FINTECH THE NEW PANACEA FOR POVERTY ALLEVIATION AND LOCAL DEVELOPMENT. A CASE STUDY OF KENYA

Introduction

Fintech is a blend of the words “finance” and “technology,” and it refers to any company that employs technology to improve or automate financial services and operations. The phrase refers to a fast expanding industry that serves both consumers and corporations in a variety of ways.

Financial technology, or simply ‘fin-tech,’ has emerged as one of the most important tools for poverty reduction and local economic growth in recent years (McKinsey Global Institute 2016). While there is an increasing body of writing criticizing the push for digitalfinancial inclusion (see Gabor and Brooks 2017; Loubere 2017; Mader 2016), the new fin-tech narrative has been adopted completely by pillars of the global development establishment and global financial sector. The World Bank, the G20, USAID, the Bill & Melinda Gates Foundation, Citibank, Mastercard, and a slew of other organizations are leading the charge, advocating for fin-tech inclusion in practically all development operations (see Häring 2017).

Some pundits go so far as to argue that fin-tech will have a profoundly positive impact on society, maybe even greater than the industrial revolution, heralding a new golden age (Porteous 2017). Importantly, the impact of fin-tech is being most rigorously evaluated in the global South, particularly in Kenya (see Ndung’u 2018), where it is reported to be generating the important lessons other African countries need to fast learn in order to take advantage of its benefits.

M-Pesa Kenya’s agent-assisted, mobile phone-based, person-to-person payment and money transfer system is by far the most internationally famous illustration of fin-alleged tech’s developmental potential not only in Africa, but in the global South as a whole. MPesa began as a test to improve the flow of money inside and between Kenya’s disadvantaged areas. Its origins can be traced back to a programme supported by the Department for International Development (DFID) of the United Kingdom in the year 2000 with the goal of encouraging the private sector to increase access to financial services. With a one-million-pound contract awarded to Vodafone, a UK multinational, the deal was intended to provide a product that could employ mobile phone technology as a foundation for delivering financial services in East Africa.  In March 2007, M-Pesa was officially launched. It was intended to specialize on offering microcredit, but it soon became evident that most clients were more interested in money transfers, which became M-main Pesa’s focus. M-Pesa is a mobile money service that allows customers to put money into their accounts and withdraw or transfer it whenever they want. It is also possible to transmit money to another account via SMS by converting cash into ‘e-balances.

Since 2007, M-work Pesa’s has been widely publicized and promoted thanks to a slew of positive press. Apart from the fact that it ‘includes’ Kenya’s poor in the local financial system by definition, one of the most significant claims made about M-Pesa is that it has the ability to stimulate economic development. Beck et al. (2015), for example, suggest that M-Pesa has aided Kenyan businesses in scaling up their operations and taking advantage of economies of scale. According to their model (Ibid., 1), increased access to trade credit contributed up to 0.5 percent of total factor productivity (TFP) growth on an annualized basis(TFP is a measure of how efficiently the basic inputs of labour and capital are used in the production process). If the authors are true, this is no small feat, given that total factor productivity growth in Kenya was 3.3 percent between 2006 and 2013, according to the authors.

The US-based economists William Jack of Georgetown University and Tavneet Suri of MIT have written the most prominent analyses of M-development Pesa’s impact to far. Beginning in 2011, Jack and Suri have delivered a number of major outcomes that have galvanized enormous support for the M-Pesa model as a development intervention, based on a long-running project first financed by Financial Sector Deepening (FSD) Kenya and later by the Gates Foundation (Jack and Suri 2011; Jack and Suri 2014). However, one of their papers in particular has struck a chord with the worldwide development community: a short summary essay published in 2016 in one of the world’s premier development journals Science, journals The article, titled ‘The long-run poverty and gender consequences of mobile money,’ attempted to assess M-long-term Pesa’s impact using the final round of a panel survey conducted in 2014. This article is critical because it introduced an incredible claim to a large group of key stakeholders, including practitioners, policymakers, and academics: “Access to Kenya’s mobile money system M-PESA increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty” (Suri and Jack 2016, 1288).

It is an understatement to suggest that this essay and its specific promise of poverty reduction has energised the worldwide development community. Indeed, since the microcredit movement began in the 1980s, there has probably been no other idea that has generated as much excitement (Dawson 2017). Suri and Jack’s 2016 flagship essay on M-Pesa is now referenced or quoted in almost every significant publication from global development institutions working on the fin-tech sector (for example, United Nations 2018, 81; UNSGSA et al. 2018). Fintech is now a thing Suri and Jack’s piece has quickly become a cornerstone of the current flurry of uplifting fin-tech articles (for example, see Beck and Frame 2018; Demirgüç-Kunt et al. 2018; Dupas et al. 2018). Furthermore, the alleged good news about M-Pesa has been taken up by a wide range of mainstream news media outlets, giving the message to a large public audience that M-Pesa has magical poverty-relieving qualities. (Aizenman, Aleem, and Barnett, 2016)

From microcredit to fin-tech as the key to poverty reduction

The sustained dominance of the prototypical local development intervention associated with the neoliberal revolution: microcredit and the broader concept of financial inclusion is, in many ways, dependent on the rapid popularisation of fin-tech as a developmental solution (Bateman 2010; Mader 2015). The microcredit movement was founded and quickly validated in the 1980s on the basis of wildly exaggerated and ultimately false claims that providing small loans to groups of poor women was a panacea for global poverty reduction, claims that were particularly associated with its leading light and Nobel Peace Prize laureate, Dr. Muhammad Yunus. Despite the lack of robust empirical evidence supporting microcredit as an effective instrument against poverty at the time (Bateman 2019), the microcredit juggernaut continued to roll onward.

However, empirical proof from an unimpeachable source was required for microcredit to achieve acceptance in the international development community. This proof came in the form of an impact review conducted in Bangladesh by then-World Bank economists Mark Pitt and Shahidur Khandker (1998), which claimed that microcredit programs helped underprivileged female clients significantly. Pitt and Khandker’s paper immediately became the most influential on the subject since it was one of the first to use a quasiexperimental design and a sophisticated econometric method to properly examine microcredit impacts. It also helped that Muhammad Yunus had been around for a long time Sold the microcredit model to the international development community using Pitt and Khandker’s findings. As a result of these efforts, a generation of scholars, practitioners, and international development agencies came to the conclusion that the microcredit model was the most efficient and rapid approach to give enormous advantages to the world’s poor. This realization sparked a tremendous global effort to build microcredit institutions throughout the developing world. Even though Pitt and Khandker’s impact assessment was widely refuted many years later (Duvendack and Palmer-Jones 2012a, 2012b; Roodman and Morduch 2014), it didn’t matter because the World Bank had already achieved its goal of making the microcredit model worldwide widespread.

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