Unmasking the storm behind M-Pesa

By John Njiraini and James Anyanzwa

After months of procrastinating and burying its head in the sand, the Government has finally admitted that the popular Safaricom money transfer service, M-Pesa, could be a disaster waiting to happen.

Borrowing a cue from experts in the banking and legal professions, the Government now acknowledges that the absence of a legal framework to regulate and supervise M-Pesa operations is a major gamble that could go wrong.

And although the people concerned from Safaricom Chief Executive Michael Joseph, Government officials, the Central Bank of Kenya (CBK), the Communications Commission of Kenya (CCK) to ardent users of the service seem to get solace from the fact that M-Pesa is only used in transferring money, experts warn the service is prone to abuse. Only weeks ago, Acting Finance Minister John Michuki acknowledged that M-Pesa, which is transferring an average of Sh4 billion a month and has about three million registered clients, is trending on fragile ground.

"I am not sure M-Pesa will end well," said Michuki.

Although he could not elaborate, opting to say he wishes to be proved wrong in the long run, Michuki was ultimately raising the red flag that its just a matter of time before a mega financial disaster befalls the country.

In the meantime, he ordered the CBK to carry out an audit on the service and prepare a detailed report on possible safeguards that can be put in place to forestall what could amount to crumbling of another financial service. The most recent to rock the financial sector was the pyramid scheme.

At the centre of the storm and an issue that the stakeholders avoid talking about is the use of the service for safe deposit. Experts view such application as a risky venture as it give M-Pesa agents custody of free cash that can be subject to abuse.

"We want to protect wananchi from the sharks who want to make money from the misfortune of others," he told reporters soon after launching the Microfinance Act and Regulations at the Kenya School of Monetary Studies.

Though only 21 months old, there is enough reason for concern. This is because during the short period it has been in existence, M-Pesa has graduated from a simple innovative concept that allows people to transfer small amounts of money easily to a complex service that is now being used as a bank account.

Millions of Kenyans are realising that M-Pesa gives them easy access to their money.

Without a law governing its operations and thus lack of a recourse body to turn to, it means the faith directed at M-Pesa could explode to a disappointment, says the Government.

CBK freeze

In August, a row erupted in the financial sector over the involvement of Safaricom and Zain mobile operators in offering services that are considered to be purely the commercial banks’ domain.

The commercial banks are raising concerns that Zain (formerly Celtel) and Safaricom are walking all over their domain without much hindrance by providing money transfer services.

It has been unclear who between CBK and the Communications Commission of Kenya — which regulates Telecom services — should oversee the operations of M-Pesa and Sokotele.

Safaricom’s M-Pesa and Zain’s Sokotele money transfer services, however have a clear edge over the banks, because they cost overwhelmingly less, and deliver funds over great distances in real time. But banks want CBK to freeze the financial activities of the mobile firms citing the absence of a legal framework to compensate clients in the event of financial losses. But their attempts are yet to yield the much-needed fruits.

It is however argued that the CBK Act was amended in 2003 to give the banking regulator an oversight on all payment services and mandate to advise the Government and what the CBK is interested in is that the money is secure, moves efficiently and the operators can mitigate risks of losses. The Parliamentary Commission on Energy, communications, Transport and Public works however said it would push for the enactment of formal legislations to govern and regulate the money transfer business carried out by mobile phone operators.

Niche market

"CCK licensed the GSM network operators to offer these services but they can be put into a more formal legal terms," Eng James Rege, the Commission’s Chairman and MP for Karachuonyo told The Standard in August. "This is a niche market that has been cut out for wireless operators and not banks."

But wedged into a tight corner by high transaction fees and tight operating guidelines, commercial banks now want the Central Bank of Kenya (CBK) to define clear rules for mobile phone money transfer services. However, banks are clearly at a disadvantage given the high cost of services the offer.

The Parliamentary Commission on Communications contend that the mobile financial service will help cushion consumers from exorbitant charges imposed by banks. The service gives many of the mobile firm’s unbanked subscribers an efficient way of transferring money.

M-Pesa service has about four million registered subscribers to date with staggering Sh24 billion transferred using the services between March last year and May this year.