M-PESA: Why Kenya? by Judith Bosibori Bosire M.A.(Financial Economics), State University of New York at Buffalo, 2010 B.A. (Economics), Mount Holyoke College, 2008 MA PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS in the School of International Studies Faculty of Arts and Social Sciences Judith Bosibori Bosire 2012 SIMON FRASER UNIVERSITY Fall 2012 All rights reserved. However, in accordance with the Copyright Act of Canada, this work may be reproduced, without authorization, under the conditions for “Fair Dealing.” Therefore, limited reproduction of this work for the purposes of private study, research, criticism, review and news reporting is likely to be in accordance with the law, particularly if cited appropriately. Approval Name: Judith Bosibori Bosire Degree: Master of Arts (International Studies) Title of Thesis: M-PESA: Why Kenya Supervisory Committee: Chair: John Harriss Professor Morten Jerven Senior Supervisor Assistant Professor Michael Howard Supervisor Professor Date Defended/Approved: December 17, 2012 ii Partial Copyright Licence iii Abstract This research paper examines the factors that contributed to the remarkable adoption of M-PESA, a mobile payments system, in Kenya. In particular, it investigates the differences in the uptake of mobile money in Kenya and Tanzania by comparing the initial country conditions, sociocultural norms and business strategies employed in the implementation process. It finds that, despite many similarities between the two countries, Kenya has experienced a remarkably higher degree of uptake compared to Tanzania. The paper attributes the higher adoption rate in Kenya to a combination of favorable country conditions, supportive social-cultural context and effective implementation strategies employed by the service provider Safaricom. It concludes that the rapid adoption of M-PESA is an exception and not the rule for mobile money adoption models, and recommends that service providers tailor their implementation strategies to the unique conditions in each country. Keywords: M-PESA; mobile money; financial inclusion; technology adoption; Kenya; mobile phone iv Dedication To my family, the Bosires, who never ceased to believe in my ability to excel and to define success in my own terms. v Acknowledgements I would like to extend my sincere gratitude to my supervisors, Dr. Morten Jerven and Dr. Michael Howard, whose insights and directives immensely contributed to shaping this paper. I would also like to thank the International Studies Program faculty members and staff for their support throughout this program. A special thank you goes to my family and friends who encouraged and supported me through this journey. In particular, I would like to recognize Lydiah Bosire and Timothy Sexton for being my patient and meticulous editors. Your criticism and encouragement contributed enormously to the success of this paper. Finally, I would like to thank my colleagues, the IS 2011/2012 cohort for your prompt response to questions, and your energy. vi Table of Contents Approval .......................................................................................................................... ii Partial Copyright Licence ............................................................................................... iii Abstract .......................................................................................................................... iv Dedication ....................................................................................................................... v Acknowledgements ........................................................................................................ vi Table of Contents .......................................................................................................... vii List of Tables ................................................................................................................. viii List of Figures................................................................................................................. ix List of Acronyms .............................................................................................................. x Introductory Image ......................................................................................................... xi 1. Introduction .......................................................................................................... 1 2. Overview of Mobile Phone and Mobile Money Service in Kenya ...................... 5 2.1. How M-PESA Works .............................................................................................. 5 2.2. What is the impact of M-PESA?.............................................................................. 7 3. Theory and Model: Adoption of Mobile Money ................................................. 13 3.1. The key drivers of user acceptance of mobile money services ............................. 17 4. Mobile Money Adoption: A comparative Case Study of Kenya and Tanzania ......................................... 23 4.1. Why was M-PESA very Successful in Kenya? ...................................................... 24 4.1.1. Country Enabling Conditions ..................................................................... 25 4.1.2. Business Model- Implementation Strategies ............................................. 35 4.1.3. Social and Cultural Context ....................................................................... 38 5. Conclusion and Recommendations .................................................................. 41 References ................................................................................................................... 45 Appendices .................................................................................................................. 52 Appendix A. Mobile Phone Connection and Growth ..................................................... 53 Appendix B. Parameters Contributing to Adoption of M-PESA in Kenya ...................... 55 vii List of Tables Table 1. Distribution of Mobile Subscriptions per Service Provider, June 2012 ............ 6 Table 2. M-PESA Market Share in Kenya and Tanzania ............................................ 30 Table 3. A Comparison of Mobile Money Adoption Parameters ................................. 40 viii List of Figures Figure 1. Cumulative Model for Mobile Financial Services Adoption ........................... 16 Figure 2. Financial Services Access Rate Prior to M-PESA ........................................ 26 Figure 3. Remittance Channels before and after M-PESA Implementation- Kenya .......................................................................................................... 28 Figure 4. Population Knowledge of Key Financial Terms and Products....................... 34 ix List of Acronyms ASCA Accumulating Savings and Credit Account CCK Communication Commission of Kenya DoI Diffusion of Innovations GDP Gross Domestic Product ID Identification Card IFC International financial Corporation KYC Know Your Customer MDG Millennium Development Goal MNO Mobile Network Operator GSMA Global System for Mobile Communication Association ICTs Information Communication Technologies SIM Subscriber Identification Module SME Small and Medium Sized Enterprise SMS Short Message Service TAM Technology Acceptance Model ROSCA Rotating Savings and Credit Association x Introductory Image Photo Credit: Laxman Rajagopalan xi 1. Introduction Kenya stepped into the arena of mobile money transfer services in 2007 through the successful launch of M-PESA by Safaricom1, a mobile network operator (MNO) (Mas and Radcliffe, 2010). M-PESA is a mobile payments system that allows users to make financial transactions such as deposits, withdrawals, bill payments, remittances, and purchase of goods and services by using a mobile phone,2 without requiring a bank account, internet connection, or a payment card. ‘M’ is an acronym for ‘mobile’ and ‘Pesa’ is a Kiswahili word that translates to ‘money’; M-PESA therefore translates to ‘mobile money’. Within 4 years of its launch, M-PESA attained over 15 million service users thus enabling millions of unbanked Kenyans, the majority of whom reside in rural areas, to have access to a 24-hour financial service system. The exceptional growth of M-PESA mobile money service in Kenya since its introduction has spurred a wave of mobile money service deployments across and beyond the African continent.3 Today, Kenya stands as a world leader in the provision of mobile money services with about 19.5 million service users and an annual transaction volume of about KES 672.3 billion (US$ 8 billion)4, or 24 percent of Kenyan Gross Domestic Product (GDP) (CCK Report, 2012). Indeed, of the about 100 million users of mobile money around the world, one in five is Kenyan (Juniper Research, 2011). 1 Safaricom is the leading mobile network operator (MNO) in Kenya, and an affiliate of Vodafone Group- a British multinational telecommunications company. 2 The mobile phone acts as both a wallet and a bank account. 3 Kenya’s M-PESA is not the first mobile money deployment; however its rate of adoption has been unprecedented. The first sustainable mobile money system was launched by Smart Money, in 2001, in the Philippines. 4 Based on an exchange rate of $/KES 85. 1 The success of M-PESA in Kenya has proven that mobile money services havethe potential to revolutionize access to financial services