Mobile Phone Payments and Demand for Cash: The Case of Tanzania

Abstract

This paper examines recent developments in mobile phone transactions in Tanzania, the extent of its adoption by the general public and motivation for its usage. It also explores how development in mobile phone transactions has affected the demand for cash holdings including its components (denominations) using cointegration approach supplemented by survey. Empirical estimation of Vector Error Correction Model (VECM) of demand for cash using Johansen’s procedure provides no evidence of reduced cash usage driven by proliferation of mobile money transactions. Meanwhile, survey evidence has shown that, in Tanzania, mobile phone transactions have progressively gained pace over the recent years and is now the most used method of payment after cash. This trend is driven by harnessing of underlying financial regulations and platforms, acceptance of this method of payment, security for not carrying cash and simplicity in terms of speed and outreach among the counterparties. The paper concludes that the use of mobile phone money services creates additional pressure on income velocity of money, with potential impact on prices. Under the current quantity based monetary policy framework, this calls for ensuring that monetary policy formulation takes into consideration of this novel development.