Connect with us

Economy

What Kenya’s mobile money success could mean for the Arab world

Published

on

Authors: François de Soyres, Mohamed Abdel Jelil, Caroline Cerruti and Leah Kiwara

Embracing the new technologies that are rapidly transforming the world would be a way for the countries of the Middle East and North Africa to unleash the potential of their large and tech-savvy youth populations. For this to happen, the region will need to create the key ‘digital public goods,’ with mobile money one of the most important.

In the modern digital age, broadband internet and online payment systems are the bridges and roads of the traditional, physical economy. They connect businesses with customers and create markets. For this digital market to function, it is vital that businesses and their customers have a means for transferring money electronically.

For a successful model, the Arab World can look to Kenya’s development of mobile money or “M-Pesa”. In many ways, the elements that lead to M-Pesa’s success in Kenya are already present in the Arab World. Young people in MENA are digitally savvy, are active on social media and are some of the heaviest users of mobile phones in the world.

The successful adoption of M-Pesa in Kenya reverberated across the African startup scene. It acted as a catalyzer and a signal for young entrepreneurs in Kenya and Africa as a whole: revolutionary ideas could be successfully implemented in Africa and generate both business opportunities and a development path for local communities.

If this was true in Africa, can it also be true for the Middle East?

What is M-Pesa?

In March 2007, Safaricom, Kenya’s leading mobile operator, revolutionized the way Kenyans manage money by introducing M-Pesa.

Money transfer via SMS texting was the first service offered. Using a basic mobile phone, users could electronically send and withdraw funds. The actual exchange of money–the deposit and withdrawal–occurs through a network of agents that essentially act as ATMs. M-Pesa agents include small shops, gas stations, post offices, and even traditional bank branches. Today, there are more than 110,000 M-Pesa agents, 40 times the number of bank ATMS in Kenya.

The service is priced in a way to attract as many network agents as possible. A cash deposit is free, but a sliding commission is charged either when e-money is sent or withdrawn as cash.  Agents earn a fraction of the value of transaction volume they generate (both cash deposits and withdrawals). Everyone can use M-Pesa, however, non-registered users pay a substantially higher fee than those registered with accounts. This is to encourage more people to register in the platform.

Since 2007, M-Pesa’s services have continued to expand. At first, it was limited to buying airtime for mobile calls or paying utility bills and schools fees. In 2012, M-Pesa launched a service enabling users to open interest-paying saving accounts and to obtain short-term loans. In 2017, Safaricom launched a platform that enabled small-holder farmers to use mobile phones to connect with suppliers (for such things as fertilizers, seeds, animal feeds), agronomists, information services and even outlets to sell their harvest.

M-Pesa’s effects

On its tenth anniversary, M-Pesa was serving 30 million customers across 10 countries. Today, 96% of households outside the Kenyan capital of Nairobi have at least one M-Pesa account.

Studies have found that households using M-Pesa are better able to withstand sudden declines in income because they can more easily receive remittances and are saving more money. Moreover, M-Pesa lead to financial empowerment of women and helped them gain control over their income. This translated into some women graduating from agriculture into more productive jobs.

The adoption of M-Pesa has had a tremendous effect on Nairobi’s startup scene. Over the past few years, the startup ecosystem in Nairobi grew very actively with business models building on M-PESA’s foundations. Kenyan startups raised a total of US$32.8 million in 2017, according to the most recent African Tech Startups Funding Report, the third largest amount raised by any one country on the continent. There are now 38 fintech start-ups  active in Kenya.

Why M-Pesa grew

The growth of M-Pesa is the result of many factors, including the ease of setting up an account (which is free and only requires an official ID), its simplicity of use, its affordability, the high literacy rate of the population, and the high penetration of mobile phones.

Another key element to M-Pesa’s growth worth emphasizing is the regulatory stance adopted by the Central Bank of Kenya (CBK). It decided not to oppose the entry of the telecom operator into the financial sector as long as it offered sufficient guarantees. CBK adopted an “above the fray” position as a regulator and allowed for experimentation in order to foster innovation.

The leading position of Safaricom allowed for significant investment in agents and the mobile network. Due to push back from its competitors, in 2016, the Competition Authority of Kenya ordered Safaricom to open its network of M-Pesa agents to the other telecom companies offering mobile money services. A year later, telecom operators reached an agreement that allows users to exchange money regardless of whether both parties to the transaction have the same provider.

