The M-Banking Revolution

Why cell phones will do more for the developing world than laptops ever could.

As recently as two years ago, mobile banking in the developing world was an object of skepticism among financial insiders. While proponents argued that cell phones could revolutionize personal finance in poorer countries, regulators warned of money laundering and most bankers worried that low customer balances wouldn't be worth the transaction costs. Many thought of "m-banking" as a niche product that, at most, could maintain the loyalty of existing traditional bank customers. Few imagined it might bring savings, credit, and liquidity to those who don't belong to a bank in the first place.

Now, however, the doubters have been proved entirely wrong. The spontaneous and unplanned explosion of m-banking in the developing world has gone well beyond expectations. And the effects for development could be monumental.

M-banking began with the widespread use of prepaid cell-phone airtime as an informal currency. Migrant laborers across the developing world would text the serial numbers on prepaid airtime cards to loved ones elsewhere in the country; the recipients of the text messages would then sell the serial numbers to local mobile airtime vendors in exchange for cash, minus a small commission. By remotely selling their airtime this way, laborers were able to avoid taking long bus rides home to the countryside to hand over cash in person.

Three years ago, Safaricom, the Kenyan subsidiary of Vodafone, launched "M-Pesa," a mobile money-transfer service that essentially allowed vendors of mobile airtime cards -- there are apparently 100,000 such vendors in the country -- to institutionalize what they had been doing informally. M-Pesa wasn't the first service of this kind, but it has become the most successful by far. Today, M-Pesa has roughly 10 million customers in Kenya, 40 percent of the adult population. It's the top vehicle for money transfers in the country, with $10 million a day in transactions. Safaricom posted record profits in 2009, some $250 million. Other m-banking products that have met with surprising success are Celpay in Zambia and Gcash and Smart Money in the Philippines.

In May, Safaricom took it one step further, partnering with Equity Bank and offering M-Kesho, an interest-bearing savings account, to all M-Pesa users. Subscribers can now use their cell phones to transfer money from their M-Pesa accounts -- using Safaricom's existing network of nearly 20,000 licensed card vendors -- into their M-Kesho accounts. M-Kesho users are also able to access mobile microinsurance and microloan products. By registering SIM cards that double as individualized account numbers, Equity Bank is seeing 8,000 new customers each day, and its CEO, James Mwangi, recently predicted that, in mere months, Kenya "will be the most-banked country in Africa and the developing world."

M-bankers worldwide already use their mobile accounts as de facto savings accounts simply by keeping cash credit: A 2008 survey found that 75 percent of M-Pesa users were already using their mobile accounts to store money. Respondents found the service over five times safer as a vehicle for savings than traditional methods like keeping the money at home. In fact, more than 95 percent found the service not only safer but faster, more convenient, easier to use, and cheaper.

These developments foreshadow a range of exciting opportunities in servicing the low-income unbanked and reducing the corruption associated with loans and financing in the developing world. With nearly 5 billion mobile subscribers in the world and airtime vendors far exceeding developing-world bank branches, it shouldn't be a surprise that M-Pesa has already inspired 60 copycat businesses across the globe.

By 2012, mobile banking operators could see nearly $8 billion in revenue just by expanding their services to the currently unbanked, according to an estimate by the Consultative Group to Assist the Poor (CGAP). In the developed world, m-banking is gaining traction in Australia, Britain, Korea, and Singapore, as well as in the United States. But only in the developing world does m-banking have such extraordinary ancillary potential. M-banking is the best opportunity yet to deliver financial services to the 1 billion people in the world who don't have a bank account, but do have a cell phone.

The effects of m-banking on the developing world are likely to be huge. The quality and reach of a country's financial services are "crucial determinants of economic growth," as Ross Levine, an economist at Brown University, once wrote. In one study of the impact of financial access on poverty in India, economists Robin Burgess and Rohini Pande estimated that every "1 percent increase in the number of rural locations banked per capita reduced rural poverty by 0.42 percent" and increased economic productivity by 0.34 percent. The potential positive economic effects in Kenya alone are striking: this year, Safaricom projects it will transfer the equivalent of 20 percent of Kenya's GDP through M-Pesa. One scholar who has studied M-Pesa, Olga Morawczynski of the University of Edinburgh, estimates that rural households that are mobile money subscribers see their incomes increase 5 to 30 percent. And though an increase in income is often only a short-term poverty solution, savings and asset-building, as encouraged by programs like M-Kesho, move people toward sustainable economic independence in the long term. Plus, the interest on loans through such programs is usually far lower than what you'd get with an informal moneylender, meaning that the risk of accruing debt is minimal.

