case 2

CASE 2: USING M- PESA AS AN INNOVATIVE LIVESTOCK MARKETING TOOL FOR PASTORALISTS, KAJIADO COUNTY, KENYA

TABLE OF CONTENTS 1.0 Introduction ................................................................................................................... 3 1.1

Back ground ............................................................................................................................................... 3

1.2 What is MPESA? .............................................................................................................................................. 4 1.3 How does MPESA work? ............................................................................................................................... 4 Chart 1: How Mpesa works .............................................................................................................................. 5 1.3.1 Challenges associated with the Mpesa service ...................................................................................... 5

2.0 Benefits of the Mpesa Money Transfer ......................................................................... 6 2.1 Financial Inclusion ....................................................................................................................................... 6 2.2 Enhanced Economic Activity .................................................................................................................... 6 2.3 Reduced Cash in the Economy ................................................................................................................. 6 2.4 Security .......................................................................................................................................................... 6 2.5 Convenience ................................................................................................................................................. 7 2.6 Lower Costs .................................................................................................................................................. 7

3.0 How M-PESA Services Works for pastoralist at Keekonyokie livestock marketing ............................................................................................................................. 8 3.2 Key learning points to learn from this innovation ..................................................................................... 8

4.0 Additional reading and references ................................................................................. 9

1.0 Introduction This case write up is about Case 1 in the “Learning Route: Innovative Livestock Marketing from Northern to Eastern Africa” and features the MPESA system as an innovative money transfer mechanism that pastoralists are using for transactional security and efficiency. MPesa is available to all Safaricom telephone subscribers in Kenya.

1.1 Back ground The Maasai pastoralist’s livelihoods revolve around their livestock and this is reflected in aspects of their rich tradition that has been passed down for generations.

One of the big problems in the pastoralists’ livestock markets in Kenya has been how to get payment to the thousands of livestock producers who are remotely distanced in the rangelands, many of whom are women. Carrying cash in livestock markets back to rangelands is a very risky thing for livestock traders’ .Since 2007 Kenya has been leading the way with an innovative mobile phone technology that has transformed the lives of millions of people and businesses.

Using Mpesa has meant herdsmen no longer need to carry cash from market. Mobile money transfer allows those without a bank account to transfer funds as quickly and easily as sending a text message.

Mobile technology has actually proven to be very beneficial to Maasai livestock enterprises and traders. Leveraging mobile devices has helped the Maasai cope with one of Kenya worst drought in history that had threatened their ability to graze and water their cattle. With the help of the mobile devices and information shared herders can find out where to bring their cattle for grazing instead of roaming in search of water and pasture. The Mpesa service has helped the Maasai who often live miles away from banks and are usually on lone grazing or livestock marketing trips with their cattle to transfer money back home or sell their livestock with ease. It has also provided the much required cash transfer security on transit from and to rangelands that have a great impediment to livestock trading.

One of the clearest demonstrations of the transformative power of access to Mpesa service is the availability of mobile network coverage in the pastoralists communities. Almost 80% of herders and livestock traders have purchased mobile phones and use them as tools of trade. They communicate with their contacts at livestock markets while still at rangelands and bring their cattle to the markets that offered the best prices. Prices became more uniform and predictable and leading to increase of the pastoralists profits. Unsold livestock (which ranged between 5 to 10 percent per day) was eliminated as buyers and sellers found each other more effectively and this reduced transaction costs in livestock trading.

Mpesa has significantly improved the ability of livestock market actors to conduct most vibrant livestock trade business at Keekonyokie livestock market by providing access to formal financial services to livestock markets on Kenya

1.2 W hat is M PESA?

M-PEAS is an innovative mobile payment solution that enables customers to complete simple financial transactions including person to person money transfer.

M-PESA allows you to make transactions simply and securely in a few seconds by using SMS technology. This has many benefits to customers in terms of convenience, security and ease of use. The pricing is competitive compared with other formal money transfer services.

