Money and microfinancing in the developing world (Part 1 of 3)

by mcampbell on December 10, 2012

The developing world has become a catalyst for change. Traditional (western) systems of finance do not function well in countries that have limited infrastructure, are impoverished, and have a large remote population. As the people still need financial services and a source of credit in order to improve their situation, some novel solutions have arisen that are based on modern communication technologies.



M-Pesa – An African alternative to traditional banking

Fiat currency is currency that has no inherent value; the only value it does hold is established by law and maintained through trust. In the west, we are accustomed to using it in its physical manifestation, and tend to see limited changes in in its valuation. As such, it is generally thought of as stable and we are conservative about altering its form and function. It’s true that we may also employ bank cards and checks, but for the most part, we’re happy to operate in cash.

The developing world has a different experience with fiat money. National currencies can be abused from within or manipulated from without, as such; they can have huge fluctuations from devaluation and inflation. Cash is not the stable pillar of the economy that it is in the west. On top of that, people just don’t see it as often (at least not in denominations with real buying power). As fiat money is an abstract concept, and the developing world has no reason to prefer its paper representation, they are perhaps more likely to embrace a substitute when it offers them greater utility.

Banking is another problem for the developing world. Most people have limited or no access to banks and even if they did, they are often too poor to open an account or secure a loan. Transporting money is an issue as well. Physically moving currency requires travel and risk. Infrastructure for moving money that is used in the developed world is not generally available and expensive when it is.

Enter M-Pesa … where cell phone carrier accounts stand in for currency. Sound ridiculous? Consider the following:

1) Why not? Does the paper in your wallet have more validity than the monetary value in your cell phone account? Both are based on trust.

2) As money, the contents of the account can be easily subdivided and transported. Local purchases can be made with it, in small or large amounts, using SMS technology. A buyer can send a payment across the country for goods or services without going in person or using a pricey financial service to send cash. It is also used in charitable donations and offerings, and the power of the collective poor can be formidable in times of crisis.

3) Accounts can be withdrawn in the form of standard currency. If your cell phone is lost, your account is still safe.

4) A new product, M-Shwari, allows for interest bearing accounts and loans.

5) The people are using it! There are more than 17 million accounts, and many of the holders never had a ‘bank’ account before. After all, is M-Pesa that much different from a bank? Its success is causing it to expand out of Africa and into the Middle East and India.



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