NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, January 22, 2014

Only about one-fourth of Kenyans have access to a traditional bank, and many people in the country farm for a living. Add those things together, and the result is that a large number of Kenyans are vulnerable to unpredictable income fluctuations.

But a new study co-authored by MIT economist Tavneet Suri shows that a growing form of electronic payments is helping Kenyans weather these financial problems by letting them informally borrow and lend money more easily. The electronic payments system, known as M-PESA, was introduced in 2007 and is now used by at least 70 percent of households in the country

In a new paper published in the American Economic Review, titled “Risk Sharing and Transaction Costs,” Suri and her co-author, William Jack of Georgetown University, show that income shocks force households without access to M-PESA to reduce their consumption by 7 percent more than households in the M-PESA network. That means the electronic money-transfers let people smooth out, as economists say, their spending — meaning they are less likely ever to have to cut back on paying for essential needs.

“The people who use M-PESA have a smaller drop in consumption when something bad happens,” says Suri, an associate professor of applied economics at the MIT Sloan School of Management. “They’re more likely to get money from their friends and family, and they receive from more different people.”