Banking with Mobile Phones - A Case for "Beyond Branch" Banking

The ubiquity of mobile phones today in Nepal as well as in other developing countries lends itself as a formidable medium to bring formal financial services to all, right at their door steps.   With a push of a few buttons, users can not only deposit, withdraw and transfer cash from their mobile phones, but also use the stored cash value to make purchases at shops and stores.  The mobile banking system requires a good ecosystem of agents and merchants in order to effectively serve the customer base.  This method of banking is truly disruptive as it will bring down the barriers and cost of banking to everybody in Nepal.

Why is mobile banking relevant to Nepal?  The explosive proliferation of mobile technology across Nepal means that this technology can be leveraged not only as a medium of connectivity, but can also serve as a medium to conduct financial transactions, with the ability to spur various entrepreneurial activities that contribute directly to the socio-economic development of the nation.  In order to understand the transformative capability of mobile phones, it is instructive to look at the rapid spread of mobile phones all over Nepal.  The year over year growth of mobile subscribers is estimated at 36% for 2009 and beyond.  In 2007, of the 3,914 Village Development Committees (VDCs) across the country, 1,886 did not have access to a basic telephone service.  Today all of the VDCs have telephone service, thanks to mobile phone technology.  And most importantly, developing sustainable financial services in Nepal is fraught with complexities primarily due to the lack of needed infrastructure.  Currently, Nepal has approximately the following penetration level of various services: 

Penetration per 100,000 people:

1.       Bank Branches                                 4.12

2.       ATMs                                                 3.40

3.       Debit/Credit Cards                         2000

4.       Mobile Phones                                25000

While looking at the statistics above, it is important to remember that formal banking era in Nepal started about 75 years ago, while mobile phones have only been around for approximately eight years and while only less than 30% of Nepali population has access to formal financial services, the number of mobile phone users in Nepal is currently 75 lakhs and is projected to reach 1.5 crores by 2014.

 Based on the promise echoed by the data above, Kumari Bank, in partnership with Leapfrog Technology, a US based Software Company, in August 2010, launched “Kumari Mobile Cash”, a revolutionary service that uses mobile phones to provide access to financial.

Through this revolutionary service, the bank plans to deliver financial services in a new and innovative way to all Nepalese, including those that do not have access to banking services, in a fast, secure and low cost manner.  The bank stresses that one does not have to have a bank account at all to use this service.

The first of its kind in Nepal, this service pioneers the “mobile wallet” concept, which allows users to store cash balances in their mobile phones.  Users are then able to deposit and withdraw cash from their mobile phones, and use the stored cash value to remit to anyone, anytime, anywhere, with the push of a few buttons. At present, this service is available through all of Kumari Bank’s 28 branches and their growing number of authorized agent locations nationwide. 

Kumari Mobile Cash will save time, effort and money for everyone in Nepal.  For instance, this means, someone does not have to travel by bus for 8 hours to deliver money to family.  It means that an elderly woman no longer has to walk for five hours to a remittance agency to withdraw the funds that her son has just sent her. 

Kumari Bank intends to use the mobile banking platform to extend microcredit loans and payment facilities to its rural customers, saving them substantial amount of time and money in the process.

Kumari Bank says that its motivation to start this service became stronger after thoroughly studying some of the precedents to this idea, prevalent in other countries such as Kenya and the Philippines.  In Kenya, Safaricom (part of the Vodafone Group), launched M-PESA (Pesa is the Swahili word for money and M stands for mobile), in 2007.  Currently M-PESA has more than 7 Million customers out of a population of 38 Million of which 18 Million have mobile phones. Its positive social and economic impacts have been well documented.  For instance, M-PESA turnover amounts to 10 percent of the country’s GDP, and research indicates that those who use M-PESA on a regular basis have realized 5-30 percent increase in their income.  This rapid adoption is a clear sign that mobile bank is continuing to fill a gap in the market that was left out by the formal financial services. 

