M-PESA resolves economic inefficiencies by facilitating money circulation and consumption, creating new business and jobs. It provides a safe way to store and transfer money, increasing savings and allowing more efficient risk sharing. This improves investment in human and physical capital. M-PESA faces the challenges of gaining user trust and overcoming network effects. It exploits concepts of price and income elasticity through its pricing structure. Safaricom can achieve economies of scale and scope by providing integrated voice, data, and M-PESA services using shared infrastructure. M-PESA relies on trust in Safaricom to overcome information asymmetries without government guarantees on deposits.

1. University Of Science & Technology Chattogram (USTC)
MASTER OF BUSINES ADMINISTRATION (MBA)
BATCH – 29TH
Assignment Topic
M-PESA
SUBMITTED BY SUBMITTED TO
Md. Shahriar Haque Mithun Mrs. Lutfun Nahar
MBA (Regular) Associate Professor
Batch – 29th (USTC)
ROLL - 1052 Mobile: +8801716120137

2. Q-1- What economic inefficiencies does M-PESA resolve and how?
M-PESA facilitated the increased in money circulation which had an effect of increasing local
consumption that leads to new business and employment opportunities. For example, the
establishment of M-PESA agents and existing store owners could also diversify their offering by
including this service that is now in much demand.
An economic situation is considered to be inefficient when it is wasteful and not producing at the
maximum output permitted by technology. To arrive at efficient economic decisions,
every firm must consider (1) what goods and services to produce, (2) how those goods and
services should be produced, and (3) for whom they should be produced.
Two problems that M-PESA faced
1. to gain the trust of the people that they were going to be serving
2. they had to overcome the hurdle of network effects.
Q-2-M-PESA exploits the concepts of price elasticity and income
elasticity of demand.
M-PESA exploits concepts of price elasticity through pricing higher service fees on the amount
bracket category which the majority of consumers commonly transact. On the other hand, M-
PESA exploits concepts of income elasticity of demand by pricing higher on the service which the
consumer patronizes more. To be specific, the cash-out fees are set to be relatively higher than
transfer fees because cash out have higher demand than transfer of money. M‐PESA is an
innovation that clearly dominates its money‐transfer predecessors on virtually all
dimensions. Users say it is faster, cheaper, more reliable, and safer, and a very large majority
report that they would suffer significantnegativeconsequences if it were to be shut down. These
expressed preferences suggest that M‐PESA is valued more by individuals than it costs. On the
other hand, the precise source of these benefits – i.e., the specific economic impacts of M‐PESA
– is not easy to calculate. We have identified a number of potential economic effects of M‐PESA
at the household level – for example from impacts on saving and investment, to risk spreading
and insurance. At the macroeconomic level, there could be important impacts on the money
supply and inflation, with implications for the extent of Central Bank regulation and the conduct
of monetary policy. We hope to explore these issues empirically in future work.

3. Q- 3- How Can Safaricom exploit economies of scale and/ or scope to
provide voice, data, and M-PESA services?
Safaricom can reduce cost on the expenses at the point of sale for establishing the system and
for its operation by providing voice, data, and M-PESA services. Specifically, by reaching
economies of scale, this helps reduce cost of readers at the point of sale. Offering different
services to customers using and operating one systemcan save cost than offering these different
services having different system because they used the same chips and equipment, people, and
retail infrastructure to market those services. M-PESA faces is due to cash float constraints. M-
PESA retail outlets cannot always meet requests for withdrawals, especially large withdrawals.
M-PESA took advantage of the falling costs of mobile phone technology enabling them to adapt
the technology to support financial services so that mobile banking has caught on within poor
countries. The low cost and the need for financial services in developing nations means that M-
PESA has the potential to reach even more people of all socio-economic levels. Although M‐PESA
does not pay interest on deposits, and does not make loans, it can usefully be thought of as
providing financial transaction services and that has operated, until recently, in parallel with the
formal banking system. Safaricom accepts deposits of cash from customers with a Safaricom cell
phone SIM card and who have registered as M‐PESA users. Registration is simple, requiring an
officialform of identification but no other validation documents that are typicallynecessarywhen
abank account is opened. Formally, in exchange for cashdeposits, Safaricomissues acommodity
known as e‐flat or e‐money, measured in the same units as money, which is held in an account
under the user’s name. This account is operated and managed by M‐PESA, and records the
quantity of e‐float owned by a customer at a given time. There is no charge for depositing funds,
but a sliding tariff is levied on withdrawals (for example, the cost of withdrawing $100 is about
$1).16 Figure 5 illustrates the schedule of total net tariffs for sending money by M‐PESA, Western
Union and Post-pay (operated by the Post Office). The M‐PESA tariffs include withdrawal fees,
and are differentiated according to receipt by registered and non‐registered user.

