Microfinance and Mobile Banking Regulatory and Supervision Issues
Anwar Ammar
Faculty of Management Multimedia University, Cyberjaya, Malaysia
Elsadig Musa Ahmed
Faculty of Business, Multimedia University, 75450, Melaka, Malaysia
E-mails: (, )
Abstract
Mobile banking is growing at a remarkable speed around the globe. Mobile banking can increase poor people’s access to financial services if regulation (i) permits the use of a wide range of agents outside bank branches, thereby increasing the number of service points, (ii) eases account opening (both on-site and remotely) while maintaining adequate security standards and (iii) permits a range of players to provide payment services and issue e-money (or other similar stored-value instruments), thereby enabling innovation from market actors with motivation to do so. This paper looks at these issues within the regulation of mobile banking. Since it lies at the interface between financial services and telecoms, mobile banking also raises competition policy and interoperability issues that are discussed in the paper.
Keywords: regulatory, supervision, microfinance, telecoms, mobile banking
1. INTRODUCTION
Evolution takes place slowly and incrementally. Ideas in one field get transferred to other fields. Unmet needs lead to new innovations and these create new economic relationships. New modifications and new mixtures take place with apparently disparate partners creating a need for other institutional adaptations. Such a fusion is now occurring between the banking industry and the telecommunication industry, creating a new notion called mobile banking. This sector is being constrained by the slower development of regulatory framework owing to conservatism and loss aversion.
One such unmet need is to provide financial services to 77% of the world’s poor currently unbanked. Specifically looking at East Asia and the Pacific, only 55% of adults have an account at a formal institution. For a country’s economy, limiting banking activity to traditional approaches can stifle entrepreneurship, stunt development and even stall economic growth through the effective exclusion of large numbers of potential banking customers. Microfinance- providing affordable financial services to the poor - is one way to meet the financial needs of those languishing.
According to the Consultative Group to Assist the Poor (CGAP), “poor people with access to savings, credit, insurance, and other financial services, are more resilient and better able to cope with the everyday crises they face. Even the most rigorous econometric studies have proven that microfinance can smooth consumption levels and significantly reduce the need to sell assets to meet basic needs. With access to micro insurance, poor people can cope with sudden increased expenses associated with death, serious illness, and loss of assets.”
On the 10th September 2008, instead of carrying cash to his weekly meeting, Mohammad Githio Yunus used his mobile phone to repay his microfinance loan. Although not the same Mohammad Yunus who fathered microfinance, he too is a pioneer: the mobile technology he used has the potential to revolutionise the microfinance industry around the world. Mohammad is one of many Kenyan individuals benefitting from a partnership between Small and Micro Enterprise Program (SMEP), a large Kenyan microfinance institution (MFI), and Safaricom, Kenya’s largest mobile operator and Vodafone partner. (TJAS).
The successful adoption of innovations in delivering a complete range of financial services to the unbanked/under banked necessitate not just modifications in financial regulation and supervision, but also the development of new legal, policy and regulatory frameworks that these new delivery modes will require to effectively protect the interests of clients, including their privacy. It will entail efforts to ensure the legal transparency and predictability required to attract financial service providers into the market, and to ensure the financial stability and efficiency of the overall economy. It will entail the development of new methods of financial education and financial capability building, especially for vulnerable low-income population groups. Innovations will also have an impact on the development of the market infrastructure supporting the delivery of financial services, particularly payment and settlement systems, remittances and credit reporting. These innovations are expected to eventually benefit all in the process of financial inclusion. (Asia-Pacific Forum 2013)
2. Microfinance
Modern microfinance was born in Bangladesh in the 1970s, in the aftermath of the country’s war of independence, when Muhammad Yunus, began an experimental research project providing credit to the rural poor. Over the years microfinance industry has grown exponentially, in terms of the number of clients as well as the number and type of providers and products. The focus is no longer only on credit for investment in microenterprises: Today there is broad awareness that poor people have many and diverse financial service needs, which are typically met by a variety of providers through multiple financial services. Over the years, the discourse has shifted from “microcredit” to “microfinance,” and now widespread concern for “financial inclusion” is directing attention to the broader “financial ecosystem” and how to make financial markets work better for the poor.
