The Mobile-Finance Revolution – How Cell Phones Can Spur Development
Jake Kendall, Rodger Voorhies
Foreign Affairs – March/April 2014 Issue
The roughly 2.5 billion people in the world who live on less than $2 a day are not destined to remain in a state of chronic poverty. Every few years, somewhere between ten and 30 percent of the world’s poorest households manage to escape poverty, typically by finding steady employment or through entrepreneurial activities such as growing a business or improving agricultural harvests. During that same period, however, roughly an equal number of households slip below the poverty line. Health-related emergencies are the most common cause, but there are many more: crop failures, livestock deaths, farming-equipment breakdowns, even wedding expenses.
In many such situations, the most important buffers against crippling setbacks are financial tools such as personal savings, insurance, credit, or cash transfers from family and friends. Yet these are rarely available because most of the world’s poor lack access to even the most basic banking services. Globally, 77 percent of them do not have a savings account; in sub-Saharan Africa, the figure is 85 percent. An even greater number of poor people lack access to formal credit or insurance products. The main problem is not that the poor have nothing to save — studies show that they do — but rather that they are not profitable customers, so banks and other service providers do not try to reach them. As a result, poor people usually struggle to stitch together a patchwork of informal, often precarious arrangements to manage their financial lives.
Over the last few decades, microcredit programs — through which lenders have granted millions of small loans to poor people — have worked to address the problem. Institutions such as the Grameen Bank, which won the Nobel Peace Prize in 2006, have demonstrated impressive results with new financial arrangements, such as group loans that require weekly payments. Today, the microfinance industry provides loans to roughly 200 million borrowers — an impressive number to be sure, but only enough to make a dent in the over two billion people who lack access to formal financial services.
Despite its success, the microfinance industry has faced major hurdles. Due to the high overhead costs of administering so many small loans, the interest rates and fees associated with microcredit can be steep, often reaching 100 percent annually. Moreover, a number of rigorous field studies have shown that even when lending programs successfully reach borrowers, there is only a limited increase in entrepreneurial activity — and no measurable decrease in poverty rates. For years, the development community has promoted a narrative that borrowing and entrepreneurship have lifted large numbers of people out of poverty. But that narrative has not held up.
Two trends, however, indicate great promise for the next generation of financial-inclusion efforts. First, mobile technology has found its way to the developing world and spread at an astonishing pace. According to the World Bank, mobile signals now cover some 90 percent of the world’s poor, and there are, on average, more than 89 cell-phone accounts for every 100 people living in a developing country. That presents an extraordinary opportunity: mobile-based financial tools have the potential to dramatically lower the cost of delivering banking services to the poor.
Second, economists and other researchers have in recent years generated a much richer fact base from rigorous studies to inform future product offerings. Early on, both sides of the debate over the true value of microcredit programs for the poor relied mostly on anecdotal observations and gut instincts. But now, there are hundreds of studies to draw from. The flexible, low-cost models made possible by mobile technology and the evidence base to guide their design have thus created a major opportunity to deliver real value to the poor…