4. Q – 4 – Using a suitable figure, draw a hypothetical demand and
marginal cost for M-PESA services. How do the following effect the
demand and profit- maximizing price?
(I) NETWORK EFFECT
Network effects is an effect that arises when the value of service or product increases as the
number of users in the network increase above a certain critical mass, this usually results in
companies having higher market shares or as some people say having market dominance. In
Safaricom`s case the main network effect is due to M-PESA. So, Bank agents specifically Equity
bank, KCB & Co-op bank. Equity bank agents probably have the best network effects because of
their numbers, number of customers and their float liquidity. Most M-PESA transactions are
person to person transactions. Merchant transactions are still cash mainly because of their
convenience, it takes some time go through the payment process since most people use
Safaricom`s USSD platform. At the same time most merchants have not yet integrated their
payments systems. This is the remaining white space in the payments industry i.e., Getting
merchant payments quick, cheap, convenient and integrating then within the business systems.
M-PESA link may provide the option of complete payment integration within a business from the
customer`s point of sale, to the supplier and financier side.
The external agency supporting M-PESA is mandated to:
• Train Agents: Effectively train staffin new agent outlets on how to successfullyoperate M-PESA
and on AML procedures.
• Deliver Point of Sale Material: Responsible for the delivery of all resource materials including
agent tills, transaction log books and registration forms.
• Brand Outlets: effectively provide and put-up merchandising materials in all the M-PESA shops
including stickers indicating the agent number, notices to customers, tariff posters and signage.
• Manage Inventory: monitoring of float and SIMEX18 availability
• Visit Shops: visits to all the M-PESA shops in the country to follow up on issues that can affect
MPESA operations.
• Provide Marketing Assistance: supervise and manage M-PESA marketing activities to ensure
value addition to both the customers and Safaricom as an organization. These activities include
road shows, promotions, conferences etc.
(II) Competition From Equity Bank’s Fin serve Service
At the time of M-PESA’s launch, Equity Bank was the largest retail bank in Kenya, serving half of
all banked Kenyans. The bank focused on swift, standardized service for all customers and
developed an innovative range of savings, credit, and insurance products for the mass market.
Equity started using alternative delivery channels as early as 2004, when it dispatched mobile
banking vans to villages and rapidly expanded its ATM network. This focus on channels to reach
lower-income segments gave Equity a first-mover advantage in areas that were ignored by retail

