Millions of Kenyans using M-Pesa and other mobile money services could be earning interest on their deposits were it not for a 2014 law that blocked it, making Kenyans the only ones missing out on earning from their mobile money deposits.
In other African countries, including Uganda and Tanzania, mobile money customers earn interest on their balances, making it similar to saving in a bank, a new report by the International Monetary Fund (IMF) reveals.
The E-Money and Monetary Policy Transmission report —published last week— assessed environments around which e-money has been practised across five African countries with the fastest growth of e-money —Kenya, Tanzania, Nigeria, Ghana and Uganda.
It shows that of the five countries, only in Kenya does the law block mobile money account holders and service providers from earning interest from deposits.
Governments in Africa require companies operating mobile money services to open accounts with banks, where they hold customers’ money, which earns interest.
“EMIs (E-money issuers/operators of mobile money platforms) have to establish a trust fund in banks to keep all the fundings received. These trust funds are treated equally with other bank accounts with respect to withdrawals, reserves requirements and other regulations.
“Interest distribution is not allowed, and, as stated in the 2014 National Payment System, any income generated from placements of these trust funds shall be donated to a public charitable organisation for the use for public charitable purposes,” the IMF report notes with regards to Kenya.
E-money regulations
Among the five, Kenya was the first to start mobile money operations when Safaricom launched M-Pesa in 2007, with Nigeria which issued MTN— its largest mobile network operator— with a licence to operate mobile money services in 2022, being the latest.
The government started regulating M-Pesa in 2014 when the National Payment System Regulations were enacted, with the law also prohibiting interest payments on mobile money balances to service providers.
“An e-money issuer shall not earn interest or any other financial return from the E-Money holder or customer.
“Any income generated from placement of these trust funds shall be donated to a public charitable organisation for use for public charitable purposes,” the law stated.
Since the enactment of the National Payment System Regulations, M-Pesa Foundation has operated as Safaricom’s charitable arm, intended to be used for public charitable activities, from interest earnings on customers’ deposits that are invested.
Before this, however, Safaricom’s ultimate parent firm, Vodafone Group, owned M-Pesa Holding Company Limited —the entity that holds and invests hundreds of billions of shillings in M-Pesa— and had the discretion to spend money earned from investing in Kenyans’ M-Pesa deposits as it saw fit.
This followed an amendment to the trust deed that created M-Pesa Holding on June 19, 2008 —just 10 days after M-Pesa was listed on the Nairobi Securities Exchange (NSE), to state that “Any such interest or income shall generally be applied first to defray the trustee’s own costs of its role in the service but may be applied for such other purposes (whether charitable or not) as the trustee, may in its sole discretion determine.”
“Any interest or income received in respect of any investment of the trust fund shall be retained by the trustee for its own accounts and shall not form part of or be credited to the trust fund and the trustee shall have no obligation (express or implied, and whether as trustee or in any other capacity) to account to any system participant for any such interest or income,” the trust deed further stated.
Vodafone continued to control M-Pesa Holding even after the enactment of the National Payment System Regulations until May last year when it announced that it had signed an agreement to sell it to Safaricom for a token price of $1 (Sh137 at the time).
Vodafone said M-Pesa Holding — the trust fund — had short-term investments of €1.247 billion by the end of March last year (equivalent to Sh186 billion at the time) and M-Pesa customer funds totaling €1.226 billion (Sh183 billion at the time).
M-Pesa subscribers
Safaricom had 32.11 million M-Pesa customers by March 31, 2023. By the end of September 2023, it said its customers held Sh273.9 billion in M-Pesa deposits.
The latest Communications Authority of Kenya (CA) sector statistics report also shows that by the end of December 2023, mobile money subscriptions stood at 38 million.
Safaricom has some of its savings products built on M-Pesa that allow customers to earn interest for the period the funds are locked up. But plain M-Pesa savings do not generate returns for users.
"In other words, e-money holders do not receive any interest on their e-money accounts,” the IMF report notes on Kenya’s mobile money environment.
What this means is that Kenyans who particularly hold money in M-Pesa and other mobile money accounts for longer periods lose value on it, due to the impact of inflation, thus losing out as compared to citizens of other countries.
But in neighbouring Uganda and Tanzania, mobile money users have been earning interest on their deposits, besides the governments also requiring operators to hold the funds in trust funds in commercial banks.
“E-money operators earn interest from their e-money balances. They are not mandated but are allowed to distribute the interest to their e-money holders. In practice, EMIs do distribute interest to their customers since 2014,” the IMF notes on the status in Tanzania.
MTN Uganda holds customers’ funds with 11 financial institutions that maintain the trust funds.
“Unlike Kenya, however, the interest earned on the trust fund should be distributed to customers at the end of every quarter,” IMF said.
In Ghana, the IMF also notes that mobile money operators have to distribute 80 percent of the interest income to e-money holders, as per 2015 guidelines.
“Therefore, holding an e-money account in Ghana is very similar to holding an account in a commercial bank,” IMF notes.
In Nigeria, payment service providers can earn interest on e-money balances and can distribute the interest income to their e-money holders.
