Mobile money enhances the effect of traditional finance on firm performance

Firms in sub-Saharan Africa face significant constraints to growth owing to different factors, including inadequate access to credit from the formal banking sector. At the same time, the lack of universal access to financial services such as bank accounts and the limited availability of bank branches often render financial transactions costly with adverse effects on entrepreneurial businesses. Luckily, sub-Saharan Africa has witnessed the advent and exponential growth in mobile money adoption than anywhere else in the world since its inception in Kenya in 2007. The success story of mobile money is evident in the 2021 Global Findex report which shows that in countries such as Benin, Cameroon, the Republic of Congo, Côte d’Ivoire, Gabon, Guinea, Malawi, Sierra Leone, Tanzania, Zambia, and Zimbabwe mobile money account ownership far exceeds financial institution account ownership.  In Benin for example the proportion of adults with mobile money accounts increased from 18 percent to 37 percent between 2017 and 2021 while financial institution accounts ownership decreased from 32 percent to 24 percent during the same period. Similarly, Zambia records a 12 percent points decline in financial institution account ownership and a 14 percent points rise in mobile money account ownership between 2017 and 2021.

The success story of mobile money has brought an important policy question as to whether mobile money can complement traditional financial services by helping firms overcome some of the constraints in the financial sector. An answer to this question is provided in a recent study by Konte and Tetteh (2023)[1] that examines the complementarity between mobile money use for transactions and traditional financial services in relation to labour productivity[2] using firm-level data across 14 countries in sub-Saharan Africa. The study argues that in the face of financial frictions, mobile money use can augment the impact of traditional financial services on labour productivity through a reduction in financial transaction costs. The findings show that firms experienced greater productivity improvement once they combined mobile money with traditional financial services such as bank credit and account ownership. Firms that only use mobile money for transactions record an increase in their productivity by 1 percent compared to firms that do not use either mobile money or bank services. However, when firms combine mobile money use with access to bank credit, their productivity increases by around 22 percent. These findings are visible among Small and Medium-sized Enterprises (SMEs) in East Africa, where mobile money is well established, but also in regions where mobile money is emerging.

The evidence shows that mobile money complements traditional financial services and therefore firms should be encouraged to use mobile money in addition to traditional financial services. The promotion of both mobile money and traditional financial services will enable formal firms to access financial products and services that are cost-effective at any given transaction. This is particularly important given that mobile money services are relatively less expensive for low-value transactions (transactions that involve small amounts) while traditional financial services are cost-effective for high-value transactions. Across sub-Saharan Africa, we expect that the use of both mobile money and traditional financial services will be favourable to SMEs given that these firms face major constraints to growth and are more likely to engage in low-value transactions. The freeing up of additional financial resources owing to mobile money use for example will propel SMEs to channel limited financial resources into productive investment and business expansion.

How can the benefits of mobile money be enhanced?  

Mobile money holds great prospects for entrepreneurial businesses in sub-Saharan Africa, but formal firms are yet to experience its full benefits. The limited direct impact of mobile money on firms’ productivity in our study suggests that there is more room for growth and value addition. A possible channel to unlock the full benefit of mobile money is the provision of credits to formal firms via mobile money platforms. In collaboration with commercial banks, Mobile Network Operators are beginning to offer microcredits on mobile money platforms to consumers in countries such as Kenya, Ghana, and Cote d’Ivoire without collateral. This model of credit provision can be leveraged to extend loans to SMEs where bank, mobile money, and telecommunication transaction records are combined to compute credit scores. Using alternative sources of information to estimate the creditworthiness of formal firms will relax the overreliance on collateral as a guarantee for credit access. The experiences in Kenya and Tanzania for example show that the provision of consumer credit via mobile money platforms can lead to over-indebtedness or default risk especially when the collateral requirements are removed. The extension of alternative finance to SMEs via mobile money platforms should account for new sources of default risks and take the necessary steps to address them.

Sub-Saharan African countries can take advantage of their experiences with mobile money interoperability (e.g. bank-to-mobile money interoperability) to experiment with open banking. Open banking requires consumers to grant access to their banking transaction records to third-party firms for tailored financial solutions including payment and credit solutions. The ability of consumers or firms to share their banking and mobile money transaction information with third-party firms will open the possibility for value-added services for example on mobile money platforms, that will be beneficial for businesses and consumers. Open banking however requires appropriate regulatory and legal framework for successful implementation.

Finally, there is the need to increase daily transaction limits of mobile money transactions especially for SMEs. This will ensure that SMEs can conduct both low-value and high-value transactions on mobile money platforms at low costs. Effective customer due diligence and know your customer (KYC) measures are required to mitigate any potential risks that may arise during mobile money transactions.

All errors and views expressed in this blog are those of the authors. They do not necessarily represent the views of the International Finance Corporation or the World Bank.

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