Mobile Money and Financial Development: The Case of M-PESA in Kenya

Abstract

Many economists argue that financial market development plays a role in fostering economic development. However, the question of how to extend financial access to the unbanked in underdeveloped countries has long remained a puzzle in the development finance literature. Much of the debate thus far has centered on how strong a role the government should play in directing this process. Using Kenya as an illustrative case study, I show that entrepreneurial innovations like the ‘mobile money revolution’ and the associated phenomena of ‘agent banking’ can play a pivotal role fostering financial inclusion and promoting financial development. The key to bringing about these innovations, I argue, is not relying on ‘hands on’ government involvement but rather pursuing a ‘hands off’ approach whereby the government merely focuses on establishing a fertile institutional environment that protects private property and promotes entrepreneurship.