A World Bank study has identified three objectives of MFIs that are very often cited (Webster, Riopelle, &Chidzero, 1996): 1) to create employment and income opportunities through the creation and expansion of micro-enterprises, 2) to increase the productivity and incomes of vulnerable groups especially women and the poor, and 3) to reduce rural families’ dependence on drought-prone crops through diversification of their income generating activities.
Over the past decade, microfinance institutions MFIs have become an important component of the broader financial sector in many countries. No longer is microfinance the domains of small NGOs that stand apart from the financial sector – increasingly, banks are competing with MFIs, while many MFIs have become banks themselves. Microfinance institutions provide a variety of financial services designed for poor clients like (savings products, microcredit, payment services, micro leasing remittances and micro insurance etc.) and has emerged an important tool with the use of new technology, policy reforms and financial innovation across the world.
Financial Access 2010 reviews that survey responses from 142 economies and updates statistics on the use of financial services found that many nonbank institutions also provide financial services and some even have specific financial inclusion mandates. These include cooperatives, specialized state financial institutions, and microfinance institutions. In a number of West African countries—Benin, Burkina Faso, Côte d’Ivoire, and Niger deposit-taking microfinance institutions have more depositors than do commercial banks, which suggests that nonbanks can be an important player in providing basic deposit services.
Although some debate exists, microfinance can be a powerful way to fight poverty and promote economic development (e.g., Littlefield et al. 2003; Goldberg2005). Each type of microfinance service can deliver social and economic benefits. Payment services allow poor households and small businesses to transfer money in a faster, safer, and easier way than cash payments. Not only do the payment services create a platform for households and small businesses to forge a formal relationship with microfinance institutions, but they also help clients build a credit history, which is critical to further utilization of financial institutions. Loan services increase household income and can provide people with better living conditions, health care, and education. Loans can also help build household assets by enabling business investments that can generate returns. Savings and insurance services help households better manage cash flow and protect them from unexpected financial hardships. Just the knowledge that these services are available can provide peace of mind, which may help people make better decisions in the long run (CGAP Impact).
3. Mobile Banking And Microfinance
Mobile banking (m-banking) is a subset of branchless banking and involves access to a range of banking services through mobile telephony. One of its main advantages is that it addresses the cost of roll-out (outreach) and the cost of handling low-value transactions by using agents instead of banks. M-banking channels are primarily used for transfers and payments, even when they offer a broader range of services.
The recent success in mobile banking can be attributed to the microfinance movement in its early inception. The Kenyan narrative with M-PESA serves as the origination of mobile banking for the delivery of microfinance. In 2005, M-PESA was designed as a pilot project to facilitate microfinance payments for Faulu, a microfinance institution (Kumar, McKay, and Rotman (2010). However, due to technical and structural challenges in its early stages, the mobile banking uptake failed (IFC, 2010). Safaricom, the mobile network operator, observed customer usage patterns and determined that customers were creatively changing the course of mobile banking (Kumar, McKay, and Rotman, 2010). This user-driven innovation changed the microfinance dynamics by sparking non-attendance of group meetings, thereby creating a “breakdown in repayment discipline (Kumar, McKay, and Rotman, 2010)”. MFIs have begun to adopt mobile banking as part of their banking platform due to the extensive gains realized.
Different approaches of mobile banking in microfinance
The different businesses models for Mobile Money that have emerged over the years can be divided into four categorize: the bank centric model, the MNO centric model, the collaborative model and the independent service provider (ISP) model with two major players: the banks and the MNOs. (Chaixand Torre, 2013). The two most used models are the bank centric model, the MNO centric model.
Bank-led. In this model, it is the bank or financial institution that takes the initiative to provide its clients with a mobile banking service. In this case, the financial institution relies on the infrastructure of the MNO to transfer the data of the transactions, but uses its own branches or partners for the distribution network.
MNO-led. This is the most prominent business model found today.In this setup MNO takes the leading role in the business ecosystem. In the MNO centric business model, the MNO acts as de facto “bank” with limited or no involvement of the financial institutions (Merritt, 2010). The MNO manages all relationships within the business ecosystem, and is responsible for all regulatory compliances (Peake et al, 2012) and the entire value chain. However, often the regulations demand that the MNO store all deposits in trust accounts at a financial institution (Tobbin, 2011).