5. banks. Equity Bank was the most prominent challenger to M-PESA from the beginning. It accused
the Central Bank of giving favorable treatment to Safaricom, especially by allowing mobile
network operators (MNOs) to offer financial products through agents while banks were not
allowed to offer banking services through agents. By 2010, the Central Bank permitted agency
banking, and Equity immediately rolled out an ambitious agent network. In March 2010, Equity
and Safaricom surprised many by partnering to launch a mobile product called M-Kesho. M-
Kesho would allow Equity Bank customers to link their bank account with their M-PESA account
and was supposed to offer credit and insurance products along with savings.M-Kesho was jointly
branded and marketed—with much fanfare—as an “M-PESA Equity account.” Despite the hype,
M-Kesho was not widely promoted after the launch. Industry speculation was that the
partnership fell apart over issues of control and the business model, and soon the two giants
were battling once again. Equity Bank launched equated by providing free SIMs to Equity
customers. Tapping into an existing customer base—already 8.4 million strong in 2014—allowed
Equity to quickly gain the network effects needed for a mobile money platform to succeed. By
the end of 2016, the Communications Authority of Kenya reported over 1 million registered
equated users, a user base just under 5 percent of the total market, with transactions accounting
for 20 percent of the market .2 The disproportionately high level of product use by Equity’s
customers is partially explained by the fact that funds transfers to other equites users are free,
making in-network transactions a more attractive option than they are on M-PESA, which charges
senders for all transactions of more than $1. However, equites have not drastically expanded or
otherwise changed Equity Bank’s customer base. By the end of 2015, its customer base grew by
0.4 million to 8.8 million. Similar growth continued through the end of 2016, demonstrating
growth in the number of accounts marginally less than historical averages. Equity’s average
deposit balance increased over this time, seeming to support the idea that, rather than offering
access to a wholly new low-income customer segment, Equites was better serving its current
clientele. On the other hand, Equity Bank’s average deposit balance remains lower than many of
its peers in the commercial banking sector. equate is more likely than other commercial banking
products to serve the poor—the marginal changes to Equity’s customer base may be a result of
Equity having already put in the effort over previous years to reach this population. Equity has
remained one of the more profitable banks in Kenya throughout this time, with profit before tax
and return on assets well above market averages, yet largely unchanged from historical trends
since the launch of equate. It is still early days for equate, and Equity continues to introduce new
services over the channel, so the story may still be evolving. equites enter a market with close to
80 percent formal financial inclusion and 24 million users of a competing service: M-PESA. For
markets with more competitive mobile money environments, the MVNO model could offer a
more disruptive market opportunity.

6. Q – 5 – Unlike bank deposits, M-PESA e-floats are not guaranteed by the
government.Usingthe conceptof astrategicmove.explainhow thetrustresolve
asymmetries of information.
The cash collected by M‐PESA in exchange for e‐float is deposited in bank accounts, called M‐
PESA trust accounts. Originally, all funds were held in just one trust account at the Commercial
Bank of Africa, but recently Safaricom has opened an account at two other commercial banks to
diversify its risk. These accounts are very much likeregular current accounts, with no restrictions
on Safaricom’s access to funds. In turn, the banks face no special reserve requirements with
regard to M‐PESA deposits, which are treated as any other current account deposit in terms of
regulatory policy of the Central Bank. There is no explicit requirement, for example, for
Safaricom to give notice of its intention to withdraw “large” quantities of cash at a given point in
time. As M‐PESA continues to expand, and as these balances grow, the authorities may decide
to revisit this arrangement. An alternative approach, adopted in the Philippines, is to institute
a 100 percent reserve requirement vis‐à‐vis mobile banking deposit balances held in accounts at
commercial banks. The success of M‐PESA has rested in part on the trust that customers have in
one of Kenya’s most well‐respected private companies, the parent. But if faith in the banking
systemerodes, a run-on M‐PESA could be sparked, thereby jeopardizing the position of the banks
in which it holds deposited funds. Finally, as M‐PESA deposits enter the banking system, they
only reduce cash in circulation to the extent that banks comply with or exceed official reserve
requirements. But as e‐float becomes more widely acceptable as an easily transferable store of
value, it will adopt the features of money. The practical implication of this is that M‐PESA could
increase the effective money supply, with possible impacts on inflation and /or output. Of
theoretical interest is the possibility that two monies could co‐exist in equilibrium. We will
address these issues in more detail in future work.
Survey methodology
In September 2008 we undertook a survey of 3,000 randomly selected households across
Kenya. At the time, both cell phone tower and M‐PESA agent coverage were very limited in the
remote northern and eastern parts of the country, so these areas were excluded from the sample
frame. The non‐excluded area covered by the sample frame included 92 percent of Kenya’s
population, and 98 percent of M‐PESA agents as of April 2008. We randomly selected 118
locations (the second‐smallest administrative unit), in which there were 300 enumeration areas
routinely visited by the Kenyan National Bureau of Statistics. Ten households in each
enumeration area were randomly chosen to take part in the survey – the GPS‐recorded locations
of these households are shown in. In order to increase our chances of interviewing households
in which someone used M‐PESA, we over‐sampled locations on the basis of the number of M‐
PESA agents present. All figures presented below have been reweighted accordingly

