The rise of a global technology industry to support financial services, known as fin-tech, has grown enormously in Africa in the last decade. Across the continent many commentators have proclaimed fin-tech as the solution to poverty and development. Examining the case of Kenya’s celebrated fin-tech model, M-Pesa, Milford Bateman, Maren Duvendack and Nicholas Loubere reveal a flawed system that is not an answer to poverty, despite the wild claims of some academic commentators. Quite the contrary, fin-tech offers Africa a further case study of how contemporary capitalism continues to under-develop Africa.
By Milford Bateman, Maren Duvendack and Nicholas Loubere
In both the global investment community and the international development community one of the most talked-about issues today is fin-tech (financial technology). Defined as ‘computer programs and other technology used to support or enable banking and financial services’, the last decade or so has seen the rise of a new global fin-tech industry, a development that is widely regarded to be positively changing the world in a variety of ways. Thanks to almost daily reports of major new investments, especially in Africa, many investment professionals are of the opinion that something akin to a new ‘gold rush’ is clearly underway. At the same time, the fin-tech model is also touted as an innovation that will greatly benefit the global poor, with enthusiastic supporters claiming that a new golden age of ‘inclusive capitalism’ is upon us.
By far the most well-known example of the fin-tech model to date is Kenya’s M-Pesa – the agent-assisted, mobile-phone-based, person-to-person payment and money transfer system. M-Pesa is widely seen as the first fin-tech institution to conclusively demonstrate that it is possible to make a profit while also very meaningfully improving the lives of the poor. Taking inspiration from M-Pesa, many in the international development community now regard the fin-tech model as a potentially game-changing private sector-funded driver of development and poverty reduction in the Global South.
In the academic community the apparent combination of poverty reduction with profit generation proved to be a very seductive pro-capitalist narrative that many mainstream economists were only too willing to engage with. The most well-known academic economists examining the impact of M-Pesa are Tavneet Suri, based at MIT, and William Jack, based at Georgetown University. With extensive funding from Financial Sector Deepening (FSD) Kenya and the Gates Foundation, since 2010 Suri and Jack have produced a series of outputs extolling the benefits of M-Pesa. Suri and Jack’s generally positive findings have resulted in mainstream media attention and large numbers of citations. This has played an important part in galvanising the international development community into supporting the fin-tech model as a development and poverty reduction intervention.
In particular, their 2016 article published in the prestigious journal Science, entitled ‘The Long-run Poverty and Gender Impacts of Mobile Money’ has played a considerable role in sparking the imagination of the international development community. This is mainly because of its sensational claim that ‘access to the Kenyan mobile money system M-PESA increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty.’ According to this article, M-Pesa was not just making profits, but the evidence seemed to show it was also making an astonishing ‘bottom-up’ development and poverty reduction contribution. This poverty reduction claim, often cited in full in media articles, quickly became the centrepiece of the evidence used by many in the international development community to justify its increasingly strong support for, and investment in, the fin-tech model.
Unfortunately, all that glitters is not gold. As we write in a Briefing just published in the ROAPE Suri and Jack’s hugely influential signature article actually contains a surprising number of errors, omissions, poor logic, and methodological flaws. Crucial labour market evaluation parameters, such as business failure (exit) and the impact of new businesses on existing ones (displacement), were entirely over-looked. The core issue of individual over-indebtedness, which in Kenya is now approaching crisis levels and which has a clear and direct link to the operation of M-Pesa, was not even mentioned as a possible downside of the fin-tech development model. For such an important and well-financed project, the methodology was also weak, diverging from many of the standard ‘best practices’ in the impact evaluation field. The important issue of causation was also raised, but in a way that we found to be questionable at best. In many ways, therefore, Suri and Jack’s analysis appears to misrepresent and vastly over-state the development impact of M-Pesa.
Fin-tech represents a new form of resource extractivism
One of the most disturbing aspects of Suri and Jack’s flawed analysis, however, is that they completely bypass the crucial equity and distributional issues that arise from the operation of M-Pesa and other similar fin-tech corporations. This is inexcusable because there are clear warning signs today that the fin-tech model possesses the potential to extract immense value from the poorest communities in the Global South, with potentially calamitous long-term consequences. Like the gambling, sub-prime mortgage and payday loan industries in the United States and UK that before and after the financial crisis of 2008 were able to grow rich by expertly extracting massive amounts of value from the communities of the poor. One might argue that Kenya’s poorest communities are also being drained of much of their needed collective wealth.