A MENA perspective

MENA could easily follow in Kenya’s footsteps, and reap immense benefits. The adoption of mobile payment systems makes transactions cheaper, easier and safer. By simplifying how clients can pay for goods and services, it helps firms reach out to new customers and foster private sector development across the economy. Moreover, as is often the case with innovations, it has the potential to be built upon and used by other new technologies and to create a positive momentum in fintech as a whole.

Governments in the Middle East and North Africa should enable digital innovation with conducive regulations and the development of a regulatory ‘sandbox’, which guarantees the security of transactions but allows for experimentation, that would stimulate the development and adoption of disruptive innovations.

Today, economic connectivity is achieved by the development and harmonization of optic fibers, IT equipment, online payment systems, information transmission and data protection policies. If the MENA region puts sufficient efforts in this direction, it could propose a new path to its citizens, in particular the youth, and bring about a new development strategy adapted to the modern age.

World Bank

Continue Reading
Comments

Economy

Free-Market Capitalism and Climate Crisis

Avatar photo

Published

on

st

Free market capitalism is an economic system that has brought about tremendous economic growth and prosperity in many countries around the world. However, it has also spawned a number of problems, one of which is the climate crisis. The climate crisis is a global problem caused by the emission of greenhouse gases, primarily carbon dioxide, into the atmosphere. These externalities are chiefly a consequence of day to day human activities, such as the burning of fossil fuels, deforestation, and conventional agriculture. The climate crisis is leading to rise in temperatures, sea levels, and more erratic weather patterns-The floods in Pakistan and depleting cedars of Lebanon are vivid instances for these phenomena, which are having a devastating impact on the planet.

One of the main reasons that free market capitalism has contributed to the climate crisis is that it prioritizes short-term economic growth over long-term environmental sustainability. Under capitalism, companies are primarily motivated by profit and are not required to internalize the costs of their pollution. This means that they are able to pollute without having to pay for the damage that they are causing. Additionally, the capitalist system is based on the idea of unlimited growth, which is not sustainable in the long-term. As long as there is an infinite demand for goods and services, companies will continue to produce them, leading to ever-increasing levels of pollution and resource depletion.

Another pressing issue that free market capitalism is recently going through is that it does not take into account the externalities of economic activities. Externalities are the unintended consequences of economic activities, such as pollution and climate change. Under capitalism, companies are not required to pay for the externalities of their activities, which means that they are able to continue polluting without having to pay for the damage that they are causing. In her book “This Changes Everything: Capitalism vs Climate” Naomi Klein argues that the current system of capitalism is inherently incompatible with the urgent action needed to address the Climate crisis.

To address the climate crisis, it is necessary to put checks and balances over the free market capitalism and/or make a way towards a more sustainable economic system. This can be done through a number of different effective policies, such as:

Carbon pricing: This can be done through a carbon tax or a cap-and-trade system, which would make companies pay for the carbon emissions that they are producing. In the article “The Conservative Case for Carbon Dividends” authors suggest that revenue-neutral carbon tax is the most efficient and effective way to reduce the carbon emissions.

Increasing renewable energy investments: an increment in the investments in clean energy technologies, such as solar and wind power, can result in the reduction in  the use of fossil fuels.

Regulating pollution: Governments can regulate pollution to limit the amount of greenhouse gases that are emitted into the atmosphere.

Encouraging sustainable practices: Governments can encourage sustainable practices, such as recycling and conservation, to reduce the use of resources.

It is remarkable that evolving Capitalism can be harnessed to address the climate change. The private sector has the resources and innovation to develop and implement new technologies and sustainable practices, but they need the right incentives and regulations to do so. Finding the balance between economic growth and environmental protection must be a priority for capitalists.

The free market capitalism has been the driving force behind global economic growth, but at the same time, it has contributed to the ongoing climate crisis. The solution to this problem is not to reject capitalism, but rather to reform it to the societies’ suitable demands. Government should consider providing a level playing field so as to make the probable transition from fossil-based energy systems to Green energy technologies possible. The capitalists should not consider short-termism over long term environmental sustainability. Government intervention to put a price on carbon emissions, invest in renewable energy, regulate pollution, and encourage sustainable practices is necessary to avoid the worst impacts of the climate crisis and build a sustainable future for all. However, here is the catch:  Is achieving net-zero-carbon emissions by mid-century a probable target? The answer is quite uncertain, however it is critical point to strive for in the face of  escalating Climate Crisis.

