African countries have promoted growth and development of financial market and market stability and advancement of their financial institutions as one of economic development strategies. Nevertheless, these efforts seem to have had limited developmental effect in the region so far and financial market in most of African countries is still unstable, small scale and cannot cover major population. Moreover, deficient and difficulty accessing information on customers make financial institutions unable to distinguish customers perfectly. As a result, formal financial institutions require collateral or complicated and strict requirements as a way of screening and monitoring, and prefer high income or employed people who are able to provide valuable collateral and deal with large financial transactions to reduce such risk and justify their transaction and management costs which deteriorated financial dualism situation, lowing the use of formal financial institutions and pushing people, who are low income and live in rural area, towards informal sources. Furthermore even though microfinance institutions provide financial services on behalf of the formal financial sector to people who do not use formal banking services, have also failed to reach the poorest and people who live in rural areas, and have limits and problems as alternative sources of finance, such as financial sustainability and excessive focus on microcredit.
However, since 2007, mobile money, as a new financial channel, has provided faster, cheaper and safer financial services beyond the risks and limitations that alternative financial channels have. This has not only rapidly increased the number of mobile money users, but has resulted in many financial institutions partnering with mobile money providers to provide cheaper and more widely available services to their customers, escaping from their “expensive” and “difficult to use” images. This partnership allows financial institutions to use existing mobile infrastructure and wireless network infrastructure to deliver financial services and facilitate financial transactions which reduce operation costs, bringing cost efficiency to the provision of financial services reducing transactions costs. Moreover, digital information reduces their screening process and the costs associated with attracting more customers. The case of M-Shwari is a good example as regards to digital information sharing and banking innovation in the credit scoring calculation.
In this context, this research examined whether mobile money has been a more effective tool for improving financially excluded people’s financial inclusion to formal finance and whether there has been a change in their financial activity after use of mobile money based on my fieldwork results carried out in Nairobi, which consisted of a survey covering 358 respondents, 129, 112 and 117 of low, middle and high income households respectively, in a total 8 different areas, and from the 2016 FinAccess household survey conducted by CBK, Kenya National Bureau of Statistics and FSD Kenya, which is the fourth in a series of surveys that measure growth and usage of financial services in Kenya.
The survey results found that mobile money was the most preferred financial instrument by all respondents regardless of whether or not they had a bank account and it was a much better channel than other alternatives especially in aspects of cost and accessibility. Particularly for the respondents who have been excluded from formal financial services, mobile money was the most important tool for their financial activities as the only proper alternative financial instrument. In addition, use of mobile money has decreased their financial exclusion (p < .001); especially with regards to sending and receiving money, the proportion of financial exclusion fell dramatically from 75.7% to 6.6% and from 72.3% to 4.6% respectively and about 80% of them started saving money through mobile money and about 93% of them sent or received money through mobile money. In addition, mobile money has allowed financial institutions to provide their services by overcoming various limitations such as lack of infrastructure and screening problem which has increased their transaction volumes. For example, mobile money based services have enabled use of loans and loan disbursement without lengthy paperwork, collateral or vetting credit officers. As a result Equity-backed Equitel mobile money processed loans worth KSh 20.8 billion (about USD 15.6 million) as of September 2016, and KCB M-Pesa loans increased to KSh 17 billion (about USD 1.3 million), a fourfold increase from KSh 4.3 billion in 2015.
In conclusion, mobile money has played a pivotal role in increasing financial inclusion and financial activities of financially excluded people and financial institutions to provide financial service, this may positively affect growth of financial institutions through increase in capital mobilisation and allocation.