M-Pesa has essentially perfected a form of ‘digital mining’ that captures and extracts a small tribute from each and every one of the growing number of tiny financial transactions made by the poor through the platform (which has become ubiquitous and very difficult to avoid). This includes microloans, money transfers, grant disbursement, credit card usage, pension payments, and so on. One simply cannot escape from the fin-tech ‘net’ that is gradually being lowered on to the poor. As more and more governments and elites are brought in as allies by the fin-tech industry, this value extraction process is only likely to speed up and intensify, with cash transactions being increasingly jettisoned and ever more transactions being mediated by fin-tech organisations.
By the same token, given the profit motive at play, it is inevitable that a range of services and products will end up being pushed on to the poor even though they largely do not need them, are not able to productively use them, or do not have any means to repay debt associated with them.[1] The value realised through such ‘digital mining’ techniques is then extracted from the local community and deposited into the hands of the fin-tech entity’s owner(s). However, with so many fin-tech entities backed by foreign capital from the Global North, the chances are that a large proportion of this ‘digitally mined’ value will head abroad to the world’s leading investment locations.
What we have here, therefore, is a value extraction process that contains the potential to progressively undermine the development process in local communities in the Global South. It does this in two important ways: first, it denies the local community an extremely valuable aggregate amount of local spending power, which is instead appropriated by wealthy individuals and institutions, many of which are located abroad. This renders an important endogenous growth trajectory inactive, since it is rising local demand that often provides the initial impetus for local enterprises to emerge in order to meet this demand. Second, fin-tech institutions also starve the local (re)investment cycle by siphoning value out of the community, and thus make it more difficult for local businesses to access the meaningful amounts of capital needed to establish sustainable commercial operations. Experiences in Asia with local banking from 1945 onwards, for example, show that reinvesting/recycling the bulk of locally-generated value back into the local economy has significant potential to kick-start economic growth.[2]
Fin-tech could, therefore, be seen as a revised version of the natural resource extraction paradigm that was largely responsible for under-developing Africa and other colonised countries over the last four centuries. The ‘resource’ increasingly being extracted from Africa today might no longer be a physical one – such as diamonds, gold, platinum, or silver -and the process might not require slavery, the employment of ultra-exploitative waged labour, or involve horrendous working conditions, but the eventual negative outcomes of ‘digital mining’ could very well be the extension and continuation of under-development.
M-Pesa thus provides us with a valuable case study of how contemporary platform capitalism operates in neoliberal Africa and how ‘digital mining’ might actually affect Kenya’s potential growth and development. In recent years, Safaricom (M-Pesa’s parent company) has become far and away Kenya’s largest company, now accounting for a massive 40% of the total stock market valuation on the Nairobi securities exchange. Safaricom is also famous for its spectacular profits. In 2019 it set a record by registering profits of around US$620 million, which would be an impressive result in even the richest countries of the Global North. To put this into perspective, this figure is slightly more than the Kenyan government spends on the entire healthcare system in the country. However, along with an additional bonus paid out in 2019 to shareholders amounting to around US$240 million, a large percentage of this US$620 million in profit was paid out as dividends to foreign shareholders. The main beneficiary was the majority shareholder (at 40%) of Safaricom, the UK multinational corporation Vodafone. Other beneficiaries are a variety of mainly foreign investors located in ‘tax-efficient’ locations (the Caribbean mainly) and who hold a 25% stake. The Kenyan government also holds a further 35% stake in Safaricom.
This demonstrates that significant value is being created by M-Pesa based on the tiny transactions of the poor, but most of it is spirited abroad via dividend payments to foreign shareholders. This helps explain why M-Pesa has become a beacon for global investors and financial institutions all seeking their own spectacular fortunes in Africa while framing their thirst for profits as altruism. Indeed, by embedding the fin-tech model in Kenya, the international development community is complicit in the establishment of a high-tech extractivist infrastructure similar to colonial-era equivalents.
‘Digital mining’ in Kenya and the foreign appropriation of the wealth generated by those languishing at the bottom of the pyramid is a less directly brutal undertaking than the value extraction process carried out in colonial times. However, the extractivist logic, the wealth transfer, and the determination to accumulate on the back of the poor have a similar character to colonial-era economic regimes, and similar potential to seriously damage socioeconomic development in the long-term.