There are downsides, of course. Some rural women have complained that their husbands working in the cities, now able to transfer them funds electronically, make far fewer visits back home. Increased demand, also, has strained the ability of some rural agents to keep enough cash on hand for withdrawals. And the successful expansion of m-banking still faces some serious infrastructural and regulatory hurdles, though aid donors -- like the Bill and Melinda Gates Foundation, which has invested heavily in m-banking in places like Haiti -- have recognized the technology's immense potential.

No matter what happens, however, in the context of global development the financial success of m-banking is already one of the greatest success stories of recent years. As U.S. Secretary of State Hillary Clinton said in January, these technologies are "allowing billions of people to leapfrog into the 21st century after missing out on 20th-century breakthroughs." And all it takes is a keystroke.

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A Food Program That's Not About Food

What India's starving children don't need is more blind handouts. What they do need is real social change.

Last year, the New York Times splashed stark images of child malnutrition in India's hinterland across its front page. More recently, another front-page article in the Times reminded the world that India's hunger problem hasn't gone anywhere and told the story of how various social-safety-net programs have failed to help. As the article explains, India still faces endemic problems with chronic malnutrition and hunger -- rates of child nutrition here compare unfavorably with many countries in sub-Saharan Africa -- that government initiatives have failed to address.

The story of why hunger persists in India is long, sometimes depressing, and full of paradoxes, the central one of course being the fact that the country actually has a booming economy and robust food stocks. But really it's a story of poor planning, social exclusion, gender inequality, and above all, a government that's failing to translate new capital into broad prosperity for its people. Because of this, the various schemes for food distribution debated in the recent Times article, which are part of the conversation as India's long-delayed National Food Security Bill wends its way slowly through the political system, will likely do little to create a long-lasting solution to hunger in India. Any real effort will have to start with the country's social and governance problems, and include nutrition programs that pick their targets better.

India's nutrition programs have failed to provide what the most vulnerable members of its population need -- and the new bill under development isn't likely to do enough to address them either. We've known for a long time that the period beginning before a woman gives birth and ending around the second year of her child's life are the crucial years for addressing nutrition. Miss this window, and the battle is largely lost. India's programs are only now just starting to take this "window of opportunity" paradigm into account. But to actually translate a policy into action, reaching all children under 2 with everything that they need (breast-feeding, high-quality foods, immunizations and preventive health care, hygiene and sanitation, and above all, mothers who are healthy themselves), an approach is required that goes far beyond food distribution. 

Taking social exclusion, the evidence has consistently shown that marginalized social groups -- particularly lower castes, certain tribes, and some religious minorities -- have poorer access to social-safety-net services and are also more likely to be excluded from India's rapid economic growth. The stories from Madhya Pradesh portrayed in the Times this year and last year exemplify this social exclusion (as does Foreign Policy's recent story on the resource wars in the nearby provinces of Chhattisgarh and Jharkhand), as they describe the precarious conditions that exist for India's tribal populations, migrant laborers, and extreme poor.

In 2006, the Supreme Court of India asked the government to universalize projects such as the Integrated Child Development Services, the world's largest health, immunization, and nutrition program for young children. This has certainly helped expand services to excluded geographic areas and groups, but ensuring quality of service and reaching the more vulnerable children is still a challenge.

Gender is a problem as well. Research has shown that empowering women is one of the most effective ways to improve nutrition, especially for children. Studies by the International Food Policy Research Institute (IFPRI), where I work, have demonstrated that the low status of women contributes to hunger and malnutrition -- not just among the women themselves, but among their children too.

It's easy to see this process at work in India. South Asia, including India, is one of the worst places in the world to be a woman, especially a poor woman. Sex-selective abortion, female infanticide, low rates of female education, early marriage, domestic violence, and social exclusion of widows create misery across the life cycle. These gender imbalances lead directly to poor nutrition among women, as well as compromising their children's nutrition. Our research in Bangladesh, for example, shows that women who condone domestic violence have children who are more undernourished than those who do not condone violence.