4. Mobile Banking Regulatory Issues
A key ingredient at the country level is the role of m-banking enabling legislative and regulatory environment. Changes in the legal and regulatory framework can either provide the right conditions for innovative m-banking players to thrive, or hinder its growth by compounding the risk already inherent in the acceptance of a novel product. The challenges of regulation are compounded by the diverse nature of operators in the market – m-banking models vary in their implementation from being entirely bank driven, to being purely driven by a mobile network operator, and more commonly a mixture of the two. Both telecommunication and banking regulators, as well as competition authorities, have a stake in the industry. Nevertheless, many countries have already adopted reforms supporting m-banking environment according to the CGAP (2010) Financial Access database[1].
· Telecommunications regulators
Traditionally, the key roles for the telecommunications regulator in an economy’s financial system were indirect: to ensure the reliability and security of the communications infrastructure that connected financial institutions to their customers as well as to each other – the same role played by the telecommunications regulator in most sectors outside of the ICT sector itself.
· Financial Regulators
Financial regulators also face many questions and concerns regarding their role in the regulation and oversight of m-banking services. Often, financial regulators are empowered to specify the scope of banking services carried out by a financial institution and to issue appropriate banking licenses. A key consideration is that, in general, only banks are authorized to take deposits, and thus the protection of deposits is a key component of banking regulation. (Rolf H. Weber) .On the other hand, credit can often be offered by nonbankinstitutions (NGOs, social development funds, etc.). Taking deposits brings with it a series of prudential regulations to ensure that funds are managed safely on behalf of the customer. Lyman et al. (2008) suggest that non-bank institutions should be allowed to offer stored value accounts under an e-money license, whereas Alexandre et al. (2011) emphasize that regardless of the structure of the model, funds should always be held in a prudentially regulated bank.
AML/CFT: In certain jurisdictions traditional face-to-face KYC in AML laws may still apply. These regulations require consumer information to be collected in processes that no longer apply in the modern Payments era. Although the objectives underlying these regulations remain current, the way they are applied to the e-Payments sector can be improved for today’s market. National banking regulations force service providers to obey anti-money laundering (AML), know your customer (KYC) and combating the financing of terrorism (CFT) rules. Alexandre et al. (2011) discuss the issue of KYC and opening accounts, noting that tiered KYC requirements are necessary to fully leverage expansive cash merchant networks. This would allow cash merchants to open limited service accounts and bring more underserved customers into the system. In the case of m-banking and m-payments, financial sector regulators need to determine the appropriate balance between stringent KYC requirements – which may limit access to banking services – and more relaxed requirements that will make it easy for more people to sign up, but that may be less effective for combating money laundering and terrorism. For example, in South Africa the government established a tiered KYC system, under which the existing AML/CFT law was amended to allow the poor and unbanked greater access to banking services by allowing less-demanding registration requirements for certain types of accounts. Certain jurisdictions only permit retail agents to undertake KYC procedures on low-level transactions. These jurisdictions may also impose subcontracting constraints. For instance, agents in India, Brazil, and Colombia, may subcontract KYC procedures if prior consent is obtained from the financial institution (Tarazi & Brelof, 2011).In contrast, Kenya does not permit an agent to delegate customer verification procedures.
E-money issuance: The E-money principle registers whether non-bank institutions can issue electronic money (e-money). For m-banking that is led by mobile network operators, it is especially important that e-money legislation allow them to accept, disperse and move funds under more relaxed regulation than banks. E-money legislation supports openness in m-banking regulatory environment. Definitions of electronic money vary by jurisdiction, but a common definition is ―monetary value stored on an electronic device which is issued on receipt of funds and accepted as a means of payment by parties other than the issuer. Most banks store money in this way (on their computers) and they are regulated in every country simply as bank institutions.Non-banking companies are permitted to issue e-money in an increasing number of developed and developing nations, including the countries of the West African Union, Kenya, Rwanda, the Philippines, Malaysia, Indonesia, Fiji, and Cambodia (Mobile Financial Services Development Report. 2011).