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Treasury report reveals fears over M-Pesa’s critical role in economy

Safaricom chief executive Bob Collymore. PHOTO | FILE
Safaricom chief executive Bob Collymore. PHOTO | FILE 

A Treasury report has warned that the collapse of Safaricom’s M-Pesa service would cause widespread disruption in the economy, indicating the deep entrenchment of mobile money transactions in Kenyans’ daily lives.

The Treasury’s recently released Budget Policy Statement (BPS) says that a technology disaster affecting the M-Pesa-dominated mobile transactions is now a fiscal risk, placing the money transfer systems among other potential threats to the economy that are watched keenly by policy wonks.

The authors of the report predict that an M-Pesa outage would cause loss of revenue — direct excise tax and corporate tax by firms running the systems — and reduce confidence in the services.

This is the first time the mobile money transfer system is featuring among the fiscal risks, indicative of the strategic importance it has acquired in Kenya’s economy barely a decade after the launch of M-Pesa.

The BPS notes that various financial products have been leveraged on the M-Pesa payment channel, increasing the inter-linkages between the technology and the banking sector.

“If this system was to be compromised, the impact would be substantial considering the linkages and the corporate tax revenue for government,” concludes the BPS.

“Technological innovation via the mobile money transfer services and its pivotal role in the economy should therefore be given due consideration as a plausible fiscal risk.”

Multiplier effect

A compromise of the system would have a multiplier effect on them and the State due to their diminished spending power, which would affect tax collection.

Some Sh2.8 trillion was transacted through mobile money last year, making it a crucial source of excise tax revenue for the government. A 10 per cent excise duty is charged on mobile money transfer services.

Kenya Revenue Authority (KRA) data shows that a total of Sh9 billion was collected in excise tax from financial services but does not indicate what share of this is from mobile money.

A system collapse would also affect the revenues of the firms who own the systems and the amount remitted as corporate tax.

A thriving mobile commerce is also mostly transacted using mobile money, meaning its compromise would affect thousands of businesses.

Kenya has six mobile money transfer services. The others are Airtel Money, Orange Money, Equitel which is backed by Equity Bank, Mobikash and Tangaza.
These systems allow for seamless transfer of cash between banks, telecoms operators, businesses and individuals.

Safaricom says that it deploys several security systems to guard against threats of disruption and to ensure all customer data is safeguarded.

The firm says data to and from the M-Pesa toolkit is encrypted, meaning that details of transactions are only passed between the handset and the M-Pesa system. The M-Pesa PIN is the second security level.

“Our M-Pesa servers and systems are secured in accordance with global security standards and the highest financial standards,” said Safaricom corporate affairs director Stephen Chege.

“Safaricom has also deployed security professionals to monitor and manage any threats to our systems, including on issues of cyber security, risk management, fraud and anti-money laundering. This includes a bank-grade anti-money laundering system.”

The risk highlighted by the Treasury is linked to the huge amount of cash transacted through the system, revenues accruing to the government from mobile money transfers, the thousands of taxpayers employed by it and the many businesses supported indirectly.

Safaricom in its latest Sustainability Report says that it has 100,744 M-Pesa agents. The six mobile money services had 158,727 agents by June this year, according to the Communication Authority of Kenya.

Safaricom, which has been running M-Pesa since 2007, says it conducts risk assessments twice a year on its key business units.

“The assessments identify various risks, their chances of occurrence, potential impact and capability of measures set to tackle the risks,” the firm says in its 2015 annual report.

Insured deposits

The firm adds it has also insured all customer deposits to prevent losses if the banks where the money is held were to collapse.

Hackers have become increasingly sophisticated and may target cash from the systems or aim to bring them down. Each of these would have a major effect as it may scare off customers.

The identification of fiscal risks is meant to allow the State to keep a close eye on them and prepare contingency plans as they have the capacity to substantially shock the economy.

Other risks the government is keeping close tabs on are the liability levels of systemically important banks, terrorist attacks, sustainability of the country’s debt and unfunded pension liabilities; all of which could substantially affect the economy and government revenues.

“Each of these risks has a linkage to the expansion of infrastructure in the country, a key government priority, which makes effective risk management all the more important,” the BPS says.

Joseph Kieyah, the Kenya Institute of Public Policy Research and Analysis (Kippra) chief principal policy analyst, said the mobile money transfer service risk is substantial, adding the State should be vigilant in much the same way it develops strategies against terrorism.

“My thinking is informed by the interlinkages of the system (to businesses and banks). The cyber threat has become a reality that we have to live with.

The magnitude of the system means that we have to take precautions,” he said.

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