Furthermore, as in colonial times, a local elite has been allowed significant freedom to manage this ‘digital mining’ on behalf of the foreign owners. As with Capitec Bank in South Africa, it is no secret that the CEO and senior management at Safaricom have been able to use the company as a vehicle through which to extract fantastic rewards for themselves, enjoying Wall Street-style levels of remuneration in recent years and with several becoming multi-millionaires as a result.[3] However, this also provides the obvious incentive to grow Safaricom as fast as possible because in that way the personal rewards attributable to those at the top are maximised. As a result, Safaricom’s CEO and other senior management have pushed growth to the limits and are now encountering problems in several areas on account of reckless over-expansion, including with regard to the company’s wilful engagement with gambling. In addition, in the early stages of M-Pesa’s growth, certain still unidentified members of the local Kenyan elite were able to secure for themselves a sizeable shareholding in Safaricom, which they later sold off for massive capital gains.[4] Pointedly, the impact on inequality in Kenya arising from these narrow elite enrichment mechanisms has been very significant.
In short, an effective value extraction process involving ‘digital mining’ has been established in Kenya, which has been misleadingly framed by many in the international development community as contributing to ‘bottom-up’ development. This process has ensured the stratospheric enrichment of a narrow group of foreign investors, Safaricom’s own senior managers, and a section of the Kenyan elite. However, this value has effectively been appropriated from M-Pesa’s overwhelmingly poor clients via their growing bundle of tiny fin-tech-mediated financial transactions.
Despite the benefit that some individuals in poverty undoubtedly enjoy as a result of M-Pesa’s services, universal financial inclusion has come at a very high longer-term price for Kenya’s poor overall. Safaricom appears to have become a classic example of the ‘cathedral in the desert’ syndrome – a vastly profitable entity that exists only by ignoring the impoverishment it is helping to create in its wake. As fin-tech spreads across Africa, it is likely we will see similar deleterious extractionist scenarios emerging.
Might we not then consider M-Pesa to be the canary in the coalmine?
Parallels with the failed microfinance revolution?
Our analysis of Suri and Jack’s hugely influential 2016 article shows that it simply does not stand up to scrutiny. One might conjecture that this has something to do with the fact that much of the funding for their work over the past decade has come from FSD Kenya and the Gates Foundation, two of the world’s leading advocates for the fin-tech model.
In this context, it is interesting to recall how the now largely discredited microfinance movement got a game-changing boost back in the 1990s thanks to a study by two high-profile World Bank economists – Mark Pitt and Shahidhur Khandker – claiming that microfinance in Bangladesh was generating major poverty reduction benefits for women Pitt and Khandker’s work was much later shown to contain many serious errors and its conclusions were unsound. Nevertheless, Pitt and Khandker’s work more than served its immediate purpose, which was to galvanise support within and around the international development community for an intervention that the World Bank desperately wanted to see go forward on ideological grounds. We might therefore pose the obvious question here with regard to the misrepresentation of M-Pesa’s impact: are Suri and Jack the new Pitt and Khandker?
Milford Bateman is a Visiting Professor of Economics, Juraj Dobrila University of Pula, Croatia and Adjunct Professor of Development Studies, St Marys University, Halifax, Canada. Maren Duvendack is a Senior Lecturer in Development Economics at the University of East Anglia, UK. Nicholas Loubere is Senior Lecturer at Centre for East and South-East Asian Studies at Lund University, Sweden.
Featured Photograph: M-PESA mobile money and Equity agent in Nairobi, Kenya (13 October, 2016).
Notes
[1] As the experience with the earlier market-driven microfinance model demonstrated by creating over-indebtedness crises in many countries, it is not too difficult to push large numbers of the vulnerable poor into purchasing products and services that are against their own best interests. See Milford Bateman. 2010. Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism, London: Zed Books. See also Isabelle Guérin, Marc Labie, and Jean-Michel Servet. 2015. The Crises of Microcredit (eds), London: Zed Books.
[2] For a general overview of Asian experiences and the importance of local reinvestment, see Joe Studwell. 2013. How Asia Works: Success and Failure in the World’s Most Dynamic Region, London: Profile Books. For the specific experience of China, see Yuen Yuen Ang. 2016. How China Escaped the Poverty Trap, Ithaca and London: Cornell University Press.
[3] The long-time CEO, Bob Collymore, and several of his senior managers have become multi-millionaires as a result of the Wall Street-style salaries and bonuses they have enjoyed during their term at Safaricom. See Macharia Kamau. 2018. ‘Report: Safaricom Paid CEO Eye-watering Sh16m Monthly,’ Standard Digital, 8 August.
