February 8

Njuguna Ndung’u

Cash Defenders are Wrong: Digital Finance Truly is ‘Pro-Poor’


Editor’s note: This was written in response to Phil Mader’s Feb. 1 post entitled “Why the Crusade Against Cash Isn’t Clearly ‘Pro-Poor.’

The power of digital payments to transform lives, particularly the lives of people with low incomes, is rightly a hot topic.

Although some have argued that the benefits of digital payments to poor people are overstated, mounting empirical evidence shows how digital financial system platforms can drive financial inclusion and expand economic opportunities. I warmly welcome debate on this issue. The arguments merit careful analysis so that policymakers around the world, businesses both large and small, and individuals can make an accurate assessment of the digital financial systems that have allowed payments in real time, especially in countries that had no payment systems.

Importantly, no one is claiming that digital finance is a panacea for global poverty, which is complex in its causes and multidimensional in its solutions. Rather, digital payment advocates argue that it creates an important infrastructure for expanding access to a range of financial services and to economic participation, which in turn can alleviate poverty and empower women when well-designed policies are implemented effectively. In addition, financial inclusion can lead to inclusive growth via increased economic activities and diverse opportunities.

My own region, East Africa, and my country, Kenya, provide several salient examples of digital payments platforms bringing clear and compelling benefits, particularly for people with low incomes. The logic is that access to financial services allows the poor to save in regulated financial institutions and to build asset bases that will enable them to escape their cycles of poverty. The most important driver of poverty in this region is low asset accumulation. The advancement of digital financial services has provided a combination of virtual savings and affordable virtual credit supply that can be used to build a diverse asset base. In addition, the vibrant economies in the region have provided an infinite supply of investment opportunities, allowing digital financial services to be a game changer for the poor.

Before digital finance, in Kenya and Tanzania most poor people were unbanked primarily due to their low and irregular incomes, as well as prohibitive physical distances to a bank or a financial service point. It is sometimes difficult for people living in developed economies to fully appreciate the consequences of being unbanked. The reality is that without a safe way to store, send or receive money, the most vulnerable people in the world find themselves with very limited ability to withstand an unexpected hardship, medical emergency or worse. Such events are major contributors to the cycle of poverty for those excluded from access to finance and who cannot build their asset bases via savings and affordable credit.

It is helpful to look at specific technological platforms that demonstrate a capacity to improve opportunities of people in poor communities. The M-Pesa technological platform has been a major catalyst of financial inclusion in several African countries, revolutionizing the payments and settlement system particularly in Kenya, opening dramatically bigger markets beyond the local neighborhood to which cash transactions are so often confined. M-Pesa and other products like M-Shwari and KCB Pesa in Kenya, and M-Pawa in Tanzania provide virtual savings and virtual credit supply platforms and have helped drive huge growth in deposit accounts. In Kenya, for example, deposit accounts have increased from 4.72 million in 2007 to over 35 million by the end of 2015. In addition, virtual savings and virtual credit supply products have utilized individual savings and transactions data to generate credit scores to assess risks and price short-term credit; a new collateral technology is emerging, and that’s good news. The existing collateral technology that requires fixed assets has inhibited growth of credit markets in most African economies.

There also is powerful evidence around how digital finance creates more transparent and efficient government taxation and revenue administration, and strengthens financial institutions, and thus improves their ability to serve low-income citizens. For example, digital finance can create a financial history instead of loan applicants needing collateral, a lack of which has been a major barrier to affordable credit and financial sector growth in many African countries. As a result, the transformation we are currently seeing will lead to more opportunities for people in poor communities.


How does this change the lives of poor people?

A recent study in the journal Science by Tavneet Suri and William Jack based on research occurring over a decade showed that mobile banking technology has pulled an extraordinary 194,000 Kenyan households – or 2 percent of all Kenyan households – out of poverty, as defined by living on less than U.S. $1.25 per day. The study found the benefits are “more pronounced for female-headed households, appear to be driven by changes in financial behavior – in particular, increased financial resilience and savings – and labor market outcomes, such as occupational choice, especially for women, who moved out of agriculture and into business.” (Specifically, the authors documented the shift of 250,000 women from agriculture into business.)

This study in Science reinforces what most us in policy making, research and in businesses in emerging and developing economies are observing in credible data sources, in conversation with other policymakers and business leaders, and in our day-to-day lives.

A rapidly growing evidence base tells the story of the power of digital financial services to contribute to improved living standards and economic opportunities for people on low incomes. The momentum toward digital economies is nearly unstoppable and the multiple benefits it affords are increasingly becoming real experiences for millions of people – particularly in the developing world.

I am concerned, therefore, that the uninformed defenses of cash-heavy economies risk unnecessary distraction from the real issue of how to ensure digital economies maximize the benefits to people in poor communities around the world.

In Kenya, I can use my digital/mobile phone account to pay for a meal in a five-star hotel or pay for a cup of tea in a roadside kiosk. I can buy a luxury jacket or a T-shirt in a high-end mall and still pay for sugar from a local shopkeeper; M-Pesa-type products transcend all market segments. Using my mobile phone, I can send savings to my virtual savings account, and I can withdraw or apply for credit without a trip to the bank. This is also true for other African and Asian economies where this is a digital revolution. Where informal markets dominate, a digital financial services platform allows a coordination mechanism across markets to emerge. This has benefited many, but poor households have benefited the most.


Photo credit: Rosenfeld Media, via Flickr.

Njuguna Ndung’u is an associate professor of economics at the University of Nairobi, Kenya, and former governor of the Central Bank of Kenya from 2007 to 20015. He helped usher in M-Pesa in 2007.




digital payments, financial inclusion, mobile finance