Continue Reading

Economy

Egypt’s “Too Big to Fail” Theory Once Again at Test

Published

on

Authors: Reem Mansour & Mohamed A. Fouad

In the wake of 2022 FED’s hawkish monetary policy, the Arab world’s most populous nation, Egypt, saw an exodus of about USD20bn of foreign capital.  A feat that exerted pressure on the value of its pound against the dollar slashing it by almost half.  This led to USD12bn trade backlog accumulating in Egypt’s ports by December 2022.

Meanwhile, amidst foreign debt nearing USD170bn, inflation soaring to double digits, and a chronic balance of payment deficit, Egypt became structurally unfit to sustain global shocks; the country saw its foreign debt mounting to 35% of GDP, causing the financing gap to hover at USD20billion. 

While it may seem all gloom and doom, friends from the GCC rushed to inject funds in the “too big to fail” country, sparing it, an arguably, ill-fate that was well reflected in its Eurobond yields spreads and credit default swaps, a measure that assesses a sovereign default risk. 

For the same reason in early 2023, the IMF sealed a deal worth of USD3bn, with the government, which unlocked an extra USD14bn sources of financing from multilateral institutions, and GCC sovereign funds, to fill in a hefty portion of the annual foreign exchange gap, albeit  a considerable amount averaging USD6bn per annum is yet to be sourced from portfolio investments.  

With the IMF stepping in, the Egyptian government agreed on a structural reform program that requires a flexible exchange rate regime, where the Egyptian pound is set to trade within daily boundaries against the US dollar, rationalize government spending, especially in projects that require foreign currency; and most importantly the program entails stake-sales in publicly owned assets, paving the way for the private sector to play a bigger role in the economy.

In due course, through its sovereign fund, Egypt planned initial offerings for shares in companies worth about USD5-USD6bn, and expanded the sale of its shares in local banks and government holdings to Gulf investment funds. 

Through the limited period of execution of these reforms, the EGP hit a high of 32 against the greenback, and an inflow of portfolio investments amounting to USD1bn took place, according to the Central Bank of Egypt. 

Simultaneously, Citibank International, cited a possible near end of the devaluation of the Egyptian pound against the US dollar.  Also, in a report to investors, Standard Chartered recommended to buy Egyptian treasury bills, and pointed to the return of portfolio flows to the local debt market in the early days of January, 2023. Likewise, Fitch indicated the ability of the Egyptian banking sector to face the repercussions of the depreciation of the pound, and that the compulsory reserve ratios within Egyptian banks are able to withstand any declines in the value of the pound because they are supported by healthy internal flows of capital.

While things seem to be poised for a recovery, the long term prospects may lack sustainability.  The Egyptian government needs to accelerate its plans to shift gears towards a real operational economy capable of withstanding shocks and dealing with any global challenges. Egypt, however has implicitly held the narrative that the country is ‘too big to fail”. This is largely true to the country’s geopolitical relevance, but even this has its limitations when the price to bail far outweighs the price to fail.

Former President George W. Bush’s administration popularized the “too big to fail” (TBTF) doctrine notably during the 2008 financial crisis. The Bush administration often used the term to describe why it stepped in to bail out some financial companies to avert worldwide economic collapse.

In his book “The Myth of Too Big To Fail” Imad Moosa presented arguments against using public fund to bail out failing financial institutions. He ultimately argued that a failing financial institution should be allowed to fail without fearing an apocalyptic outcome. For countries, the TBTF theory comes under considerable challenge.

In August 1982, Mexico was not able to service its external debt obligations, marking the start of the debt crisis. After years of accumulating external debt, rising world interest rates, the worldwide recession and sudden devaluations of the peso caused the external debt bill to rise sharply, which ultimately caused a default. 

After six years of economic reform in Russia, privatization and macroeconomic stabilization had experienced some limited success. Yet in August 1998, after recording its first year of positive economic growth since the fall of the Soviet Union, Russia was forced to default on its sovereign debt, devalue the ruble, and declare a suspension of payments by commercial banks to foreign creditors.

