Mpesa’s lessons for the World: Patrick Njoroge joins Chris Brummer at DC Fintech Week

Dr. Chris Brummer: I am now delighted to welcome Patrick Njoroge to FinTech Week, who many of you around the world are familiar with. Mr. Njoroge is the governor of the Central Bank of Kenya and is joining us to talk about Mpesa, and the path breaking innovation the country has initiated, and the plans that he has looking forward. Mr. Njoroge, thank you so much for joining us here over at DC FinTech Week.

Patrick Njoroge: Thank you, Chris. Thank you very much for inviting me to appear in this presentation and this fintech week.

Dr. Chris Brummer: So, you know, I think many viewers certainly who are at our conference may take perhaps Mpesa for granted a little bit because it’s there and it’s been such a spectacular success. But maybe you could talk to us just a little bit about where Mpesa came from and what it took on your end or at least on Kenya to get such an expansive program up and going. A little bit about the history of the Mpesa.

Patrick Njoroge: Thank you. Thank you, Chris. Delighted. I am pretty sure most people in this conference have had the time and pass of the product Mpesa and really the genesis of this is in — back in 2007. And that is when it was launched. And basically what it does, it allows persons to transfer money to other persons, so P2P transactions. The history of it is, and it uses your digital device, so with your phone, I can actually — you can actually transfer money to me and I’ll get the money, I’ll receive the money instantly. The genesis of it is that actually the company — Safaricom Nauset, it’s called, but the time it was Vodafone — and under Grant that was given by the the U.S. government — no the U.K. government — it provided, it put together a project or put together a product that allowed these transactions to happen. Now, when they brought the product to us, they said, “well, we can do this, but we don’t know if there are any laws that we could, that we need to obey, we need to follow, et cetera, et cetera, et cetera.” At the time, there were no laws that actually allowed you to have these sort of transactions. Did you own the digital format? And so Safaricom worked closely with the central bank to come up with a sort of a framework. Obviously, the central bank realized that this is a very interesting product and there was a clear need, a clear social need, because transferring money between persons was actually a very complicated operation here in Kenya. So a proper need and good technology, but you also needed to be sure that the risks are taken care of. And that’s why the central bank worked closely with Safaricom and indeed the innovator, and eventually when the product was ready, when the risks were minimized, when maybe there is risk in terms of transaction, financial stability, et cetera, were reduced sufficiently, the product was launched. So this was also launched on the basis of a test and learn. We were not sure what — how the distorting audit vote would evolve going forward. And so it was important to be clear that we will learn as as time goes by and adjust it appropriately. Now, fast forward — in 2013, actually, we did put in place the National Payment Systems regulations and not a law that actually, let’s say, yeah, to define how these transactions will take place in this in this space. And fast forward, the product has become very successful and there are other products now, it’s not just Mpesa. So, for instance, in terms of financial inclusion, in 2006, 26 percent of our population were included. Now it is, last year it was 83 percent. So there’s a substantial increase in this regard. There’s one last thing I want to mention in terms of the impact. We now have an ecosystem around Mpesa. It has actually evolved into a sort of a big tree. So something started as a small stream and now you have a sort of a mighty Mississippi, which is the entire ecosystem. So your point about Kenya being the start of this fintech and indeed also being the, let’s see, the cradle of fintech is is actually accurate.

Dr. Chris Brummer: You know, there’s so much in that answer that I think a lot of people of looking today at so many other new kinds of financial technologies and innovations and really the process of thinking through how to approach new innovations that I think people can learn from and to learn from the Kenyan experience. But just to make clear, I mean, it sounds like you had on the one hand, sort of this this this new product being brought in, this particular instance by, you know, a telecom kind of company and they had this idea, and then there was a deep kind of collaboration and experimentation with the central bank. And then after sort of examining just sort of how the system would operate, you had laws that were were step by step being developed as as that product was being, I guess, mainstreamed. And now, as the world knows, the penetration of Mpesa and sort of P2P payment systems, really, it’s perhaps unrivaled really anywhere else. Do you sense when you’re talking to your colleagues, other central bankers around the world, that your experience has been informative of sort of conversations that people are having now when it comes to other kinds of innovative technologies? What kinds of things are people asking you given all of the success that that that you’ve had?

