On 26 February 2014 the Governor of the Bank of Tanzania (BOT) released Circular n. NPF/MFS/01/2014 “on utilisation of interest from the trust accounts.” The Circular states that interest accrued on the trust accounts should directly benefit mobile money customers and agents [1]. Last week, Tigo Tanzania began to make a profit share distribution of 8.7 million US dollars out of returns generated on the capital held in the Tigo Pesa Trust Fund, to its 3.5 million Tigo Pesa customers and agents.

According to the Circular, all mobile money providers shall “submit to the BOT an application for utilization of the funds held in the trust accounts representing interest accrued, detailing the manner in which the funds shall directly benefit the mobile money customer.” The interest could be used, for example:

• in the form of customer education campaigns;
• for customer care;
• to subsidize operations in rural areas;
• to provide other benefits to customers, such as insurance; or
• to be paid out directly to customers.

Country examples: Addressing how to use interest accrued in trust or escrow accounts

Tanzania is not the only country that is addressing the question of how to use the interest accrued in trust or escrow accounts. Other countries also addressing the question include:

• In March the Central Bank of Liberia released the new Mobile Money Regulations opting for a solution similar to the one advanced by the Bank of Tanzania.
• Kenya’s National Payment System Regulations state that income generated from the trust funds must be used “in accordance with Trust legislation and in consultation with the [Central] Bank” and must be “donated to a public charitable organisation for use for public charitable purposes”.  Kenyan Trust Law requires that the income of a trust be used for the benefit of the person or persons named as beneficiaries of the trust arrangement.
• Ghana as well is making progress: according to the draft Guidelines for Electronic Money Issuers circulated by the Bank of Ghana in January, e-money issuers shall “pass through all of the interest accrued on the e-money float.”
• Malawi’s Mobile Payments Systems Guidelines state that interest earned on trust accounts shall not be “to the benefit of or otherwise paid to the Mobile Payment service Provider”, although the guidelines do not address the question of whether customers may benefit directly from these funds.
• In Namibia, the Determination on Issuing of Electronic Money prohibits the payment of interest to customers but states that “E-money issuers are permitted to earn interest on pooled funds.”
• In July 2014, the Reserve Bank of India circulated for public comment draft guidelines that aim to create a new regulated entity, the “payments bank” (whose features are very similar to an e-money issuer), which would allow providers to pay interest on the value stored in mobile accounts.

Over the past few years,the GSMA and other stakeholders have advocated that mobile money customers be allowed to earn interest on their funds.[2] The GSMA believes that paying interest to customers would not change the nature of the trust accounts or the role of the non-bank providers (which are not permitted to intermediate the funds), and therefore would not affect the risk associated with the business.

What would be the effect of payment of interest on customers’ behaviour? How would this impact financial inclusion and potential business models?

In April 2013, Telenor Pakistan launched Khushaal Munafa, a mobile money savings product, with the aim to promote savings and reduce vulnerability of low-income families. According to Roar Bjaerum, Head of Financial Services Asia for Telenor Group, “This product represents a major step forward for the rural population of Pakistan which previously used cash and relied on more traditional ways of saving, and is important for Telenor as well because it stimulates customers to keep money in the mobile money account making them more attractive than over the counter transactions. We see that Khushaal Munafa customers keep some extra balance in their account compared to Easypaisa customers. However, still only a small part of our customer base has signed up for this product and it is too early to say how large the impact [will be].”

If receiving interest on the value stored could be an incentive for mobile money customers to keep funds in the system (within the existing maximum balance limits) instead of cashing out, what would be the implications?

(i)      Financial inclusion:

• The ability to accrue interest would encourage unbanked people to open mobile money accounts, thus joining the formal financial system.
• Rewarding the savings behaviour of mobile money customers that are still out of the reach of the banking system would help to build their awareness of how important it is to save. This would also help to build their capacity to take advantage of formal savings products, thus preparing them to open a bank account should the value proposition be compelling when/if banks provide them with that opportunity.

(ii)    Mobile money business models:

• If customers start keeping some extra balance on their accounts, that would lower the number and value of cash-outs, which could ease some pressure on liquidity management for the providers. Pursuing a cash-light economy through the digitization of financial services is one of the objectives of many policymakers. But mobile money providers need transaction revenue to cover the costs of the cash-in and cash-out networks and achieve a sustainable business model.  The fee structure for mobile money today is not designed for savings, and costs would not be covered if providers had to pay agent commissions for every deposit but could not recover these costs in the form of customer withdrawal fees. That said, if funds are held on the wallet, providers could expect higher margins on mobile money by extending the mobile money loop. Customers who start carrying positive balances will have a greater propensity to use funds digitally (e.g., paying their bills without having to cash-in or making merchant payments), which would be key for providers’ efforts to maintain a profitable business model.

How feasible is it to pay out the interest to mobile money account holders?

If regulators allow providers to pass the interest through to customers and if mobile money providers decide to pursue this solution, issues that will need to be considered include whether this will apply to all accounts or only to those that have a higher and more stable minimum balance, how interest per client will be calculated, and how often the interest will be credited to the users’ balances, among others.

If the regulator is willing to let providers pay interest to incentivise savings behaviour, should they also think about extending deposit insurance? A recent MMU blog discusses this point.

As the industry scales, it’s important that regulators keep thinking of innovative ways to use digital financial services to advance financial inclusion and to make financial systems more secure, stable, and efficient. Paying out interest accrued on trust or escrow accounts and extending “pass through” deposit insurance to mobile money accounts could be the next big innovations along the path to full digital financial inclusion.

[1] The current cumulative balance in the mobile money trust accounts held by Tanzanian commercial banks in the name of mobile money agents and customers is TZS 254.6 billion (US$ 156 million).

[2] See Tilman Ehrbeck and Michael Tarazi (2011), “Putting the Banking in Branchless Banking: Regulation and the Case for Interest-Bearing and Insured E-money Savings Accounts“, in World Economic Forum’s Mobile Financial Services Development Report. This position was endorsed by the GSMA, see Simone di Castri (2013), “Mobile money: Enabling Regulatory Solutions“, GSMA paper.