Dependency rises with collapse of rural economy

The collapse of Kenya’s rural economy has left urban folks with the burden of meeting the financial needs of rural-based relatives, raising the level of dependency in the country by the largest margin in a span of three years.

Fresh data on movement of money in the economy indicates that the majority of rural homes are relying on cash remittances from relatives and friends in towns to meet two thirds of their daily consumption needs.

CGAP, a World Bank funded research group, says remittances from Kenyans living in towns to their relatives in the countryside have increased by 30 per cent in the past two years, helped by increased efficiency of delivery and a steep fall in the cost of transactions since the launch of mobile-based money transfer platform M-Pesa.

In one of the initial studies to establish the social and economic impact of mobile phone money transfer services, Financial Services Deepening (FSD) group found that the dependency ratio in Kenya has risen above 20 per cent since 2002 as more rural folks turn to relatives and friends for support in meeting their daily consumption needs.

A fifth of Kenyans living in the countryside said remittances from relatives have become their main source of livelihood compared to 14.3 per cent who confessed to living on handouts in 2006.

The M-Pesa mobile money transfer service was launched in March 2007 and has since registered a steady growth in the number of registered users to about seven million in just over 30 months. During the period, M-Pesa has moved an estimated Sh130 billion in small amounts averaging about Sh1,500 per transaction.

Safaricom’s main competitor in the mobile phone money transfer business is Zain, which is estimated to have about 300,000 registered users since launch of its “Zap” service in February.

“The financial diaries (of research respondents) reveal that such remittances constitute as much as 70 per cent of rural household income,” says the CGAP report.

The report echoes a recent study by FSD, which showed that slowing economic growth and acute food shortages has doubled the number of dependants that Kenyans with a regular income are supporting.

Analysts attribute the unfolding trend to the shrinking agricultural output —the buttress of the rural economy that supports an estimated 80 per cent of Kenya’s population.

“Food production is going down, while the population is rising,” says John Akoten, an economist at the Institute of Policy Analysis and Research (IPAR). “A huge proportion of income of rural populace is spent on consumption.”

Persistent drought has pulled back the agricultural sector’s contribution to the total gross domestic product (GDP) by one percentage point to about 23 per cent in the last one year.

Kenyans have relied on courier, post, hand delivery, banks and other money transfer services to send remittances to their dependants in the past, but there is little comparative data which assesses the impact of remittances on the livelihoods of the recipients.

CGAP documented the M-Pesa usage habits of a sample study group in Kibera – a low income Nairobi estate with an estimated one million people, who are predominantly migrant workers from rural Kenya. The researchers then followed the money trail to Bukura, a farming village in Western Kenya, documenting the spending habits of the recipients.

Those surveyed said their income had increased by between five to 30 per cent in the last two years.

“Such an increase is the result of money being sent more frequently,” says the research. “By breaking up their transfers, urban migrants end up remitting more money back home.”

The net increase in remittance receipts is also attributed to the savings in transportation and transaction costs associated with other traditional forms of remittances. Sending money by M-Pesa is estimated to be up to one third cheaper than through “PostaPay” service and about two thirds cheaper than sending cash using bus courier services.

But even though the study says M-Pesa could have increased rural household incomes by up to a third, economists are skeptical that the rise is likely to boost the economy in any significant way.

Respondents said they mainly spent the remittances on their daily consumption needs, paying school fees and buying farm inputs.

“Little is being set aside for investment or savings which can be used to stimulate rural development,” says Dr Akoten. “What is required is technological revolution of agriculture in rural areas so that land productivity is raised several fold.”

The Central Bank of Kenya (CBK) governor Njuguna Ndung’u also says there is little to suggest that remittances to the rural areas are likely to boost growth.

“Based on the data we have obtained from Safaricom, the major impact M-Pesa has had is to change the mode of money transfers in the country,” said Prof Ndung’u in an interview.

Analysis done by CBK shows that close to half of all Kenyans (47 per cent) who regularly send money now prefer to use M-Pesa.

The biggest victims of the mobile phone money transfer revolution, as per the CBK data, are the post office money order service whose usage has virtually died out, and the bus (courier) services.

Money orders used to account for a fifth of all cash transfers but its market share has now dwindled to zero per cent, while bus companies’ share of the cash transfer business has plunged to a tenth from about 24 per cent two years ago.

Senior policy analyst at the Kenya Institute of Public Policy Research and Analysis (KIPPRA) Joseph Kieyah however says an increase in household incomes could boost economic growth in the long term.

Prof Kieyah says more efficient cash transfer systems are likely to improve money transmission in the economy, which is a key parameter used to gauge success of any country’s monetary system.

“When you transfer money you allow individuals to spend which stimulates economic growth regardless of how this money is spent,” said Prof Kieyah “The money is also likely to improve lifestyles of the rural folk.”

Also interesting in the CGAP and FSD’s studies on usage of M-Pesa is the observation that seven per cent of recipients prefer to save a portion for “emergencies” while 14 per cent retain a fraction in their accounts for “everyday use.”

The CGAP researchers say the tendency to save reveals a “latent demand” for appropriate savings products within the two communities studied.

“It also reveals an important opportunity for Safaricom. By partnering with financial service providers, mobile operators can play as significant a role in mobilizing savings as they did in releasing money flows across the country.”

Prof Kieyah says the savings are prove that convenience offered by the mobile phone transfer services is sufficient incentive for users to forego interest income offered by commercial banks.

“High cost of banking discourages savings especially from small savers,” says Dr Akoten. “M-Pesa has provided an infrastructure through which people can make small savings.”

The IPAR research fellow however says service providers must address security concerns that have so far limited maximum transfer limits to about Sh35,000 per transaction to stand a chance of transforming the service into a microfinance banking product in future.

Such a transformation would however also put the mobile phone money transfer services under CBK’s regulatory watch and possibly raise its transaction fees due to the relatively high banking compliance costs.

CBK says enactment of the National Payments Bill currently in the attorney general’s office will pave way for regulation of mobile money transfers by the bank.

The regulator says despite inherent fraud and network downtime risks, the expansive mobile phone networks hold the key to opening up access to financial services by currently excluded rural populations.

The mobile services must also be upgraded to minimum bank for international settlement (BIS) standards to enhance inter-linkages with international payment and settlement systems.

So far Safaricom and Zain have stated their money transfer services will remain basic value-addition products.

But increasing cooperation agreements between the telcos and commercial banks and reports about new mobile phone banking products that are still at the testing stage point to a blurring distinction between the two industries.