Kenya’s Shift to Electronic Payments, an Example of Courageous Government

Dr. Ruth Goodwin-Groen: Dr. Mwau, what drove Kenya to deliberately move away from a cash-only economy and create a strategy to shift to an electronic payments economy?

Dr. Geoffrey Mwau: Let me start by saying that when you look at all the benefits that can be realized for a government, economy, and citizens – particularly for women – any government would be prepared to do what it takes to move to electronic payments. In 2009, we began moving virtually all government payments from cash or cheques to electronic payments in regions that were accessible through the Central Bank electronic payment system. We also started making social transfers through mobile money systems. With the Integrated Financial Management Information System (IFMIS) now being rolled out across Kenya we will soon be in a position to integrate all electronic forms of payment throughout the country. This has increased transparency and also saved the government money by increasing the efficiency with which we distribute payments. Even more importantly it has modernized our economic infrastructure and helped individuals and small businesses gain access to formal financial services.

Dr. Ruth Goodwin-Groen: Which challenges did you expect and which challenges surprised you?

Dr. Geoffrey Mwau: There are barriers and challenges to overcome to achieve these benefits and Kenya has been fortunate to have had leadership that is courageous and tenacious in addressing them.

We always expected opposition from people who benefited from the cash-only economy. Some individuals and even agencies profited from the non-transparent distribution of high volumes of cash. Electronic payment systems bring the full light of day to government operations by providing an electronic footprint. We knew there would be some who benefited from the status quo who would fight hard to challenge or delay the shift.

However, the challenge that was more surprising was the need to build trust among the population. It was so clear to us how recipients would benefit that it was, admittedly, a bit unexpected how much we had to invest in education and engagement. For example on January 24, 2009 the Permanent Secretary of the Ministry of Finance, Joseph Kinyua, publicly posted the Ministry of Finance’s Audit Findings on M-Pesa Money Transfer Services as a way to build trust and creditability in the banking sector and mobile accounts. This reassured the Kenyan people that these mobile accounts had the backing of the Government and that their money would not be stolen. This is just one example of the robust outreach to the public.

The close collaboration across the Ministry of Finance, Ministry of Information and the Central Bank enabled us to overcome these challenges. It was remarkable how each agency had leaders and senior officials who were able to work together and provide a united front against vested interests for the benefit of the people. Without this collaborative leadership, Kenya would not be where it is today.

Dr. Ruth Goodwin-Groen: Dr. Mwau, you mentioned earlier the benefits to the government and economy of Kenya. What are the biggest benefits to the Kenyan people from the shift to electronic payments?

Dr. Geoffrey Mwau: Using electronic accounts means that payments and transfers to recipients arrive on time, wherever they are, with a transparent electronic record of the payment. In the past, delays in cash payments could mean no food or necessitate a loan until the cash arrived, so this speed and reliability is a dramatic turnaround. Electronic payment also eliminates the illegal practice of ‘facilitation’ fee demands by those who delivered the cash.

Additionally, recipients do not fear theft or loss. Even with a mobile phone account people feel safe because if the phone is stolen, their loaded SIM card is typically kept in a private place. Beyond being safe, the account is easily accessible for immediate use.

The longest-lasting benefit comes from the reduced transactions costs which allows us to reach millions of poor and vulnerable Kenyans—especially women—who were hitherto unbanked. This has contributed significantly to advancing financial inclusion. Just to illustrate this, a street vendor can borrow US$ 50 from a Micro Finance Institution (MFI) which might look very small to others, but she can buy merchandise, sell it and repay within a day or two. She doesn’t have to travel to get the loan or to repay and as a result repayments rates have been very high. More importantly, the MFIs can track the risk profile of each of borrower and thereby determine the amount and cost of future loans. The recipients now have a financial account. Instead of trying to save money under the mattress where it is in danger of discovery, fire or financial pressures, many more Kenyans can safely save and begin to build assets. This account is also open to others. Mothers with sick or injured children could quickly request a transfer to their account from a relative and more quickly access a clinic and save their child’s life. Many Kenyans in the United States of America get such requests from family at home and can transfer funds cheaply and immediately.

While these benefits are universal, they are particularly important for women in Kenya who typically are responsible for feeding and caring for children and are also vulnerable to theft, lack of privacy or control of their money.

Dr. Ruth Goodwin-Groen: If you could share one piece of advice with other governments who are today where Kenya was in 2009 when it began this journey, what would it be?

Dr. Geoffrey Mwau: This journey began way before 2009 when we started to undertake reforms to liberalize, and create a regulatory environment in the ICT sector that supported participation and innovation. Therefore, my first piece of advice is that countries should have the requisite policy and regulatory environment to enable competition and innovation.

Second, strong leadership is crucial. Kenya has been fortunate to have courageous champions who are committed to this vision and who understand how it will shape Kenya’s future. For example, the Minister for Information Mr. Mutai Kagwe and the Permanent Secretary Dr. Bitange Ndemo who in 2004 took very bold decisions that completely transformed the ICT landscape in the country. Another example is the implementation of Integrated Financial Management Information System(IFMIS). Similarly, a focused Finance Minister and strong political leadership have seen the implementation of a fully-fledged IFMIS at the national level and it’s presently being rolled out to county governments. IFMIS will fully automate all public financial management systems in government helping us to eliminate waste of public resources. As a result, we will have more money for priority expenditures. Bottom line? Leadership matters.

Third, expanding upon leadership issues, I can’t stress enough the importance of joint leadership of multiple agencies. Cross-agency leadership ensured policy and regulation that was balanced among all interests. For example, the banking sector was worried that this might challenge their business so we had to reassure them that in the very near term, it would be good for their business. It turns out we were right, as there are now over a billion extra shillings in bank savings accounts thanks to mobile phone accounts.

Fourth, it is important that a government undertakes some key investments in the early stages when the private sector is not ready and/or not sure of the policy direction. This is what we did when we invested in the first fibre optic cable to increase the speed, reliability, and capacity of Kenya’s internet and telecommunications sector. This, together with the reforms that we had undertaken to liberalize and deregulate the sector resulted in a drastic reduction in the cost of internet and therefore, communication. (Today, it costs much less to call from Kenya to the USA than from the USA to Kenya for example. People call the USA as if they are calling someone next door!) This investment sent a clear signal that the Government was serious. Slowly, over time and as the sector matures, the Government will be able to divest from this venture and focus more on regulation and promoting innovation.

Of course, other governments might want to make the journey faster than we did. So, my final piece of advice for governments is that they join the Better Than Cash Alliance to benefit from the knowledge, sharing, and collaboration of multiple governments, companies, and the development community.

Dr. Ruth Goodwin-Groen: What is the next stage in the ongoing digitization of Kenya’s financial system?

Dr. Geoffrey Mwau: Right now, we are working with our development partners to create a single electronic platform through which all cash transfers can be managed in accordance with our National Social Protection Policy. Initially we will be able to transfer about US$ 100 million through this platform and this will further increase the efficiency of the system and the benefits for recipients. We are also continuing to pursue a policy direction that is supporting innovation by the private sector because they really are the leaders in this endeavour. And we are increasing our leading role as a facilitative government on this topic, in part through our work with the Better Than Cash Alliance. There is still much to be done, but we are now at the stage where this has evolved from a calculated risk to a transformative success. So now the politics are easier and we can place more focus on the operations and investments.

Dr. Ruth Goodwin-Groen: Thank you Dr Mwau for these inspiring insights!