Mobile money opens up new opportunities for small business to access financial services

The rapid expansion of mobile money systems is creating new opportunities for micro- and small enterprises (MSEs) - particularly in low-income countries - to access financial services. To extract the full development benefit, governments need to pioneer new legislation and regulations.

The international community should actively support the development of sound regulatory frameworks and relevant institutions, as well as facilitate the exchange of practice and expertise, says UNCTAD in the Information Economy Report 2011: ICTs as an Enabler for Private Sector Development, released last week.

Mobile money deployments have taken off in the past two years. According to data from the GSM Association, some 109 such deployments had been implemented as of April 2011, spanning all developing regions. Only 11 of these are in developed countries (chart 2). Africa is leading the trend with 51 mobile money systems in place, and as many as 37 of the deployments are in least developed countries (LDCs). There are now more than 40 million users, according to the providers from whom subscription data are available.

Mobile money is providing increased access to finance for MSEs, which traditionally have been poorly served by existing lending institutions. Banking through mobile phones allows for real-time transfer and the receipt of small amounts of funds at low cost. They can reduce the costs of processing and administering small loans, thereby alleviating a significant disincentive for lenders to extend credit to MSEs.

As noted by the Secretary-General of UNCTAD, Supachai Panitchpakdi, “Mobile money services promise widespread benefits for private sector development. With appropriate regulation, these services have the potential to contribute to much-improved financial inclusion.”

The Information Economy Report 2011 stresses that existing mobile money systems can become even better adapted to meeting the needs of small businesses; most mobile money deployments were set up with people-to-people transfers in mind. Basic money transfer or payment functions can have a major impact on the way small enterprises operate. They can enable them to better manage their cash flow and expedite the delivery of supplies and goods.  One challenge is the “walled garden” mobile operators use for their money services. For example, a user of MTN Uganda´s MobileMoney cannot send money that directly ends up in the mobile money wallet of an Airtel Uganda user. For a small business to make effective use of mobile payments and mobile financial services, interoperability becomes more important.

A second challenge relates to transaction limits. Governments could introduce tiered systems, with higher transaction and balance limits as well as higher security measures for small business users.

A third challenge is related to cross-border transfers. International remittances represent an important source of finance for many small enterprises in developing countries, and households that receive remittances have been found to be more likely to start entrepreneurial activities. Currently, only a few deployments cater for international money transfers.

Fourthly, few microfinance institutions (MFIs) have integrated mobile money into their operations. There is scope for mobile technology to help expand outreach, cut transaction costs, improve customer service and reduce fraud. Adequate attention should be given to learning from early adopters. In Kenya, for example, Musoni became the world´s first MFI to rely entirely on mobile money for both disbursements and collections.

Developed countries have limited experience in the policy design and implementation of mobile money systems, in contrast with most other policy domains. This means that governments in countries that introduce mobile money must pioneer new legislation and regulation. The Information Economy Report 2011 recommends a test-and-learn approach by which conditional approvals are granted that allow regulators to observe market developments before issuing regulations. As regulations evolve, there will be reasons to revisit various legal and policy considerations.

Governments and their central banks should explore ways to absorb small enterprises into the mainstream by means of mobile-based commercial and financial transactions. In order to capture the full potential, dedicated research is needed to extract lessons from the early adopters. The international community must play an active role in supporting the development of sound regulatory frameworks and relevant institutions.