7. Potential economic impacts on households
M‐PESA facilitates the safe storage and transfer of money. As such, it has a number of potential
economic effects. First, it simply facilitates trade, making it easier for people to pay for, and to
receive payment for, goods and services. Electricitybills canbe paid with a push of afew buttons
instead of traveling to an often-distant office with a fistful of cash and waiting in a long queue;
consumers can quickly purchase cell phone credit (“airtime”) without moving; and taxi drivers
can operate more safely, without carrying large amounts of cash, when they are paid
electronically
Second, by providing a safestoragemechanism, M‐PESA could increasenet household savings.21
Third, because it facilitates inter‐personal transactions, it could improve the allocation of savings
across households and businesses by deepening the person‐to‐person credit market. This could
increase the average return to capital, thereby producing a feed‐back to the level of saving.
Fourth, by making transfers across large distances trivially cheap, M‐PESA improves the
investment in, and allocation of, human capital as well as physical capital. Households may be
more likely to send members to high‐paying jobs in distant locations (e.g., the capital), either on
a permanent or temporary basis, and to invest in skills that are likely to earn a return in such
places but not necessarily at home. Fifth, M‐PESA could affect the ability of individuals to share
risk. Informal risk‐sharing networks have been found to be an important, although not fully
effective, means by which individuals spread risk, making state‐contingent transfers among
group members. By expanding the geographic reach of these networks, M‐PESA may allow more
efficient risk sharing, although the risk‐reducing benefits might be mitigated due to issues of
observability and moral hazard when parties are separated by large distances. Jack and Suri
(2011) describe the risk sharing impacts it has had in Kenya in more detail. Sixth, a further risk‐
related effect arises if M‐PESA facilitates timely transfer of small amounts of money. Instead of
waiting for conditions to worsen to levels that cause long term damage, M‐PESA might enable
support networks to keep negative shocks manageable. For example, a household head with
access to M‐PESA who suffers a mild health shock might receive a small amount of money via M‐
PESA that allows him to keep his children in school. If this money was delayed, or the sender
waited until the recipient “really needed it”, the children might have quit school, the effects of
which may be hard to reverse. Seventh, if M‐PESA allows households to spread risk, they may be
led to make more efficient investment decisions, relaxing the trade‐off between risk and return
that they would otherwise face. M‐PESA could conceivably alter bargaining power and weaken
incentives within households or other networks. Economically weaker family members might
expect larger and more regular remittances from better‐off city‐dwelling relatives, who
themselves might find it hard to justify not sending money home. This could weaken incentives
for rural household members to work or innovate, offsetting some of the efficiency‐enhancing
benefits of improved geographic labor allocation and risk sharing.

