Cell phone banking in Kenya protects public health

It’s rare that I read an academic paper I can get really, really excited about, but this is one of them.

Researchers at Georgetown and MIT have shown that transactions over M-PESA, an African phone banking service can help struggling households when faced with a sudden illness, weather event or economic shock.

We explore the impact of reduced transaction costs on risk sharing by estimating the effects of a mobile money innovation on consumption. In our panel sample, adoption of the innovation increased from 43 to 70 percent. We find that, while shocks reduce consumption by 7 percent for nonusers, the consumption of user households is unaffected. The mechanisms underlying these consumption effects are increases in remittances received and the diversity of senders. We report robustness checks supporting these results and use the four-fold expansion of the mobile money agent network as a source of exogenous variation in access to the innovation.

M-PESA is a cel phone based banking system which allows users to send and receive money to friends and family. Transactions can be small; most users are transferring less than $10 at a time. Users are charge about $.40 to transfer money and a percentage to withdraw. It is free to deposit money into the system.

Anyone can be an M-PESA agent. Starting an M-PESA business requires only a small investment so that even extremely rural areas have access to the system. Agents receive a percentage of transaction costs, and often piggy back it onto existing enterprises such as grocery stores and mobile phone shops. M-PESA not only provides a needed service, but has also created profitable business opportunities for people even in isolated rural areas.

The system is wildly popular. Africans are extremely mobile but maintain deep friend and family networks often spread out over wide distances. When a person has trouble, he or she will often turn to family and friends for financial help.

Previously, people would send money by getting on a bus and travelling, or by sending it with friends who might be going to a particular destination. Transportation costs are high ($5 to go a distance of 200km) and often outweigh the amount to be sent. Sending money by hand also incurred risks of loss to theft and misuse.

The number of M-PESA users has skyrocketed since its introduction in 2007. Nearly all adults in Kenya have access to a cel phone now, and the number of M-PESA users is now 70% of all mobile phone users.

Shocks due to illness or negative weather events such as drought can be devastating for a poor household. A single bout of malaria could set a family back as much as a month’s income or more. When poor households lose money, they don’t get it back and successive events can quickly pile up so much so that families will often wait until illness has become too severe to effectively treat.

Jack and Suri, the researchers who conducted the study found that illness shocks can reduce a households consumption by at least 7%. An average household only consumes around $900 a year, nearly half of which is for food. A 7% reduction in consumption could mean that households will simply eat less given a sudden negative event.

M-PESA users, however, experience no reduction in consumption given a sudden health or economic event. Presumably, the ability to transfer money quickly over long distances provides insurance against disaster. Mutual reciprocation allows the system to effectively function to protect against financial disaster.

This has incredible implications for public health. Financial concerns are an incredible barrier to insuring prompt and effective treatment for diseases such as malaria, diarrheal disease and respiratory infections. An efficient system of moving money creates a broader social insurance scheme, protecting the public against the worst and, hopefully, reducing costly advanced treatments and mortality.

M-PESA is a private sector entity, which was never intended as a public health intervention. However, in an area where public sector health delivery is inefficient, underfunded and most broken, a private sector banking initiative could help bolster availability of life saving drugs (for example) by insuring a consistent flow of money. Shops in extremely isolated rural areas will be more likely to stock malaria drugs if they know that customers have the means to pay for them.

This also has incredible implications for development. One of the pillars of the Millennium Development Goals and the recent Rio+20 Conference on Sustainable Development is to insure that the basic health needs of the poorest people on the planet are met. This cannot happen without addressing the greater problem of financial stability of poor households, which requires the participation of the private sector. Covering basic issues of financial movement, security and access to funds by isolated households is a major step to not only helping households which are disproportionately impacted by health and weather events, but also allows flow of cash to poor regions, bolstering local economies.