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Microfinance and Mobile Banking Regulatory and Supervision Issues

Anwar AmmarFaculty of Management Multimedia University, Cyberjaya, Malaysia

Professor Dr. Elsadig Musa AhmedFaculty of Business, Multimedia University, 75450, Melaka, Malaysia

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Mobile banking is growing at a remarkable speed around the globe. Mobile banking can increase poor people’s access to financial services if regulation:-

(i) permits the use of a wide range of agents outside bank branches, thereby increasing the number of service points,

Mobile Banking Regulation Advantages

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(ii) eases account opening (both on-site and remotely) while maintaining adequate security standards and

(iii) permits a range of players to provide payment services and issue e-money (or other similar stored-value instruments), thereby enabling innovation from market actors with motivation to do so.

Mobile Banking Regulation Advantages

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This paper looks at these issues within the regulation of mobile banking. Since it lies at the interface between financial services and telecoms, mobile banking also raises competition policy and interoperability issues that are discussed in the paper.

The Objectives of the papers

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Evolution takes place slowly and incrementally. Ideas in one field get transferred to other fields. Unmet needs lead to new innovations and these create new economic relationships. New modifications and new mixtures take place with apparently disparate partners creating a need for other institutional adaptations. Such a fusion is now occurring between the banking industry and the telecommunication industry, creating a new notion called mobile banking. This sector is being constrained by the slower development of regulatory framework owing to conservatism and loss aversion.

 

Innovation Evolution

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One such unmet need is to provide financial services to 77% of the world’s poor currently unbanked. Specifically looking at East Asia and the Pacific, only 55% of adults have an account at a formal institution.

According to the Consultative Group to Assist the Poor (CGAP), “poor people with access to savings, credit, insurance, and other financial services, are more resilient and better able to cope with the everyday crises they face.

Poor Access to Banking Services

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Mobile banking (m-banking) is a subset of branchless banking and involves access to a range of banking services through mobile telephony. One of its main advantages is that it addresses the cost of roll-out (outreach) and the cost of handling low-value transactions by using agents instead of banks. M-banking channels are primarily used for transfers and payments, even when they offer a broader range of services.

Mobile Banking And Microfinance

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The recent success in mobile banking can be attributed to the microfinance movement in its early inception. The Kenyan narrative with M-PESA serves as the origination of mobile banking for the delivery of microfinance. In 2005, M-PESA was designed as a pilot project to facilitate microfinance payments for Faulu, a microfinance institution (Kumar, McKay, and Rotman (2010). However, due to technical and structural challenges in its early stages, the mobile banking uptake failed (IFC, 2010). Safaricom, the mobile network operator, observed customer usage patterns and determined that customers were creatively changing the course of mobile banking (Kumar, McKay, and Rotman, 2010). This user-driven innovation changed the microfinance dynamics by sparking non-attendance of group meetings, thereby creating a “breakdown in repayment discipline (Kumar, McKay, and Rotman, 2010)”. MFIs have begun to adopt mobile banking as part of their banking platform due to the extensive gains realized.

 

Mobile Banking And Microfinance

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The different businesses models for Mobile Money that have emerged over the years can be divided into four categorize: the bank centric model, the MNO centric model, the collaborative model and the independent service provider (ISP) model with two major players: the banks and the MNOs. (Chaixand Torre, 2013). The two most used models are the bank centric model, the MNO centric model.

Different approaches of mobile banking in microfinance

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A key ingredient at the country level is the role of m-banking enabling legislative and regulatory environment. Changes in the legal and regulatory framework can either provide the right conditions for innovative m-banking players to thrive, or hinder its growth by compounding the risk already inherent in the acceptance of a novel product. The challenges of regulation are compounded by the diverse nature of operators in the market – m-banking models vary in their implementation from being entirely bank driven, to being purely driven by a mobile network operator, and more commonly a mixture of the two. Both telecommunication and banking regulators, as well as competition authorities, have a stake in the industry. Nevertheless, many countries have already adopted reforms supporting m-banking environment according to the CGAP (2010) Financial Access database.

 

Mobile Banking Regulatory Issues

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Such reforms include enabling branchless banking (43 countries), revising Know-your-customer requirements (55), facilitating access to rural areas (46), introducing basic bank accounts (20), enabling microfinance (53) and bolstering consumer protection (65). 64 countries have drawn up strategy documents to improve financial inclusion. See next section for a discussion on how some of these reforms support m-banking.

Mobile Banking Regulatory Issues

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Traditionally, the key roles for the telecommunications regulator in an economy’s financial system were indirect: to ensure the reliability and security of the communications infrastructure that connected financial institutions to their customers as well as to each other – the same role played by the telecommunications regulator in most sectors outside of the ICT sector itself.

 

Telecommunications regulators

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Financial regulators also face many questions and concerns regarding their role in the regulation and oversight of m-banking services. Often, financial regulators are empowered to specify the scope of banking services carried out by a financial institution and to issue appropriate banking licenses.

Financial Regulators

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A key consideration is that, in general, only banks are authorized to take deposits, and thus the protection of deposits is a key component of banking regulation. (Rolf H. Weber) .On the other hand, credit can often be offered by nonbank institutions (NGOs, social development funds, etc.). Taking deposits brings with it a series of prudential regulations to ensure that funds are managed safely on behalf of the customer. Lyman et al. (2008) suggest that non-bank institutions should be allowed to offer stored value accounts under an e-money license.

Financial Regulators

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This paper demonstrated the regulatory and supervision concerning the microfinance in general and mobile banking microfinance issues as the industry is growing very fast around the globe. In this respect, regulations and supervision should be in place to protect both the industry and the services provided as well as the customers’ receiving the services. Following are some recommendations for regulators and policy makers are involving in the microfinance services and the academic and professionals who are doing research in this area.

Conclusion

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Continue to improve regulatory framework for domestic branchless banking and low-value cross-border transfers in Mozambique, South Africa and Zambia

Permit in parallel, as in other pioneer countries (Philippines, Kenya) the development of pilots for domestic (when not existing) and cross-border transactions

As a first step, create regulatory space for domestic branchless banking and low-value cross-border transfers in Angola and Malawi.

In the same way, permit pilots for domestic (as a first stage) transactions.

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