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Mpesa enables you to:

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Transfer money from person to person

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Transfer money from individuals to businesses

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cash withdrawals at designated outlets

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loan receipt or repayment

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Buy Safaricom airtime

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Pay bill

To load money into your M-PESA account you need to go to an M-PESA Agent and make a cash deposit which results in electronic money being transferred into your M-PESA account (This is confirmed by an SMS received by both the Agent and the Customer).You can then conveniently transfer money to other mobile phone users by SMS transaction.

To withdraw cash from your M-PESA account or (for unregistered customers to get cash), you need to go to an M-PESA agent and make an electronic transfer to the agent who will exchange this for cash.

1.3 How does MPESA work?

Subscribers of Safaricom register for the Mesa service by filling up a simple form and providing any identification proof. Once registered, Safaricom replaces their SIM with the MPesa enabled SIM (if required, all new mobile subscribers now get the MPesa enabled SIM). To load the money on the wallet, the user needs to visit the nearest agent and deposit cash there in exchange for “e-Float”.

This e-Float is like currency that can be used to make payments or transfer to any other person.

The e-Float is can be transferred to any person or merchant via encrypted SMS. The receiver of the virtual currency can either use it for further transactions or can cash-out from MPesa designated outlets. The figure along side depicts the MPesa transaction flow.

The chart below illustrates how an Mpesa transaction is carried out.

Chart 1: How Mpesa works

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1.3.1 Challenges associated with the Mpesa service Despite being touted as a financial inclusion service, M-Pesa user households are twice more likely to have a bank account than non-user households. It is young, male, urban migrants who are driving the uptake of services – customer adoption. Hence, the adoption is not uniform across social strata.

Both agents and customers complain of cash float problems, especially in the rural areas.

Because the majority of transactions in the village are withdrawals, agents must maintain their cash float. They do this by making frequent trips to the bank. This can be problematic if the agent is not close to an urban centre, where most banks in Kenya are located. This situation is frequent despite great efforts by Safaricom on the store liquidity management.

The service availability is not uniform across the country. The service availability is defendant on the network availability which is strong in the south-west corner of the country (as seen in the picture alongside). There are only 2000 towers of Safaricom which are not sufficient to cover the entire country.

2.0 Benefits of the Mpesa Money Transfer 2.1 Financial Inclusion Developing countries are severely constraint by the physical infrastructure of the financial institutions which means that a large part of its population is excluded from the formal banking system. M-PESA with its over fifteen thousand agents is much more accessible to an ordinary Kenyan. M-PESA helped the Micro Finance Institutions (MFIs) to go deeper into remote areas very quickly without substantial increase in the costs.

Financial inclusion has a multiplier impact on the lives of people drawn into the formal financial system which leads to social inclusion. When the poor people get access to financial services, their cash flow management gets better, their financial planning is enhanced and their savings are increased with increased options for providing for themselves for their old age. M-PESA has brought many unbanked customers under the formal financial system.

2.2 Enhanced Economic Activity Getting cash into the hands of people who can use it is limited on the supply-side rather than demand-side; more than the shortage of funds, it’s the ability to move money from the sender to the receiver that is the stumbling block. Since the creation of money, the ability to move it from A to B—the so-called “velocity of money”—has been a fundamental cornerstone of economic activity. But the issue is exactly how money transfer is made to happen in an emerging market where the infrastructure is poorly developed and where very few people have or even want bank accounts. Mobile Money Transfer platform is instrumental in substituting the banking infrastructure as in most of the emerging markets, the mobile phone penetration far out numbers the bank account penetration (by a ratio of 3:1, i.e. for every one bank account holder, there are three mobile phone owners).

M-PESA has been instrumental in driving growth and development in Kenya. M-PESA has resulted in higher remittance and hence higher economic activity leading to faster growth. CGAP in its survey has found that the incomes of rural recipients increased by 5- 30% since they started using M-PESA. 2.3 Reduced Cash in the Economy In the absence of formal banking system, most of the transactions are cash based giving no audit trail to the regulators. M-PESA brought in the transparency in the money transactions by reducing the cash economy and digitising the transactions. M-PESA is equivalent of credit card or debit card which allows the regulators to monitor the trail. There is more visibility on the money flows as the remittances move from informal channels to formal channels.