Patrick Njoroge: First, there has been a lot of questions by other, let’s say, similar economies that want to see the benefit of Mpesa, and they would want to have that in their own countries. And actually, there has been good sort of reporting of the idea into other parts of the world — Rwanda, Tanzania and now Uganda, but have really made significant steps in this area, and also the financial inclusion numbers have improved dramatically. But it’s not just Africa. It’s actually other parts of the world that remember, for instance, famously a few years ago, maybe four years ago, I spoke in Paris at the national treasury there. And after talking about this, they were kind of very curious and actually wanted to understand a lot more and really did see the benefit. So it’s not just the, let’s say, margin markets or for that matter, developing nations, but it’s also the advanced economies. So your point earlier about people who have been in the space, the advanced economies space, the United States, elsewhere, also learning from this is very much — is accurate. So that’s one set of people, a set of questions. The other one is the experience itself, distilling the experience. And I think I have made the point to them that, as you have explained, the — a key element, of course, is the innovation. But innovation was not sufficient. It is necessary, but not sufficient. You also need a sort of a very innovative, innovative regulator. So the issue of working collaboratively, as you say, with the regulator was key. And the other element, which is also very important, is appreciating the need of what is there that — what is the benefit to population? And that, I think, is something that is much more important today in the various other questions that we are having, for instance, when we discuss crypto currencies and things like that, the question I would have is: what is the what is the need that they are feeling, or is it just a technology, a new tool and we are interested in just the technology, but not what it is going to help the citizens, et cetera, et cetera. So those are the issues, so we’ve been talking to other our peers and others around the world about our experience. And we’ve distilled it and I think it is beneficial. So I think that’s what that’s what I would say.

Dr. Chris Brummer: So, can I ask then, I guess two questions — and I think first, with the introduction of Mpesa, you had mentioned this this boost in financial inclusion. Mpesa is a kind of a payments tool. Was that financial inclusion in terms of the unbanked becoming banked or was it just in terms of the wider access to financial services as this ecosystem around Mpesa developed?

Patrick Njoroge: The answer to that, it is these are people that are within a particular — it’s access to financial services, so they are within, I think, 1.5 kilometers of our financial touchpoint and so Mpesa and related services allowed them to be to have brought the financial services to the customer. So in some sense, you could think of in the past when we were very heavy on banks, you measured financial access by how far you are from a banking system, bank branches, et cetera. But now it is also — and this is important — it is also all the touch points that relate to Mpesa. For instance, there are a lot of agents, Mpesa agents, that actually were, in a sense, mushroomed around the country. And you are able to move from, let’s say, from cash to digital wallet by just going down to, let’s say, the nearest kiosk, Mpesa kiosk, giving them your cash, and then they loaded into your E-wallet and vice versa. You could also move out of your wallet to cash by going to all these agents, so. It was access from that fundamental point, and I think it has led to other things, but you had the second question.

Dr. Chris Brummer: Yeah, well, then the second question was, because you did mention this issue of cryptocurrency, and for many countries, cryptocurrencies are coming onto the scene. You have similar conversations about sort of inclusion when it comes to more efficient and low cost payment services. You know, you’re situated a little bit differently from many countries precisely because of the penetration of, you know, Mpesa and other kinds of payment systems. I mean, when you hear — when you listen to buzzwords like Bitcoin and cryptocurrency, stable coins, whatever, you know, what’s your sense of those technologies? And do you see them as sort of part of what will be your conversation in Kenya, or do you think that sort of where you are now, you know, there’s a higher sort of burden of proof when it comes to demonstrating the value of those technologies, given the fact that you guys are so far ahead on on the fintech evolutionary curve?

