Mobile money presents a new avenue for monetary policy

As the economic threat posed by Covid-19 virus continues to escalate, many central banks around the world have been rushing to cut interest rates and create stimulus packages to ensure that there is adequate money supply to keep businesses afloat.

Here in Kenya, as markets awaited to see what new measures the Central Bank of Kenya would take, it came as an interesting surprise that the first announcement would be after a joint meeting between the banking regulator and mobile money operators.

The intention was to announce a new set of measures to increase use of mobile money transactions and contain the spread of Covid-19 virus. It turned out to be a profound and subtle insight into how mobile money has found space within Kenya’s monetary policy.

This new added layer of sophistication allows Kenya to implement economic stimulus in a manner that can directly target citizens at the grassroots. This is unprecedented in economic history and opens a rich vein of potentially ground-breaking research that could have many benefits for Kenya and other developing economies.

Monetary policy largely focuses on regulating the amount of money supply in an economy by either increasing or decreasing interest rates. This has been the key function of central banks across the world. Kenya, however, presents a unique economic model in which more people have access to mobile money than to bank accounts, and for this reason telcos have more influence on the money circulating within an economy than the traditional central bank.

While the last few years have seen an increase in research on how mobile money will impact the future of monetary policy, the approaches have been overly theoretical with no specific criteria or principles. Up until now, it had never been clear, which specific mobile money levers could be pulled to influence an increase or decrease in money supply.

And so, in quick succession, the key parameters were laid bare. Lowering transaction charges, increasing transaction limits and eliminating any cost between mobile money wallets and bank accounts were some of the tools that could influence money circulation in the economy.

In a sense, this marks a watershed moment in economics, whereby future market movement could depend less on the benchmark interest rates and more on mobile money configurations.

In many ways this situation was long in coming, not least because of inherent challenges of traditional monetary policy application in Kenya.

Indeed, the weak transmission signal between the Central Bank rate and bank lending rates has been a recurring theme over the years. A good case in point would be the November 2019 slashing of interest rates by the CBK, which failed to trigger any meaningful reduction of lending rates by commercial banks, well into 2020.

In sharp contrast, mobile money can reach each citizen at a personal level and bypass layers of government and corporate bureaucracy, significantly increasing the efficiency of any stimulus measures that might be required to boost the economy during such a difficult period.

While the benefits might be many, the role of mobile money within monetary policy also introduces a new set of challenges. For one, the data required to make the relevant decisions will be largely held by private institutions and not state agencies as has been the tradition.

This could essentially place greater control of monetary policy into private hands, who might not always act in the interest of the common good. One of the remedies for this might be in better regulation to create a level playing field that allows for the active participation of numerous mobile money operators competing on innovation and customer service.

The place of mobile money in implementing economic policy, both fiscal and monetary, is an area Kenya can provide great leadership, drawing from its 13 years of active engagement with this technology.

In order to appreciate how unique Kenya’s situation is, one only has to reflect on the recent statement by the US Federal Reserve chairman Jerome Powell when addressing the recovery measures, who said ,"We don’t have the tools to reach individuals and particularly small business.”

The need for mobile money-driven economic policy cannot be overstated. In the final analysis, it might be said that the Covid-19 crisis tested the limits of the central bank-led monetary policy as espoused by Milton Friedman and the Chicago school of economic thought, and the world is now marching towards the mobile money-led Nairobi school of economic thought!

Mr Ken Gichinga is chief economist at Mentoria Economics.