Risk sharing and the economics of M-PESA

William Jack
Georgetown University

Tavneet Suri
MIT Sloan With support from the Consortium on Financial Systems and Poverty
Impact and Policy Conference August 30 September 1, 2012 Bangkok

The solution: problem:

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M-PESA as a risk spreading tool

Formal insurance is limited Informal insurance exists, but is often incomplete.why? Moral hazard: information asymmetries Limited commitment: contract enforcement Transaction costs
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Summary of findings
The consumption of households who dont use M-PESA falls by about 7% - 10% when they suffer negative shocks Lower transaction costs allow households who use M-PESA to smooth these risks perfectly

The M-PESA concept

Remote account storage accessed by simple SMS technology Cash-in and cash-out services provided by MPESA agents

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Millions

16 14 12

Customer and Agent growth

2011

30,000

25,000

10

20,000

Customers

8 6

Customers 2008 Agents

15,000

10,000

4 2 0
Oct-06 Apr-07 Nov-07 Jun-08 Dec-08

2007

5,000

0
Jul-09 Jan-10 Aug-10 Feb-11 Sep-11

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Agents

2009

2010

Lake Victoria Nairobi

Mombasa

June 2007
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Note: partial data only

Lake Victoria Nairobi

Mombasa

Dec 2007
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Note: partial data only

Lake Victoria Nairobi

Mombasa

June 2008
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Note: partial data only

Lake Victoria Nairobi

Mombasa

Dec 2008
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Note: partial data only

Lake Victoria Nairobi

Mombasa

June 2009
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Note: partial data only

Lake Victoria Nairobi

Mombasa

Dec 2009
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Note: partial data only

Lake Victoria Nairobi

Mombasa

June 2010
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Note: partial data only

Our household survey

3,000 households across most of Kenya Four rounds: 2008, 2009, 2010, 2011
Uganda

Somalia

Nairobi

Tanzania Indian Ocean

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Who is using M-PESA?

100%

75%

50%

Households outside Nairobi

25%

Median consumption ~$2 per day

0% 2008 2009 2010 2011

>$2/day

$1.25-$2/day

<$1.25/day

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Banking for the unbanked?

100%

75%

50%

Households outside Nairobi

25%

Median consumption ~$2 per day

0% 2008 2009 2010 2011

Unbanked

Banked

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100%

How do people use M-PESA?

Share of households

80%
60% 40%

20%
0%

Transactions

2009 data
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How often do people use M-PESA?

Less often Once a year Every 6 months Every 3 months 4% 4% 14% 43% 6% 5% 24%

Monthly
Every 2 weeks Weekly Daily 0%

2%
10% 20% 30% 40% 50%

Transaction Costs
1,400 1,200 1,000 Tariff 800 600 400 200 0 0 5,000 10,000 15,000 20,000 25,000 Amount deposited and sent M-PESA: Reg to reg 30,000 35,000 40,000

Postapay

Western Union

Empirical strategy
c = a + Shock + User + bUser * Shock + controls Consumption User Shocks dont hurt users so much (b)
Users are richer ()

Non-user (a) Shocks hurt ()

Shock

No shock

Shock status

Basic Results
M-PESA User Negative Shock User*Negative Shock OLSA 0.553*** [0.037] -0.207*** [0.038] 0.101** [0.050] -0.105*** [0.033] -0.207*** [0.038] PanelB -0.090** [0.036] 0.241** [0.116] 0.176*** [0.050] 0.052* [0.028] -0.069** [0.032] PanelC -0.016 [0.047] 0.232 [0.169] 0.156** [0.062] 0.055 [0.035] -0.068 [0.043] Without NairobiC -0.008 [0.049] 0.120 [0.141] 0.150** [0.065] 0.050 [0.037] -0.056 [0.045]

Shock, Users Shock, Non-Users

A: Full sample with time Fes; B: Full sample with controls + interactions C: Full sample, controls + interactions, time and time x location FEs
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Improving Agent Access

Distance to the 3.5 closest agent 3 (km)
2.5 2 1.5 1 0.5 0 4

22% Change 14% Change 33% Change

Round 1 Round 2

40% Change

28% Change

Mean Distance (km)

5th Percentile

25th Percentile 50th Percentile 75th Percentile

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Using Agent Roll Out

Agents w/in Agents Agents w/in Agents Distance to 1km w/in 2km 5km w/in 20km Agent Negative Shock Agents Agents*Shock 0.152 [0.152] -0.022 [0.039] 0.055*** [0.019] 0.122 [0.153] -0.003 [0.031] 0.050*** [0.015] 0.148 [0.160] 0.018 [0.024] 0.021** [0.010] -0.176 [0.140] -0.002 [0.006] -0.002 [0.005] 0.619*** [0.203] 0.051 [0.054] -0.058*** [0.019]

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Mechanisms
Consumption smoothing could be effected through
Remittances Savings Information/communication

We find remittances are the dominant factor

More likely, More often, More Larger network
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