2.4 Security M-PESA provides unbanked mobile phone users with a secure platform which uses simple, tailored menus on their phone to send fully encrypted and PIN locked messages to a thoroughly audited financial accounting system.

M-PESA not only increased the MFI activity but is also used as a medium of storage of money.

Informal saving channels are much less secure than formal saving facilities. Those who can afford it least suffer the highest risk. Both the banked as well as unbanked customers of MPESA are using it as storage medium as it is easily accessible. There are many more agents of MPesa than bank which means that the customers need not travel long distances to withdraw cash.

With M-PESA, there is no need to carry cash and hence the risk of the cash getting lost or stolen is not there.

2.5 Convenience Many people in emerging economies have to travel far from home to find work and need to be able to send money back to their families so they can pay bills. The cost of money remittance is very high in most of the parts of the world ranging from 3 to as high as 10%. This is the reason why more people depend on informal channels (through friends and family) to remit money or physically deliver the money. Traditionally, this has meant high fees, risky unregulated services, or long expensive trips carrying cash in an unsafe and unpredictable environment. It has been observed that M-PESA users needed to make fewer trips back home to deliver money and the transaction size also came down with frequent transfers. Unlike bank, the M-PESA service is accessible 24X7 and money can be sent anytime, anywhere.

2.6 Lower Costs Mobile technology can lower the cost of remittances as it removes the need for physical points of presence and ensures a timely and secure method of transaction

3.0 How M-PESA Services Works for pastoralist at Keekonyokie livestock marketing To transact, the pastoralists and traders deposit money in their M-PESA account at an agent outlet. The agent will do this transaction for them using their handset.

To send or put money into their M-PESA account they go to an authorized M-PESA agent with their phone and original ID inform the agent how much they wish to deposit or withdraw. The Agent will use their phone to send them e-money in exchange for cash deposited. The pastoralist will receive an SMS from Safaricom confirming the transaction. To send money the pastoralist must first deposit money into their own account and they cannot deposit money directly into another person’s M-PESA account.

The Maasai pastoralists and livestock traders at Keekonyokie livestock market use Mpesa services for the following • • • • • •

Purchasing meat with Mpesa where Butchers send money to meat traders to deliver supplies Maasai pastoralists traders purchase livestock from distant livestock producers Pastoralist send money to families who are many miles away from market for basic needs Traders buying from distant producers this reduces transaction costs in livestock trading and shorten transaction time.

Booking hotel accommodation with Mpesa when going to distance markets to buy livestock Buying phone credit while in remote rangelands without agent services.

“All the Maasai pastrolist needs is a mobile phone and the ability to remember their telephone number” “I don’t need to go to the bank when I have the bank in my phone” –ole Masyi livestock trader 3.2 Key learning points to learn from this innovation A) M-Pesa, by providing access to formal financial services to livestock markets in Kenya, has significantly improved the ability of livestock market actors to conduct most vibrant livestock trade business at Keekonyokie livestock market business.

B) Partnership of the network operator (mobile phone Company) with understanding the market needs has brought the necessary discipline and compliance aspects of managing money transfer that unite a combination of key skills to improve access to finance for the un-banked pastoralists.

4.0 Additional reading and references http://www.safaricom.co.ke/index.php?id=745http://en.wikipedia.org/wiki/M-Pesa http://siteresources.worldbank.org/AFRICAEXT/Resources/258643-1271798012256/MPESA_Kenya.pdf http://thenextweb.com/africa/2011/10/24/local-transactions-by-kenyas-mobile-money-service-m-pesaexceeds-western-unions-global-transactions/ http://technology.cgap.org/2008/06/17/why-has-m-pesa-become-so-popular-in-kenya/