8. Remittances
The primary function of M‐PESA, at least as it was conceived, is to reduce the costs of making
remittances from one individual to another, especially across large distances. We collected
detailed data on all kinds of remittances, both monetary and in‐kind, and sent by all means.
reports the shares of households in the sample who sent or received remittances in any form by
rural/urban location and by M‐PESA use. About half of remittances seemto go from children to
their parents: recipients are most likely to be parents and senders are most likely to be children
or other relatives. Remittances sent by MPESA are less likely to go to parents, but more likely to
go to other relatives or friends. This holds true for remittances received by M‐PESA as well – they
are much more likely to be received from friends and other family members than remittances
received through other methods. This suggests that M‐PESA is used more frequently by younger
people and people outside the direct parent‐child relationship. This may also signal that M‐PESA
users have and/or take advantage of much broader networks than non‐users (something we will
study more closely in future research).
Suitability of the Platform
From the outset of the project, Vodafone Group had determined that this product would target
the unbanked and therefore the technical platform would need to serve the unique needs of
these customers. This included the ability operate in the absence of a consumer bank account
and a consumer interface that is compatible with the most basic of phone models. At the time of
implementation, most off-the-shelf platforms were largely designed for developed economies
and therefore the functionality and experience of these products would not be suitable for M-
PESA. As a result of this,Vodafone Group reluctantly made the decision to build their own service
even though they knew this option would likely cost more and take longer. The initiative was
outsourced to Sagenite which is a British software development firm specializing in new product
innovation. In the end, this decision proved to be well worth the effort. The unique design of M-
PESA and its ability to service its target customers along with Vodafone’s control over all aspects
of the platform is one of the key reasons the service has been so successful.
Trust in the Service
Although Safaricom has an extremely trusted brand in Kenya, initially customers did not easily
trust that their money would be deposited by the agents servicing the product. When SMS
receipts were delayed or lost, customers would often accuse the agents of fraudulent activity
and quickly lodge a complaint with Safaricom. Over time this has improved and customers are
now getting used to transacting with agents.About 4.3% of users have reported that their money
was transferred to the wrong recipient and only 1/3 of these users have managed to recover
these funds. Although customers perceive this to be the fault of Safaricom, in most cases it is a
result of user error. Nonetheless, this type of situation reduces the customer’s trust in the
platform so Safaricom is working to proactively address these cases and assist users in the return
of their funds.

9. As the developed world begins to rebuild the recently collapsed global financial system, the
financial architecture in parts of the developing world is being rapidly transformed. As the costs
of mobile phone technology have fallen, and as the technology has been adapted to support
financial services, mobile banking innovations have begun to spread across and within poor
countries. The low cost, and the widespread unmet demand for financial services, as captured
by low rates of bank access,means that mobile banking has the potential to reach remote corners
of the socio‐economic, as well as geographic, spectrum. That potential appears to be being
realized in Kenya, through M‐PESA, a mobile banking system operated by Safaricom. We
estimate that M‐PESA had reached nearly 40 percent of the adult population after a little more
than 2 years of operation, and that now, approaching only the fourth anniversary of its launch, is
used by more than two‐thirds of households. Part of this success is due to a rapidly expanding
network of M‐PESA agents, who now number over 23,000. The descriptive statistics across
rounds suggest that the product has been adopted by an ever‐broadening cross‐section of the
population. While it has always been used by a non‐negligible share of those with lower
economic means, it has quickly expanded its reach into these groups, and is now used by
households with a wide range of economic, demographic, and educational characteristics. M-
PESA retail agents are responsible for registering new customers and facilitating cash deposits
and withdrawals. Retail agents often play a key support role for customers as well, since they are
able to quickly and easily contact M-PESA Customer Care. Retail agents are required to follow
strict KYC and AML practices during new customer registration and to validate a customer’s
identity during each transaction using the national ID card presented by the customer.
Transaction limits are set at 35,000 Kshs (approx. USD 450) per day for cash deposits, transfers
and withdrawals and at 10,000 Kshs (approx. USD 130) for airtime purchases. Retail agents are
also required to record transactions in a paper log book. For each transaction, the agent enters:
the MPESA balance, the date, agent ID, transaction ID, transaction type (customer deposit or
withdrawal, agent cash rebalancing), value, customer phone number, customer name, and the
customer’s national ID number. Most of this information is copied from the confirmation SMS
that the agent receives. Customers are then asked to sign the log for each transaction, which
helps to discourage fraud. The log book is branded by Safaricomand allretailagents usethe same
format.