The Kenyan case shows clearly how mobile money can contribute to financial inclusion and economic growth, as well as to spread the offer of innovative financial services and M4D products that can ride on the mobile money platforms. Two weeks ago during the 2013 GSMA MMU Leadership Forum, Prof. Ndung’u, Governor of the Central Bank of Kenya answered some questions around mobile money, financial inclusion, and how the digitalization of the financial systems affects monetary policies, sharing the key lessons that the Central Bank of Kenya has learned from the development of mobile financial services and other financial inclusion initiatives, and identifying the success factors and potential pitfalls. Our conversation is reported below.

MMU: In many countries the regulator is just starting the journey toward digital financial inclusion, mobile deployments are waiting for the “go ahead” from the regulator, the prudential framework is not yet clear. Given your experience developing a regulatory framework for mobile money in Kenya, what advice would you give to your peers in other markets in order to help them to achieve greater financial inclusion?

Prof. Ndung’u:

1. Consider a ‘Test and Learn’ approach

Lessons we have learnt show that regulators must think beyond the conventional brick and mortar delivery channels to enhance financial inclusion. It is critical to embrace technological innovations and provide a supportive policy environment to nurture the growth of MFS in a safe manner. Careful assessment of risks through the “test and learn” approach along with the creation of products and systems that lower the risk profile of such services will allow enhanced access to financial services through innovation while maintaining systemic stability. Carrying out pilot tests of the innovative products before inception provides a chance to evaluate the success of that product in the MFS environment and hence curbing the risks of failure. In addition, it is important to avoid the fear of the unknown since an extreme risk-averse attitude can lead to corner solutions. Specifically, CBK has taken a proactive stance and has been at the forefront in embracing innovations and creating an enabling environment for MFS to flourish.

2. Balance financial access with financial stability

A proactive regulatory environment is critical in ensuring a balance between access and stability. Given that most often the process of enacting legislation takes a long time, awaiting legislation to embrace innovation risks the possibility of stifling innovation, slowing market dynamism and thus undermining access. Consequently, in Kenya, the strategic policy choice was to allow technological innovations in MFS, but under prudent monitoring and review to ensure that the integrity of the financial system is maintained. Further, CBK has continued to discharge its financial stability role to ensure that innovations do not become a source of market instability. Among the initiatives undertaken to assure of a balance between financial access and financial stability include the licensing of credit reference bureaus to curb information asymmetry, adoption of risk based supervision, consolidated supervision, market discipline through periodic disclosures by market players and financial education and consumer protection.

3. Better regulation rather than more regulation

A regulator must realise that better regulation is more beneficial than more regulation. This is because we must ensure that innovations are not stifled by heavy regulatory regimes. Better regulation is characterised by a regulatory framework with ability to:

• readily identify weaknesses and emerging vulnerabilities;
• analyse and price risks appropriately;
• provide appropriate incentives  (and penalties) to induce prudent behaviour in the market place; and
• encourage innovations and develop strong institutions of the regulators and the regulated – strong institutions define appropriate incentives and the rules of the game.

4. Creating a conducive environment and competition

For a robust MFS eco-system to be realized, focus must be placed on creating a conducive environment to attract private – sector investors into the mobile phone and MFS sub-sectors and ensure that the market is open to competition. Elimination of entry barriers, dismantling of the state monopoly and creating an enabling legal environment encourages increased domestic and foreign investments. This results in an increase in the competitive supply of mobile telephony and new products that take advantage of the MFS platforms. In Kenya, this has facilitated the expansion of the mobile phone market and MFS industry which has notably increased the level of financial inclusion in the country.

MMU: What are the critical roles of the regulator with regard to mobile money?

Prof. Ndung’u:

Regulators have a role to guide markets to develop – with safety, credibility and stability.

Emerging trends include the recognition of the changing role of regulators and policymakers and the importance of their leadership to enhance financial inclusion. Though most regulators may not have an explicit mandate to develop their markets, regulating an undeveloped market is an uphill task. Developed markets are known to be more complete and efficient than undeveloped markets. Consequently, regulators involvement in actively developing their markets through cultivating partnerships with other regulators and mobile operators and providing advice when required, will supplement their supervisory role. In a developed market the level of formal financial inclusion is high and as a result, surveillance to ensure continued soundness of the market is enhanced.

When regulators embrace a leadership role in developing the market they become innovative, and take reasonable risks inherent to making the changes needed to create a more inclusive financial sector. Although regulators main concern is always the safety and soundness of financial systems, those that have made the most progress have been willing to explore new routes or to use new tools to enhance traditional financial activities.

MMU: Some regulators still don’t feel comfortable authorising an MNO for providing mobile money services. What is your experience working with MNOs, and what advice would you give to operators to help them gain the confidence of their central banks? 

Prof. Ndung’u:

Private-Public Policy Dialogue is key. The MFS eco-system consists of both private and public sector players understanding each other and working together. Regulators, for instance, are important in this eco-system in developing a regulatory environment that makes it possible and attractive for the private sector to innovate and develop innovative MFS solutions. Private sector players, on the other hand, are critical in the delivery of innovative MFS though they are often motivated by profits, not the broader socioeconomic benefits of financial inclusion. Consultative engagements with key players are thus critical in ensuring that providers received the necessary support from Governments/regulators in embracing their innovations. In Kenya, for example, the process of introducing new technologies involves a rigorous consultative process between the providers and the relevant government authorities. This process involves analysis of the innovative products, consultations, carrying out a pilot, roll out of the product and finally improvements in the products if need be. 

Sharing of experiences amongst other regulators is very important, as well as considering international best practices. CBK has learnt a lot from key players within the MFS eco-system both within the country as well as from other countries across the globe through various knowledge exchange mediums. For instance, the Bank learnt more about the agency model from a study tour held in Brazil and Columbia in 2009. We have also hosted several Regulatory Authorities, from Nigeria, Guinea, Malawi, RDC, Zimbabwe, among others to share experiences on mobile money, mobile banking and agency banking. We have learnt that knowledge sharing is a very enriching experience and is the way to go in learning from one another given that we share similar peculiarities in our MFS landscapes. Through these exchanges we have learnt that other delivery channels are also enhancing the MFS eco-system.

MMU: What is the impact of mobile money on the financial access landscape and CBK monetary policy?

Prof. Ndung’u:

Financial depth (proxy: M2/GDP) has been increased quite substantially in Kenya. The velocity of money has increased, which implies that less cash is being used in the economy, therefore, money is mostly “inside money” which can support the improvements in the transmission mechanism for monetary policy. A declining ratio of currency outside banks due to improved access to financial services (as a result of innovations) has led to reduction in currency outside the banking sector. And rising money multiplier is evidence as well due to increased financial innovation.