[4] It was revealed some years ago that unnamed members of Kenya’s elite allowed, through the necessary legislation, the formation of M-Pesa on the condition that the majority shareholder in Safaricom -Vodafone – would allow them to privately benefit as well. Using a special investment vehicle, Mobitelea Ventures, this elite group was given a portion of shares in Safaricom that it was able to sell on later for fantastic financial gains. Pointedly, it was possible for these individuals to hide their identities thanks to commercial confidentiality clauses respected by Vodafone, and also retain almost all of their massive financial gains via the use of Caribbean tax havens. See Xan Rice. 2007. ‘Kenyan Inquiry into Vodafone’s Mystery Partner.’ The Guardian, 16 February.
This is a fascinating and impressive deconstruction of the mythology of what the authors refer to tellingly as ‘digital mining’.
In addition to the revelation (for some of us) of how new fin-tech makes vast profits at the expense of poor people in sub-Saharan Africa, this piece also draws attention to the crucial role of specific publications in promoting this mythology, despite the questionable methodology of the research – raising questions about the integrity both of the authors themselves and also, at least in one case, of the journal that published the work, and also about the relevance of sources of funding for the ‘orientation’ and eventual ‘findings’ of such research.
Interesting article, the paper; “The Long-run Poverty and Gender Impacts of Mobile Money” is very misleading but a dream to cherish for the IMF, World Bank, Gates foundation and International Payment providers such as VISA and MasterCard who conceal profit aspirations with the financial inclusion and poverty alleviation gospel. Most fintec articles conflate the commercial success of mobile network operators and the generous dividends which they pay their wealthy shareholders with poverty alleviation. In Zimbabwe, the largest mobile money provider extracts between 1-6% transaction fees (total payable by both payer and payee), not only that, the government also decided to add another 2% tax on all transactions, these extortionate fees are paid by the very same people whom they purport would be lifted out of poverty by digital forms of money. How will an 8% transaction fee charged on a micropayment made by a poor person alleviate poverty.
“By the same token, given the profit motive at play, it is inevitable that a range of services and products will end up being pushed on to the poor even though they largely do not need them, are not able to productively use them, or do not have any means to repay debt associated with them”.
There is no data to back up this claim. You seem to be arguing that the provider of the service (the lender) extracts more profit than the additional value the borrower is able to create as a result of the loan. You seem to be arguing this is the aggregate result. That is of course possible but isnt inevitable. It would be great if you could add some references with evidence.
Chris, just saw your comment so we are late getting back you (so apologies) but I hope you see it sometime. There is in fact an abundance of evidence we present in the full paper and other outputs derived from it to back up our claims on irresponsible ending issue, plus the evidence is, unfortunately, building by day. The massive overindebtedness issue we covered (see also the excellent article by Donovan and Park, 2019) shows that it is very easy to sell microcredit, but not so easy to pay it back and poor individuals as a result get regularly wiped out (think also of the sub-prime crisis in the US in the 2000s that destroyed so many low incomes neighbourhoods). Note also that Kenya’s overindebtedness crisis was especially acute in the gambling industry and it created huge problems for youth (which is why, of course, the Kenyan government sensibly closed it down in 2019). It is simply astonishing that Suri and Jack never even mentioned this over-indebtedness crisis, still less factor it into their evaluation. Moreover, a more recent survey by FSD Kenya found that “Nearly 1 in 2 digital borrowers reported having had to borrow more, sell assets, reduce expenditure on food or take a child out of school to repay a loan in the past 12 months” (FSD Kenya, 2019: 12) which again indicates problems repaying. You seem to be arguing that the provider of the service (the lender) will act responsibly and stop providing credit when they see that the borrower is in trouble. This is neoclassical financial theory, which is fine for modelling but fundamentally flawed as a view into real life. So in short, the lender DID make far more profits on the lending than the borrower made as a result of the digital microloan. This problem is endemic in the neoliberal financialised world and its called, of course, reckless lending.
Dear Mr Bateman,
Thanks for this enlightening article. I do wish you had opened up an alternative vision of how a fintech could operate to avoid digital mining. What would be a way for MPesa to operate that did not increase poverty in the countries they operate in. I’m visiting Kenya right now and the people here seem to be unhappy with mPesas monopoly position
Kind regards
Atia Janssens