Delivering financial services through mobile phones is a game changer.  Traditional banking outlets will never adequately serve the remote areas of Nepal.  The economics is simply not there.  However, the challenges involved are enormous.  In order for this service to realize its potential, it has to be supported by an extensive awareness campaign.  In Nepal, Bottom of the Pyramid (BOP) represents 86% of the economically active population.  BOP population are those that live on less than USD 2 per day, have no access to financial resources, and are most vulnerable population because of their susceptibility to predatory lending, and are exposed to risks of carrying cash.  Making mobile banking successful in Nepal requires this class of people to be made comfortable with technology, to help them overcome illiteracy and their resistance to change.  In addition, the regulatory framework in the space is practically non-existent.  Overcoming these challenges is a feat that one bank alone cannot achieve.  The banks need to think beyond competing with each other and join hands in this quest for social transformation, which not only delivers tangible benefits to society, but also promises good profit potential, not with excessive fees, but with economies of scale.

This article is co-authored by Sanjay Poudyal, Head – Corporate Strategy & Development, Kumari Bank, and Himal Karmacharya, Co-CEO, Leapfrog Technology, Inc.

A Piece on Strategy

The military profession has taught the business community many tactics over the years when it comes to sizing up opponents.  It is known that many ex-military commanders quite often enter the business community and are able to make an instant difference with their leadership capabilities that they catapulted in the field of war.

While the tactics may help win the fight, it is strategy that helps win wars over the long run.  The field of strategy in business is relatively new, having originated only in the 20th century, primarily, derived from the strategies used in wars.  Since then, strategy in business has evolved over the years and has carved out its own niche of sorts.  My article attached discusses this and a bit more.

SP

Took a Break

It is rare that one gets to get away from it all, away from traffic, from office, from people.  Therefore, when one gets a chance to indeed get away, it would be foolish not to grab on to the chance.

That is precisely what I did for the last one week.  One whole week it was of walking into pristine nature, magnificent landscape, unforgettable scenery, and oh also, treacherous trekking averaging about 9 hours a day for three straight days around Mustang district of Nepal.  The price I had to pay (apart from the expenses along the way) was a body that was sore from head to toe.  But the pain was well compensated indeed.

Heading back now into the world of computers, internet, traffic, work, and people only to build a desire again to get away from it all again.  Such is the cycle of life!

-SP

Text me the Money!

Yes, exchanging money is now as easy as exchanging SMS, using your mobile phone.

In underdeveloped countries, the mobile phone penetration has far out-dueled those of traditional banking means such as bank branches and ATMs.  So then, leveraging this penetration makes an absolute sense to deliver financial services, doesn't it?

Think about a service that allows you to conveniently send and receive money from anywhere to anywhere, that too, in a point to point fashion which does not require either the sender or the recipient to travel in order to complete the transaction.  In underdeveloped countries, this means, someone does not have to travel by bus for 8 hours to deliver money to family.  It means that an elderly woman no longer has to walk for five hours to a remittance agency to withdraw the funds that her son has just sent her.  It also means parents can pay for their children's education fees directly from their mobile phones, regardless of whether the children study in a school next door, or next city.

Hey, you could even lend a quick buck or two to your buddies.  If SMS is now the language amongst the youth, then why not use it more!

No credit for credit cards - First of all, to have a credit card, one needs to have a bank account, which is a privilege for many in poor countries.  Who needs a bank account and a credit card, when one can pay for merchant expenses easily with a mobile phone?  Why carry cash and be vulnerable to insecurities?

Banking with mobile phones is a paradigm shift from the traditional ways of delivering financial services.  In underdeveloped countries, this type of service has the potential to revolutionize not just the banking sector, but the entire economy.  Let the underdeveloped countries have at least one competitive advantage over the developed ones - let this service provide it to them.

-SP

USD Turning into Japanese Yen!

The fundamentals that normally would boost the valuations of firms listed in the stock market appear to be in a dismal state. Majority of the firms have reported shrinking profits, or no profits at all. The uemployment rate is climbing towards 10 percent - forecasted to reach 12 percent. Property foreclosures are at an all time high, up 37 percent in July 2009, compared to July 2008. What possible scenario then would lead to an upsurge in valuations of publicly listed firms, leading the equity market to enjoy significant gains in the last six months? The Down Jones index (DJIA) is up close to 50 percent in September 2009, compared to March 2009.

