An enabling environment is one that allows, and may even encourage, the introduction and development of new business models that meet a defined public policy objective. In this case, the objective espoused by many countries is that of increasing financial inclusion – the proportion of people with appropriate formal financial services. In our 2006 report for DFID, we proposed two key dimensions for an enabling environment in a new sector like mobile money. These were:
Openness: the extent to which new models that had the potential to be transformative were not prohibited from starting up.
Certainty: the extent to which policy makers and regulators provide clarity that reduces the level of risk for private sector operators not only at start-up but over time.
Quadrant 1 (high certainty and high openness) is clearly the most suitable situation to facilitate mobile money, hence the direction of the arrows. However, based on early diagnostic work in two African countries (South Africa and Kenya), we hypothesised that middle income countries like South Africa were more likely than low income countries to be in quadrant 2 (high certainty, low openness) because they typically have more developed regulatory regimes. That is, they usually have a range of regulatory institutions that have issued regulations or guidance on mobile money or related issues, increasing the certainty, but they face the real risk that a plethora of overlapping and sometimes obsolete regulations will reduce the space in which they can innovate. Conversely, we hypothesised that in low income countries like Kenya, there was simply less on the books in the way of legislation and regulation, usually resulting in more discretion for regulators (and correspondingly, less certainty for providers), but this lack of regulation could also create more openness for the development of innovative models. The report suggested which regulatory domains were affected by mobile money but did little to prioritise among them.
Recently, three colleagues Lyman, Pickens & Porteous (2008) went further, suggesting how to prioritise the factors based on identifying two necessary conditions for branchless banking to emerge from the range of country diagnostic missions undertaken in 2007. These conditions are:
1. Agents must be allowed to operate on behalf of banks and others to open accounts and handle cash in and out functions.As Lyman, Ivatury, and Staschen (2006) argued convincingly, this particular arrangement greatly extends the potential reach of the financial system since existing businesses, such as local merchants, can function as financial service points at much lower cost than if a bank had to set up a new branch or even an ATM infrastructure.
2. Regimes to oppose money laundering and the financing of terrorism (AMLCFT) should be proportionate. Specifically, the due diligence procedures required under know your customer (KYC) regulations (now present in most countries) for opening new deposit accounts or taking payments, must allow for reduced identification and verification procedures for low risk customers. Otherwise, low income people could never meet the standards set in developed countries which, for example, require them to verify a physical address by presenting a utility or other bill.
Lyman et al. (2006) identified four more regulatory areas (“next generation issues”) that would affect the trajectory of development. There should be an appropriate space to issue e-money and other stored value instruments, along with effective consumer protection, an inclusive system to regulate payments, and appropriate competition rules for new payment systems. They also affirmed the earlier observation that, because the regulation of mobile money cuts across many regulatory domains, the risk of coordination failure is higher.
From Information to Rating
To proceed from the general insights about regulatory factors above to a country rating model for mobile money, we took two steps:
1. We designed a simplified questionnaire that collects answers about the status of policy or legislation (including regulation or guidance) across the two dimensions of openness and certainty and in the main domains bearing on mobile money.
2. We then developed a scoring model that weights the answers obtained relative to the purpose of the rating expressed above.
We focused on using publicly available information from diagnostics in four key countries, chosen because of their scale and the levels of interest and activity in mobile banking. They include three leading countries that are mobile money pioneers in the developing world – Kenya, the Philippines and South Africa – and India. In India, interest in mobile money has exploded in the past three years after mobile subscriptions took off in that massive country with its great infrastructural challenges for traditional models of extending the financial system. Several Indian banks have introduced various mobile channels for their customers, although mass usage of those channels reportedly remains low and is certainly not yet transformational.
While this is a small sample, these four countries offer sufficient variation in terms of income level per capita and extent of activity and development in mobile money to test our hypotheses about enabling environments and the growth of mobile money.
The outcome of the scoring summarised in Figure 2 supports several of the hypotheses I advanced earlier. Three points are especially important. First, the openness of the environment does indeed matter: in all of the three countries that are ranked much higher on the openness axis (i.e. to the right hand side), mobile money models have been relatively more active for longer and are more widely used, compared to India, which lies lower on the openness axis.
Second, however, the countries classified as middle income by the World Bank (South Africa, the Philippines and India) all lie higher on the certainty scale than low income Kenya which is clearly in the bottom right quadrant (high openness but low certainty). The Philippines is positioned just inside the top right quadrant, reflecting the fact that while its environment is very open, some of the models have been authorised based on bilateral letters of agreement, the Filipino Central Bank (BSP) is now moving beyond this level of discretion towards a broader framework in key areas like e-money issuance by non-banks. On 9th March 2009, the BSP published a guidance circular setting out an approach for nonbank e-money which increases the certainty around this issue: in fact, it results in an increase of 0.5 in the certainty score for the Philippines, decisively boosting its position within the top right hand quadrant.
In some ways, South Africa’s position is surprising: experiments began there comparatively early and several well known pioneering models such as WIZZIT and MTN Mobile Money emanate from there, but the role that non-banks can play in issuing e-money is circumscribed by the current guidance note on e-money which has frustrated some potential innovators. To further enhance its environment, South Africa would have to amend its position, for example by creating a category of regulation for non-bank e-money issuers, or ‘narrow banks,’ a step that has in fact been suggested. In general, common law countries have an advantage in terms of openness because of the presumption that whatever is not prohibited is in fact allowed; in civil law countries, the reverse applies.
Finally, India has a plethora of legislation. Its laws, regulations and guidelines across a range of areas provide certainty, but limit the openness on key issues: for example, what types of entities can serve as agents? The Reserve Bank of India first allowed agents to function in 2006, and in 2008 issued further guidelines to clarify the restrictions on this role.
While it is easy to make the case for openness, recent events in Kenya also show the importance of certainty. For example, M-PESA, perhaps the largest single mobile money model in these four countries based on number of users, is not formally regulated but operates at a system-wide scale under a no-objection letter from Kenya’s Central Bank.
Clearly, openness and certainty alone are not sufficient to ensure the sustainable development of mobile money. The safety of clients’ deposits matters too, as Lyman Pickens and Porteous (2008) point out. In the absence of a framework that creates certainty about which types of entities can enter and how they must behave, too much openness to innovative models from new entrants can be risky, especially once these models move beyond the small-scale pilot stages.
Question for Discussion: what is the right balance between openness and certainty and how can regulators find it?