In Egypt, although the country remains to face a number of challenges, signs remain relatively less worrying than 2022, as global sentiment suggests that leverage will be provided in the short-term at least. Egypt’s diversified economy, size and relative regional clout may very well spare the country the fate of Lebanon. However, if reforms do not happen fast enough, the TBTF shield may become completely depleted.

Hence, in order to avoid an economic fallout scenario a full fledged support to the private sector’s local manufacturing activity and tourism is a must.  Effective policies geared towards competitiveness are mandatory, and tax & export oriented concessions are required to unleash the private sector’s maximum potential and shift Egypt into gear.

Continue Reading

Economy

Sanctions and the Confiscation of Russian Property. The First Experience

Avatar photo

Published

on

After the start of the special military operation in Ukraine, Western countries froze the assets of the Russian public and private sector entities which had been hit by blocking financial sanctions. At the same time, the possibility that these assets could be confiscated and liquidated so that the funds could be transferred to Ukraine was discussed. So far, only Canada has such a legal mechanism. It will also be the first country to implement the idea of confiscation in practice. How does the new mechanism work, what is the essence of the first confiscation, and what consequences can we expect from the new practice in the future?

Loss of control over assets in countries that impose sanctions against certain individuals has long been a common phenomenon. The mechanism of blocking sanctions has been widely used for several decades by US authorities. A similar methodology has been adopted by the EU, Switzerland, Canada, Australia, New Zealand, Japan and some other countries. Russia and China may also resort to these tactics, although Moscow and Beijing rarely use them. In the hands of Western countries, blocking sanctions, however, have become a frequent occurrence. Along with the ban on financial transactions with individuals and legal entities named in the lists of blocked persons, such sanctions also imply the freezing of the assets of persons in the jurisdiction of the initiating countries. In other words, having fallen under blocking sanctions, a person or organisation loses the ability to use their bank accounts, real estate and any other property. Since February 2022, Western countries have blocked more than 1,500 Russian individuals in this way. If you add subsidiary structures to them, their number will be even greater. The volume of the property of these persons frozen abroad is colossal. It includes at least 300 billion dollars in gold and foreign exchange reserves.

This is not counting the assets of high net worth Russian individuals worth $30 billion or more which have been blocked by the G7 countries. However, the freezing of property does not mean its confiscation. Although the blocked person cannot dispose of his assets, it formally remains his property. At some point, the sanctions may be lifted, and access to property restored. In practice, restrictive measures can be in place for years, but theoretically, the possibility of recovering assets still remains.

After the start of the special military operation (SMO), calls began to be heard in Western countries to confiscate frozen property and transfer it to Ukraine. Confiscation mechanisms have existed before. For example, property could be confiscated by a court order as part of the criminal prosecution of violators of the sanctions legislation. However, such mechanisms are clearly not suitable for the mass confiscation of property. Blocking sanctions are a political decision that do not require the level of proof of guilt that is required in the criminal process. To put it bluntly, the hundreds of Russian officials or entrepreneurs put on blocking lists for supporting the SMO did not commit criminal offenses for which their property could be subject to confiscation. The sanctions have spurred the search for such crimes in the form of money laundering or other illegal operations. But the amount of funds raised in this way would be a tiny fraction of the value of the frozen assets. To implement the idea of confiscation of the frozen assets of sanctioned persons and the subsequent transfer of the proceeds for them, Ukraine needed a different mechanism.

Canada was the first country to implement such a mechanism. The 2022 revision of the Special Economic Measures Act gives Canadian authorities the executive power to order the seizure of property located in Canada which is owned by a foreign government or any person or entity from that country, as well as any citizen of the given country who is not a resident of Canada (article 4 (1)). The reason for the application of such measures may be “a gross violation of international peace and security, which has caused or may cause a serious international crisis” (Article 4 (1.1.)). The final decision on confiscation must be made by a judge, to whom a relevant representative of the executive branch sends a corresponding petition (Article 5.3). Furthermore, the executive authorities, at their own discretion, may decide to transfer the proceeds from the confiscated property in favour of a foreign state that has suffered as a result of actions to violate peace and security, in favour of restoring peace and security, as well as in favour of victims of violations of peace and security, or victims of violations of human rights law or anti-corruption laws (art. 5.6).