Is this a glimpse of what is known as "Irrational Exuberance" as Greenspan once put it (and later became a title of the book written by Yale prof. Shiller)? Is Wall Street simply rushing to glory without any stable foundation to fall back on?

The underlying reason of the surge in the stock market, however, might be found by analyzing the recent foreign exchange performance of the USD. From March 2009 till September 17, 2009, the USD has weakened by more than 17 percent against the other formidable foreign reserve currency EURO. The logical reaction to this news is that this cannot be good. However, there is a silver lining in the weakening dollar. What the weakening dollar does is it boosts the balance sheets of thousands of American firms that claim revenues from sales overseas. Let us think about this for a second. For instance, an American firm makes EURO 10 million in revenues from its European operations. This revenue when translated to USD today, figures to be 17 percent more than it would have been back in March 2009. Aaah. After all, the balance sheets of the American firms are always recorded in USD terms. OK, but, is the forex behavior the only explanation for the upsurge in the stock market in the last six months? Well, it is difficult to see any other signs in the economy right now that would make anyone believe otherwise.

Now to the follow on question. Is the decline of the dollar a calculated move by the federal reserve or is it market driven? Is the fed trying to boost the sentiment of the US consumers by giving them capital gains sooner than they expected (i.e, not backed by fundamentals)? Consumer spending after all is the backbone of the US economy, and that the fed would strategize something like this to reignite consumer spending cannot be ruled out. Someone on CNBC this morning claimed that this is a calculated move by the fed, turning the dollar to what he termed the "Japanese Yen". Why did he say that? It could be because the Japanese Yen has been a weak currency for a long time as Japan has been in a perpetual recession that it never seems to be able to climb out of. The interest rates in Japan have been near historic lows for ever, discouraging Japanese and foreign investors from Yen driven investment schemes, and turning them to investments overseas, backed by other currencies. Japan's population is aging, meaning they are risk averse, and focused on wealth preservation.

But China is still investing in US treasury bonds which in turn should strengthen the dollar. There is news however that China is starting to cut back on its US bond investments because of the weakening of the dollar. The other plausible explanation for the dollar's decline could be our beloved metal - Gold. Gold has been doing very well in recent months and investors might have been lured into its appeal and in return are abandoning the dollar.

Whatever the case may be, the weakening USD appears to be doing wonders to the US stock market, and by the same measure, firms located in other countries that earn heavily in USD would see their balance sheets, in their local currencies, shrink. To verify this, we would need to research the equity market performances in various other countries, a task I hope someone is up for.

-SP

Does Recession Invite Inflation or Deflation?

Depends on measures taken to combat recession......

A common misconception related to inflation and deflation is that one is a result of an increase in price level while the other one is a result of a decrease in price level, respectively. These are however the symptoms of inflation and deflation, and not the underlying reasons.

The real reason why inflation occurs is because of increase of money supply in the economy; i.e, government prints more money, banks lend to the public at a greater propensity, credit cards and debit cards proliferate in the economy and so forth. As the amount of money circulating in the economy increases, prices of commodities across all sectors go up to match up with the increasing affordability. Similarly, deflation is a result of contraction of money supply in the economy; i.e, government stops printing money, banks lend at smaller scales (credit freeze), and consumers stop relying on credit cards as a mode of purchase, and start spending much less, exactly what is happening today in the recession affected countries.

Therefore, some amount of deflation is inevitable in countries affected the most by the current financial crisis.

Let us take US as an example.The recently published data indicates that the number of people unemployed will reach 10 percent of the working population. That is about 15 million more unemployed people compared to when the economy was doing well (unemployment rate was around 5 percent then). The purchasing power of these additional 15 million unemployed would be drastically reduced, resulting in a drastic reduction of the amount of money circulating in the economy, thus reducing the demand for consumer goods, and thus providing a downward pressure on price levels. In a recent McKinsey & Company survey, 90 percent of US respondents said that their households had reduced spending as a result of the recession—one third of them “significantly.” More than half said they expect to keep their expenditures down after the recession. As consumers return to more traditional spending patterns, companies will have little choice but to reduce prices in order to maintain competitiveness and retain market share. This is more so true for products that have positive elasticity with the income level of consumers.