When it comes to children, malnourished women are much more likely to give birth to a low-weight baby -- birth weight being an important predictor of child survival. Not surprisingly, one-third of babies born in India are born with low birth weight, compared with one-sixth in sub-Saharan Africa.

The extent to which women are allowed to control household spending also affects childhood nutrition. Numerous studies, including those by IFPRI, have shown that income or assets controlled by women are more likely to be spent on items that benefit children and themselves, such as food, clothing, and health care, than assets controlled by men.

As with social exclusion, gender inequality has been the target of a number of government and civil society programs. Sex-selective abortion, female infanticide, early marriage, and domestic violence are illegal -- though they still persist. Some states, including Madhya Pradesh, have conditional cash transfer programs aimed at families with girl children. These programs provide financial incentives to families to keep girls in school and delay marriage. Unfortunately, though, little is known about their impact. This is another problem: Well-intentioned investments are made, but without research into outcomes, little is known about how well they work and how they can be made to work better. 

Under the best of circumstances, though, reshaping social norms around gender and class could take a long time. Part of the impetus must come from the Indian media, which to their credit have taken an interest in pushing Indians to question the basic assumptions they grew up with. A long-running TV serial, Balika Vadhu (Child Bride), tackles issues of child marriage and ostracism of widows by showing the daily struggles and stories of a girl married as a child and another married early and widowed at age 16. The show is among the top 10 most-watched soap operas in India. In October 2009, Life Gulmohar Style, a 156-episode radio drama by the BBC World Service Trust aired on FM channels of All India Radio and Dhamaal Radio and took on issues of women's rights, including the question of dowry, in the modern world by portraying the lives of five young people, men and women; the BBC World Service Trust will conduct research on the social impact of the show later this year.

Finally, there's the role of good governance in addressing the crisis. As the recent Times story pointed out, vast resources are being lost to bad planning and corruption. The proposed National Food Security Bill aims to guarantee food security for all people in India, using means such as provision of subsidized food grains. However, it is currently caught up in acrimonious back-and-forth between the group of ministers who drafted its early version and critics who would like to see a more encompassing bill. In either case, it doesn't address any of the broader social problems that are really at the heart of the hunger problem in India.

That's a huge niche for government to fill, as a major report last year from the Institute of Development Studies pointed out, suggesting solutions to governance problems such as poor local-area service delivery, poor outreach to excluded groups, and the overall political economy of nutrition in India. There are ongoing experiments with some approaches to increase transparency and accountability: for example, leaning on local-level government or civil society groups to audit programs. Programs like the National Rural Employment Guarantee Scheme, which guarantees 100 days of hard-labor employment to poor rural families and sets a minimum wage rate for such labor, has offered ways to inform communities about their rights and address grievances. Such mechanisms should be tried out in nutrition programs as well.

All these efforts notwithstanding, government has a ways to go, both on the national and local levels -- and outside pressure can help. India's media has been, again, a key player in the fight. The Tracking Hunger campaign by the Hindustan Times has continued to portray different dimensions of the hunger and nutrition problem in India, while other papers have covered discussions surrounding the National Food Security Bill as it continues to be developed. But NGOs and research organizations need to continue to offer material to the media and civil society that puts pressure on Indian policymakers (such as IFPRI's India State Hunger Index), while also asking tough questions about how the current programs are functioning.

International donors and NGOs must work on investing in programs and research with a positive effect on women and marginalized classes and minorities. Nutrition, health, and anti-poverty programs must be designed so that they help women control family resources. Leaders at the G-8 and G-20 must force India to confront the role of social exclusion, gender inequality, and poor governance in malnutrition. Research institutions must make the effort to document the effectiveness and impact of ongoing efforts to address food security and nutrition, to report on people who are left out of such programs, and to tell the positive stories of those who implement successful programs in the face of these hurdles. 

India's hunger problem is not necessarily fatal. If the country can take some decisive action, reaching out to women and the poor and excluded and scaling up the social safety net in effective ways, it could make radical changes in a comparatively short time. Countries such Brazil, China, and Thailand have made huge leaps in nutrition in their countries, all in a short period of time. India can hardly afford to be left behind.