The first target of the new legal mechanism will be the Canadian asset of Roman Abramovich’s Granite Capital Holding Ltd. The value of the asset, according to a statement by Canadian authorities, is $26 million.

Roman Abramovich is on the Canadian Blocked List, i. e. his property is already frozen, and transactions are prohibited. Now the property of the Russian businessman will be confiscated and, with a high degree of probability, ownership will be transferred to Ukraine. This is a relatively small asset (from the standpoint of state property), but the procedure itself can be worked out. Further confiscations may be more extensive.

The Canadian experience can be copied by other Western countries. In the US, work on such a mechanism was announced back in April 2022. although it has not yet been adopted at the legislative level. In the EU, such a mechanism is also not finally fixed in the regulatory legal acts of the Union, although Art. 15 of Regulation 269/2014 obliges Member States to develop, inter alia, rules on the confiscation of assets obtained as a result of violations of the sanctions regime. The very concept of violations can be interpreted broadly. So, for example, Art. 9 of the said Regulation obliges blocked Russian persons to report to the authorities of the EU countries within six weeks after blocking about their assets. Violation of this requirement can be regarded as a circumvention of blocking sanctions.

There are several consequences of the Canadian authorities’ initiative.

First, it becomes clear that the confiscation rule is not dormant. Its use is possible and is a risk. This is a serious signal to those Russians and Russian companies that have not yet come under sanctions, but own property in the West. It can be not only frozen, but also confiscated. This risk will inevitably be taken into account by investors and owners from other countries, which could potentially be the target of increased Western sanctions in the future. Among them are China, Saudi Arabia, Turkey, and others. It is unlikely that the confiscation of Russian property will lead to an outflow of assets of these countries and their citizens from Canada and other Western jurisdictions. But the signal itself will be taken into account.

Second, the Russian side is very likely to take retaliatory measures. Western companies are rapidly withdrawing their assets from Russia. The representation of Canadian business in the Russian Federation was small even before the start of the operation in Ukraine. If the practice of confiscation becomes widespread, then the Russian side can roll it out in relation against the remaining Western businesses. However, so far, Moscow has been extremely hesitant to freeze Western property. While the US, EU and other Western countries have actively blocked Russians and their assets, Russia has mainly responded with visa sanctions. The confiscation could overwhelm Moscow’s patience and make the retaliatory practice more proportionate.

Finally, the practice of confiscation modifies the very Western idea of sanctions. It currently implies, among other things, that the “behavioural change” of sanctioned persons would result in the lifting of sanctions and the return of property. The freezing mechanism was combined with this idea. However, the confiscation mechanism contradicts it. Sanctions now become exclusively a mechanism for causing damage.

From our partner RIAC

Continue Reading

Publications

Latest

Finance33 mins ago

Astana hosts 18th Iran-Kazakhstan Joint Economic Committee meeting

The 18th meeting of Iran-Kazakhstan Joint Economic Committee meeting was held on Thursday in Kazakhstan’s capital Astana, at the end...

World News3 hours ago

The importance of Iran’s membership in the SCO

The members of Majlis (the Parliament) have approved the emergency of the plan of Iran’s commitments to achieve the position...

World News4 hours ago

Sabah: ‘The Americans have deceived themselves, the Europeans and Ukraine’

The US is repeating the same mistakes as in Iraq, Afghanistan, Libya and Syria. Now – in Ukraine. So it...

South Asia7 hours ago

Saudi-Chinese Friendship: Should India be Concerned?

Saudi Arabia hosted the grand China-Arab summit in December last year and leaders of the two nations deliberated on future...

Southeast Asia9 hours ago

China’s assurance of Rohingya repatriation between Myanmar-Bangladesh

We now have new hope thanks to news reports that were published in the Bangladeshi dailies on Tuesday and contained...

Science & Technology11 hours ago

Deployment of 5G Technology: Scrutinizing the Potential Menace & Its Repercussions globally

5G, or fifth generation, is the latest generation of mobile telecommunications technology. It promises faster internet speeds, lower latency, and...

Europe12 hours ago

Serbia must reject the ultimatum regarding Kosovo

The President of Serbia, Aleksandar Vucic on January 20th  had a meeting with the Western negotiating team about the solution...

Trending