phone.
“It is creating an interesting tension,” Paul Muthaura, acting Chief Executive of the Capital Markets Authority, acknowledges in an interview with Frontera. “But government for a very long time has been continually making the point that margins in Kenya are too wide, so this is an alternative way to pass the message.”
Like M-Pesa, Kenya’s latest financial platform – M-Akiba, or mobile savings – is all about bringing money services to those too remote or too poor for inclusion in the past. The minimum spend to buy bonds will be slightly higher than a savings account, but not too much, at the equivalent of $30.
M-Akiba will demand a “lot of investor education to make sure people understand the product,” says Muthaura. Another job, he says, is to work out a “market maker framework,” so that whenever people want to cash in their bonds, someone is providing a price at all times.
But the authorities aren’t waiting to have everything in place first – and this is what has set Kenya apart in a world of tightening regulation. Here technology leads – regulation follows, says Muthaura.
“When the M-Pesa product was being designed there was a great deal of regulatory flexibility,” he says. “It was given enough room to find its feet before very strenuous regulations were introduced. It’s why we’re not seeing it taking off at nearly the same rate in many other countries.”
Getting the timing right is nevertheless critical for the first mobile bond platform. Plans to start the service were put on hold last year as Kenyan Treasury yields soared as high as 23%.
“Rates have since come down to 9-11%, so we are expecting fresh launch dates from the government in the near future,” Muthaura says.
Mobile money is coming to the capital markets after dominated just about every other form of regular transaction in Kenya. Hardly anyone here pays bills directly any more – telephone, cable, even in a shop. In a virtually cashless Kenya, you simply transfer money from your mobile to the shop’s account.
There are obvious benefits: less cash lying around reduces the risk of robbery; a farmer has better prospects if she can save her few shillings to buy seeds in the right season or when prices are lowest.
And then there are the less quantifiable advantages: some scientists attribute the spread of bacteria and disease to grubby bank notes; and leading the world in mobile money is spurring Kenya’s evolution as a technology hub, with competition for jobs encouraging youngsters to develop the necessary skills.
“Kenya is seen as the Silicon savannah,” Bob Collymore, the Chief Executive Officer of Safaricom, which provides the M-Pesa and M-Akiba platforms, said at a recent investment conference in London. “For human capital, I’m probably better placed than when I worked in Japan and some other places.”
Sharing the same conference platform with Collymore, Cherie Blair, the barrister wife of the British former prime minister, noted other positives. “Generally speaking,” she said, “a computer doesn’t take a bribe.”
So what’s next for Kenya’s democratization of money?
Anyone who’s been to Nairobi lately will have noticed cranes and buildings popping up on just about every street. For the most part, the funding comes from banks, which carry the risk of the development going bust.
“They put quite a margin on that for developers to be able to raise that money,” says Muthaura at the Capital Markets Authority. If developers can raise money from a “wider diversified pool, the risk premium for each shilling is significantly lower.”
Real estate, or more specifically, Real Estate Investment Trusts, is the next stop in widening access to finance. The regulator has designed a new legal framework for what it calls a Development REIT, allowing public money to be pooled for construction projects.
Development REITS will “give Kenyans an opportunity for exposure to the significant growth being seen in the real estate sector,” says Muthaura. “Even without availability on a mobile platform, we see this as a significant stride in democratizing finance and broadening access to opportunities for return.”
January 6, 2016
Our focus on Africa continues tomorrow with a look at one nation’s efforts to turn climate change into an opportunity for growth.
Listen to the full interview with Paul Muthaura, acting Chief Executive of the Capital Markets Authority: