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Cash is disappearing, is this the reason Kenyans are broke?

By Dominic Omondi | July 18th 2020

When Kenyans who grew up in the 90s feel like their current economic fortunes have changed for the worse, they seek refuge in the past.

Like in the Biblical paradise that is flowing with milk and honey, they recall those years gone by as ones where notes and coins flowed free. Or so they believe.

Still, in those days, a person’s brush with being broke could easily be cut short by their stumbling across a coin or note on the ground.

These days, such flukes are uncommon. And some Kenyans will insist it is because the flow of money has dried up.

To some degree, they are right.

The number of coins and notes, especially outside of banks – and as a fraction of the total money in the economy – has been declining, dropping from 12 per cent in 1995 to five per cent as at the end of March this year.

However, the amount of money in circulation has not dropped. 

Growing transactions

According to data from the Central Bank of Kenya, the value of currency outside of banks in the last quarter of a century has increased seven-fold – from Sh29 billion to Sh198.3 billion in March this year.

Moreover, if there was no money as some people claim, there would be fewer transactions. And with fewer transactions, fewer goods and services would be produced.

Yet, since 1995, the gross domestic product (GDP) – or the value of all the goods and services produced in the economy – has increased 22-fold to almost Sh10 trillion this last financial year from Sh461 billion. This signals an increase in transactions.  

Further, an expanding economy reflects an improved standard of living, though not always.  

But even if there were fewer bank notes in the economy, this does not necessarily mean fewer transactions. Even in the 1990s, most of the money was not in the form of paper and metal. Instead, a big chunk of it was held in the form of electronic digits on computer servers.

Today, the total money in circulation – excluding government debt held by non-bank institutions such as pension funds and insurance companies – adds up to Sh3.7 trillion. In 1999, there was Sh244 billion in the economy. 

Today, 38 per cent of the money available, or Sh1.4 trillion, is in demand deposits. This is money in current accoutns that can be withdrawn without needing to provide notice.

In 1995, the cash in demand deposits was only Sh44 billion, or 18 per cent of the total amount available.

A similar amount is held in savings and deposit accounts. This money can be withdrawn after a certain period of time, and is not easily available.

There is also money held in foreign currency valued at Sh642 billion, or 17 per cent of the total money in circulation. Twenty-five years ago, there was close to Sh13.7 billion in foreign currencies, or 5.6 per cent of the total.

This increase illustrates the growth in earnings from the export of goods and services.

Holding a huge chunk of money in notes and coins is not only risky but also cumbersome. If you want to make a big purchase, you would rather instruct your bank to wire the money into the seller’s account, or write a cheque.  

“Only a criminal buys a house, for example, by handing over a suitcase full of banknotes. As long as people are willing to trade goods and services in exchange for electronic data, it’s even better than shiny coins and crisp bank notes; lighter, less bulky, and easier to keep track of,” said historian Yuval Noah in his book, Sapiens: A Short History of Mankind

Money is anything that is accepted as a medium of exchange – it could even be the infamous Bitcoins, as long as it is trusted. Most money remains digits captured on computer servers.

But how did these digits, represented as a fraction of currency outside of banks, increase?

Mobile wallets

The simple answer is the mobile phone. Perhaps the reason we no longer stumble across hard currency on the ground is that people do not put money in their pockets but in mobile wallets.

While cash remains king – more than 90 per cent of transactions in the country are done using banknotes and coins – the unveiling of M-Pesa, Safaricom’s mobile money transfer service in March 2007, was a turning point.

Before then, if you, for example, wanted to send money to a relative or friend, it had to be in hard cash. Today, you just send them a text that you have transferred a certain amount of money into their mobile wallet.

So where does this money go?

The money held in M-Pesa, or other mobile money wallets, is cash in a bank, making it a demand deposit.

The Central Bank, which is the financial regulator responsible for monetary policy, captures M-Pesa cash as M1, which also includes currency outside of banks and the money in current accounts, such as a salary account. M1 comprises highly liquid cash, and it is where most mobile money goes.

And while the fraction of currency outside of banks (classified as M0) has declined by 54.3 per cent, that in M1 has increased 54.1 per cent, an indication that cash has moved into demand deposits, most likely in mobile money wallets.

As of May, there were 60.2 million mobile money subscriptions that undertook 136 million transactions valued at Sh357.4 billion.

These transactions not only involve sending and receiving money, but also payment for goods and services, reducing the use and need for notes and coins. Kenyans can also borrow and save on their mobile phones.   

And with the Covid-19 pandemic, CBK Governor Patrick Njoroge has seen an opportunity to kill two birds with one stone: curb the spread of the disease and deepen financial transactions.

CBK recently waived mobile transaction fees on small sums of less than Sh1,000 in a bid to get people to move away from cash. Njoroge extended these measures to the end of the year.

Low-value transactions of Sh1,000 or less account for more than 80 per cent of mobile money transactions.

But there are some overlooked facets to going cashless.

Besides having to deal with slow-moving queues at the supermarket as people fumble to find mobile money icons, there is also the fact that Big Brother can track each and every one of your transactions. So you better be paying your taxes.


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