New ways to strengthen old ways: M-PESA and informal finance

When organised financial services reach people who have for generations used informal mechanisms to manage their money, one of the most important features they bring is reliability - ensuring, for example, that loans and savings withdrawals are disbursed in full and on the promised day, or that deposits and repayments are collected and recorded accurately. It matters because informal devices and services, despite their many virtues, are not always reliable. The problem with moneylenders, most poor people will tell you, is not so much that they charge high interest rates as that you can't depend on them to give you a loan in the first place. Savings clubs of one sort or another are a boon when they work well, but they don't always work well. Storing money with a neighbour keeps it out of the greedy hands of your husband, but when you need to get it back in an emergency the neighbour may not have the cash ready at that moment. Unfortunately, this is sometimes the case with MFIs as well. Nothing irritates me more than to hear MFI staff telling their clients, "sorry, can you come back next week?" When that happens, their services are no better than those that poor people can find for themselves in the informal sector.

But it’s an oversimplification to think that organised services are better than informal ones, and that the sooner the one replaces the other the better. In practice, formal services often help informal mechanisms become more reliable by interfacing with them. Given that organised services rarely bulldoze informal mechanisms out of the way, but coexist with them for years on end, this too is important. In East Africa many savings clubs became more regular and effective when their members decided to hold their weekly meeting on the same day that the local MFI came to the village. In India women's savings groups gained better control of their pooled funds when NGOs finally managed to persuade banks to allow the women to open joint savings accounts. In Bangladesh being a client of an MFI such as Grameen Bank boosted one's creditworthiness, and it became easier both to borrow and to repay loans taken in the informal sector.

In mid-May, I was in Kenya as one of a group of researchers brought there by the Gates Foundation to ponder the significance of M-PESA and similar services. In and around Kisumu, western Kenya, I heard a dozen stories that suggest that M-PESA may be giving a healthy boost to the reliability, reach and effectiveness of several traditional forms of informal finance. M-PESA is a service run by a mobile phone company that allows you to swap cash conveniently for electronic value at any one of tens of thousands of M-PESA agents found in small shops all over the country. You can carry your e-money around in your phone until you are ready to encash it again, or, by tapping a few numbers into your phone, pay bills with it or transmit it to other people who can just as conveniently turn it back into cash if they wish to.

It was a well-timed trip, because it coincided with the public launch of M-PESA’s tie-up with Equity, Kenya’s leading bank, a venture that will turn M-PESA’s money-movement services into a channel for formal banking, with Equity clients able to use M-PESA to transact with their bank in a range of formal savings, credit and insurance products. You can read more about M-PESA and Equity at: and at David Roodman’s blog at and

With the spotlight shining brightly on how formal banking can get a boost from M-PESA, I thought it an especially good moment to look at links between M-PESA and informal finance. So while my fellow tourists were busy interrogating M-PESA agents I slipped into the streets of Kisumu and of Holo, a small market some miles away, and spoke to a dozen men and women about their experiences with M-PESA. All twelve were, I estimated, on low or lower-middle incomes. Of the twelve, all but one had already opened an M-PESA account – and even she felt the need to tell me that she was planning to open an account any day.

Among the poorest was Peter, who hawks a plastic basketful of snacks to people milling around at the bus station. His total stock-in trade, he told me, was worth about $35. Like many owners of a very small business, his capital is too small for him to isolate it from his personal life, and it tends to get eroded whenever he has to fork out for expenses such as a doctor’s bill for one of his children. When that happens he needs to find a loan to replenish his stock quickly. In theory, his best bet for a loan is his better-off uncle, but for a long time he was rarely able to tap this source because the uncle had moved down to Nairobi – a two-day round trip away by bus costing $16 in fares. But now that both Peter and his uncle have M-PESA, a loan is just a text-message away. Better still, because Peter can repay conveniently by M-PESA, his uncle is even more disposed to lend to him, confident that the money will come back quickly and reliably. Loans from the uncle now ensure that Peter is almost never without a full basket of goods.  Greg, who runs a shoe-stall in Kisumu, is among several of my interviewees who, like Peter, said that M-PESA had made their informal borrowing easier and more reliable, with the result that transaction volumes had risen.  

This area of western Kenya is rich in informal finance, and Peter also uses ASCAs - savings clubs that pool regular deposits into interest-bearing loans for their members. ASCAs, and ROSCAs – another kind of savings club where the amount deposited each round is given in whole to one member, in rotation – were reported by nine of my twelve interviewees, and in several cases M-PESA is used to facilitate them. Ruth is a landlady in a small way, owning three small shacks in Kusumu market, one of which is rented out to an M-PESA agent. Her ROSCA (like almost everyone here she calls it a ‘merry-go-round’) is typical. She and her nine fellow members, all women, each deposit $1.30 (100 Kenya shillings) each day with their treasurer, and every tenth day one of the members receives the full $130 collected in the ten-day period. Ruth explained to me that since nearly all the members are small traders or craftswomen, they often have to move around to other markets, and may not be able to keep up with the daily deposits. But M-PESA has helped: a member away for a few days can send her payments by phone to the treasurer, and the frequency of perfect full-value payouts has climbed steeply. Again, as with Peter’s uncle, the effect is to increase everyone’s confidence in the system, encouraging growth in the use of ROSCAs like this one. Kate, a clothes-and-shoes stallholder nearby told me she is now in no fewer than five ROSCAs of the sort described by Ruth: in several of them, the pay-out is made via M-PESA, leaving a convenient audit trail in the form of the text-messages that confirm the sending and receipt of all M-PESA payments.     

Out in the small market at Holo, I found the same kinds of story. Belinda, turning a sewing machine on the veranda of her small market stall, told me that she is in two ROSCAs, each of $1.30 a day, and her friend Isabel, who sells fruit and vegetables from the stall next door, said that ‘almost everyone’ she knows has a phone and an M-PESA account' and that ‘yes, of course we use it to make merry-go-round payments – why wouldn’t we?’

But I also found people using M-PESA to help control their privately-kept mini-savings. Kenneth is a blacksmith’s assistant – he pumps the bellow to keep the fire hot while his boss hammers the metal – and he tries to keep some e-value on his phone. Just last week his mother, in his distant home village, needed money for drugs, and as soon as he heard about it Kenneth was able to send her $8, without needing to find a reliable courier to take the money home, or to take a day off work to go himself. It’s not just that the phone abolishes time and distance, serving two of the great principles of good finance – timeliness and proximity – but also that it markedly increases reliability.

With such a strong boost to its effectiveness, informal finance looks to have many thriving years ahead of it in Kenya.