Patrick Njoroge: Thank you. In terms of cryptos, et cetera, I think we have to appreciate that there are the technologies that they represent are very interesting and very good technologies. So from a technological perspective, there’s something there. But on the other hand, the issue is there may be tools in search of a problem to resolve, and that’s where our concerns or our questions are. I mean, Ali on Bitcoin was in a sense, you know, played up as the new sort of do-it-all. And I’m saying that also to be somewhat provocative. And and also the technologies were put forward as something that, you know, have something I want to say powers in terms of let’s say they have you there being, let’s say, unable to break into them, et cetera. Now we know what has happened since then. History has revealed that those, let’s say those points that were put out there or those properties may or may not have been, let’s say, accurate. But the point I would make is they do have a place, I mean cryptocurrencies have a place. But it has to be clear that it is a specific place that has properties. For instance, you need to be concerned about some of the potential negative side effects of this. And we’ve talked about the issue of illicit them, supporting illicit transactions, et cetera. So you do need to have them in a place where or in a space where those sorts of concerns are taken care of. Secondly, the question is, is it just for transactions, right? Because, as you say, here in Kenya, we do have significant transactions that are taking place through other channels. So the question is, what is the problem that these cryptocurrencies are trying to resolve? Well, is it the issue of anonymity? And when you get into anonymity, then you have issues of emails. I mean, money laundering and all those other concerns and anonymity may not be one, an issue that, let’s say the vast majority of the population are interested in. So my point is the space of cryptocurrencies needs to be well mapped out. Frankly, it has looked more as a sort of speculative investment, again, trying to be provocative. It could really be like tulips, you know, in the golden days or for that matter, all the other speculations that or let’s say bubbles that we have had. And frankly, today, you know, Bitcoin is more of — and another coins, similar coins — are more of an investment thing, right? You put money in it and you hope that you’re going to get twice as — well a return of X percent — in so many months or years or whatever it is. So that’s one set of things. But on the other hand, you do have the other issue of other currencies, and these are — is it crazy for me to say something about CBDC?

Dr. Chris Brummer: Well, I was about to say — you’re definitely reading my mind, you know

Patrick Njoroge: Please go ahead, ask the question.

Dr. Chris Brummer: No, no, no. Because it’s just such an interesting space in which you find yourself in. And you know that the conversation on CBDCs is, you know, what, number one, differentiates that then from something like Bitcoin, right? And then secondly, as again, someone who’s running a very highly sophisticated payments infrastructure, one that is not necessarily being driven through the central bank, but certainly involves some collaboration and lots of supervision by various kinds of actors, you know, what do you see as as as when you hear about CBDCs? What do you hear about the use case and the value for Kenya?

Patrick Njoroge: OK, so CBDC, this is a central bank digital currencies. So the there is actually a lot of, let’s say, discussion and a lot of work around this by central banks and others, buyers, et cetera. And we are involved in it sort of on the margins, but we are also involved in it in various ways. The only point I would make — well, let me make several points on this. First is that I think, from my perspective, the push came very much because of the private cryptocurrencies and the way those sort of mushroomed. And I think we felt that central bankers felt left out, and we sort of said, “well, maybe this is our space.” Now, central banks wouldn’t go in the same way private sort of currencies or coins would. What do I mean by that? I mean, central bankers do understand their fundamental mandate and their mandate really relates to, obviously, price stability and other things, financial stability, et cetera. And so the idea here is, could we as central banks or could I at our central bank, true to its mandate, use this tool in a way to achieve efficiently the purpose that was set out in our arts, in our charter, et cetera, et cetera? And I think that’s really where the conversation is today. And there was a recent report by the various central banks in the advanced economies, plus the BIS, precisely on sort of what the principles of such a central bank digital currency would be, what are the principles that — of this digital currency would need to to abide by? Now, my point in this is we will look at it, and we should look at this thing, and see whether there is a potential for ourselves doing our work better. The point — the only point here is that I mean, one could ask, but already central banks do provide currencies to, or do provide let’s say liabilities, to banks. So what is different? The critical difference here is that the liabilities would be available, meaning the currency would be available to the general public. And today now — and it wouldn’t be cash. Today now, the only way, let’s say, a private citizen would hold a central bank liability would be — through cash. Now, I want to say that the problem is there’s another push in all this, which is what I call the death of cash. But I think, unfortunately, the death of cash has been greatly exaggerated, and it will be with us for some time. And from our perspective as to our cash, demands have gone down. But they will not — they haven’t gone down to zero. We still have significant demands. And and this, I think, is something that we need to look at carefully, because it’s not that we want to go into cashless economy. I think we should be going to a less cash economy. And in that space, you still have the current arrangements and they seem to be doing generally OK, both in terms of efficiency and also in terms of speed, et cetera.

Dr. Chris Brummer: Well, Governor, this has been a fascinating conversation. Thank you so very much for joining us. You know, there are a lot of lessons that we have to learn around the world, really, from your experience, from Kenya’s experience and your time has been extremely appreciated.

Patrick Njoroge: Thank you, Chris. Thank you for spending time with me.

This interview was part of DC Fintech Week 2020.

Chris Brummer is a Georgetown law professor, author, and lecturer.

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