In the great depression of the 1930s, the money supply in the US fell 25 percent from 1929 to 1933, and co-incidentally, so did the price levels by the exact same amount. This fact places primary blame for the depression on the US federal reserve for allowing the money supply to fall by such a large amount. Economists such as Milton Friedman have argued that contractions in the money supply have caused most economic downturns and that the great depression is a particularly vivid example.

The US federal reserve has been careful not to repeat the same mistake again and has been busy expanding the monetary base by injecting huge amounts of capital in the economy. However, these relief efforts have not led to desired results: consumer confidence has not increased and banks are still keeping credit frozen. This has created a surplus of Bank Reserves to fight the financial crisis.Banks have plenty of cash on hand at an affordable lending rate (Today, the Federal Funds Rate is at 0% - virtually free capital) but they are not putting it into circulation. Strangely, having a large cash balance sheet is typically a negative factor for banks. For their stock to perform, they need to turn those reserves into interest bering loans that yield them profit - expanding the credit and money supply. This has not transpired. We are also seeing deflation in the Consumer Price Index. The value correction in the US housing market by up to 30 percent in some markets has also contributed to deflationary pressures. In parlance, the cost of living has gone down. If the measures to combat the recession continue to include huge amount of capital injection in the economy by the fed, deflation today, combined with a mounting Federal Deficit will invariably lead to inflation tomorrow.

This argument--that the financial crisis will eventually lead to inflation--is based on the view that governments will be tempted to monetize the fiscal costs of bailing out the financial system, and that this sharp growth in the monetary base will eventually cause high inflation. The massive injection of liquidity in the financial system will be inflationary, as it accommodates the demand for liquidity that the current financial crisis and investors' panic have triggered. Once this excess demand for liquidity shrinks, the supply will remain in excess and thus giving rise to inflationary pressures. In other words, the fiscal costs of bailing out financial institutions would eventually lead to inflation if the increased budget deficits associated with this bailout were to be monetized, as opposed to financed with a larger stock of public debt. However, as long as such deficits are financed with debt or higher taxes--rather than by the printing presses--such fiscal costs will not be inflationary, as taxes will have to be increased over the next few decades and/or government spending reduced to service this large increase in the stock of public debt.

It can be beleived that central banks will be tempted to monetize these fiscal costs--rather than allow a mushrooming of public debt--and thus wipe out with inflation these fiscal costs of bailing out lenders/investors and borrowers. What exactly happens remains to be seen.

SP

A Brief Reflection on Maoist Government's Eight-Month Rule in Nepal

Having left for the US in 1992, each trip to Nepal is anticipated with excitement. The gallis in which I ran, the chaurs on which I sweated cricket matches, the schools in which I studied, a longing desire to see these places once again somehow remedies the painfully long flight. As the saying goes, a land in which one is born is second to none, not even heaven. The touchdown point at Tribuvan international airport, then works at its best to dust off the excitement. The 'Je Pani Chalcha' modus operandi makes itself clearly evident right when I enter the immigration hall and carries throughout.

Once in Kathmandu, the excitement further erodes when I turn on the water faucet to see it supplying vacuum more than water. The erosion continues when I turn on the light switch only to be reminded of the power cuts at the expense of the resilient residents. The stench on the streets of decaying garbage, the abundance of dirt and debris – the list goes on. The so-called restoration of 'multi-party democracy' that was achieved in 1990 seems to have done no good. In the last eighteen years since the restoration, the country appears to have taken eighteen large steps backwards. For instance, throughout my childhood in Nepal, I do not recall experiencing load shedding similar in length to the one that is seen now. I do not recall lines in front of petrol stations, long enough to cause massive traffic gridlock for miles.

A corporation that epitomizes Nepal's downfall very well is the Nepal Airlines (Previously known as the Royal Nepal Airlines). The gross mismanagement of the corporation, which once had its network expanded to various cities in as far as Europe, has brought it to the brink of extinction. We might recall that when the airline sacrificed goats in hopes of survival, the news became a laughing stock material in the global arena. Nepal as a country has gone through similar downward spiral of sorts. The previous leaders of the country have done an excellent job in leading the backward march, making Nepal a laughing stock in the global arena. Travel anywhere in the world with a Nepali passport, and the point becomes clear.

Those of us that are aware of the new found middle-class prosperity in India and China must have heard of the term 'emerging economies'. Rather than put each of Nepal's feet on the back of China and India towards the race of prosperity, we seem to have completely missed the signal that the race in fact had even started. Our senior citizen politicians appeared oblivious to the leveled playing field that globalization bestowed upon us.

Although the present not so legitimate (rejected by janta) government claims that the Maoist government did not fulfill any of the promises that were made when in opposition, one must remember that revolution does not happen overnight. Blaming all the deficiencies on the Maoist government would be misdirected contention. One must remember that it takes years to accumulate the magnitude of deficiencies that Nepal is currently faced with, and the Maoist government was at the helm for hardly a year. Yes it is true that promises did outweigh the results during the Maoists' short stint in power, however, the efforts that they undertook suggested at least some level of business and commercial acumen in possession of those running the government, unlike in the past, and unfortunately the present.

In coming up with a plan to generate 10,000 MW of power in the next ten years, the Maoist government recognized uninterrupted GDP growth of the country as its top priority. It understood that the tremendous hydro power potential in Nepal can help boost the country’s GDP, but that the hydro power can only be extracted if the necessary capital from international investors can be entertained. The hydropower potential in Nepal makes entering the country a valuable proposition for foreign investors either in the form of FDI (foreign direct investment) or FII (foreign institutional investment), given the export potential of hydropower to neighboring countries such as India and China. Hydropower resources in the country are estimated to have a theoretical potential of 83,000 MW[1] out of which 43,000 MW is expected to be technically and economically feasible.[2] The required capital to extract this potential is beyond the nation’s capacity and therefore requires foreign investment. For instance, to generate each additional 1000 MW of electricity through hydropower requires approximately USD 1 billion worth of investment at a minimum. For Nepal, this level of investment is difficult to envision[3] without the help of foreign capital investment. The Maoist leadership recognized this and as a result aligned the objective of its foreign visits to encourage hydro power development in Nepal.

The Maoist government’s recent efforts and the subsequent success in collecting tax revenues have to be commended. In spite of the fact that additional revenues were not invested adequately, credit needs to given where it is due. What needs to be understood is that, because of inadequate tax revenue realization in the past, the government has been running on a budget deficit, and in order to meet the deficit, it either has been borrowing or printing more money.[4] The classical economic theory suggests that continuous printing of more money increases money supply in the economy and therefore increases inflationary pressures on prices. One of the reasons why inflation is out of control in Nepal therefore is precisely because of low tax revenue realization. As citizens, we want the government to build the country, but at the same time, also don’t want to pay taxes to help them build it. People in Nepal need to get over this wish and realize that payment of taxes are an integral part of the economy and cannot be avoided.

It was encouraging to hear the Maoist leader express concern over the increasing trend of brain drain in the country[5]. In doing so, the Maoist leadership recognized that no economic development is possible without the necessary intellectual capital, regardless of how much one accumulates the financial capital.

I do not recall the governments in the past speaking about economic development, much less doing something about it. At least the Maoist government spoke about it, and the points they have raised are validated by various economic theories. Transitions take time, and as such, it would be best that miracles are not expected overnight. Unfortunately, while Nepal's citizens have shown their uncanny ability to be patient while suffering hardship, the ones hungry for power have none of it, and jump at an iota of chance to grab it whenever possible, resulting in as frequent a change in government as some people change their underwear.

-SP

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[1] The total hydropower capacity need of Nepal for 100 percent electrification is currently about 1200 MW

[2] If the price of fossil fuels continue to rise, the economically feasible hydro power in Nepal will increase further

[3] Nepal’s GDP in year 2007 was approximately USD 10.2 billion

[4] The revenue raised by the printing of money is called seigniorage. The term comes from seigneur, the French word for “feudal lord”. In the middle ages, the lord had the exclusive right on his manor to coin money. Today this right belongs to the central government, and it is one source of revenue.

[5] Kantipur February 20, 2009