MOBILE MONEY FOR FINANCIAL INCLUSION: POLICY AND REGULATORY

PERSPECTIVE IN ZIMBABWE.

Alex Bara

Research Fellow

Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU)

55 Mull Road, Belvedere

Harare

+263 772 962 491

+ 263 4 778423;

alexabara@yahoo.com

Abstract

The arrival of mobile telephony and innovative technology is forcing regulators to re-evaluate their rules for financial service provision. Mobile phone technology is bringing new dimension where nonbanks are now able to offer financial products. Nonbanks like Mobile Network Operators (MNOs) may be well-placed to dramatically expand the reach and range of financial services for the poor and unbanked. Zimbabwe has also adopted mobile financial service, currently, being provided by both banks and non-bank institutions. Inevitably, it has been confronted with the regulatory challenges associated with Mobile Money (MM). The country has benchmarked it policy and regulation for MM products driven by MNOs MM service on international standards, more specifically, on the Kenya’s M-PESA Model. Whilst currently there is no legislation which directly regulates MM in Zimbabwe, the Central Bank (Reserve Bank of Zimbabwe -RBZ) has used the National Payment System Act to regulate MM and has internally developed some operational policy guidelines to enable direct supervision of MM. The major shortfalls of the current policy include lack of clarity on the model which the country adopts, non-enforcement of interoperability and lack of emphasis on financial inclusion. Zimbabwe can learn from the MM regulation of countries such as Kenya, South Africa, Indonesia and Philippines, particularly on issues to do with consumer protection, Know Your Customer (KYC) procedures, capitalisation of service providers and the general environment of mobile financial services. This paper makes a number of recommendations, firstly, the need for enactment of an Electronic Money Act, which covers issues of interoperability, among other. Secondly, the RBZ must enable technology to reach its full potential and must be pro-active soon after innovation, in coming up with suitable regulation. Third, engaging international development partners in coming up with such regulation may also help since these partners have the technical expertise and the financial capacity to handle such initiatives. Fourth, the RBZ is also encouraged to consider the peculiarities of the local environment in drafting the suitable regulation on MM by looking into cases where its adopted model (the M-PESA) model succeeded and failed as well. Fifth, there is also need to harmonise regulation to address issues of potential conflict of regulators and individual institutions. Lastly, the Regulator must link Mobile Money to Financial Inclusion.

Key words: Mobile Money, Banking, Regulation, Financial Inclusion, Mobile Network Operators (MNOs), Zimbabwe.

1. INTRODUCTION

Mobile Money (MM) is one development which has managed not only to revolutionise the way banking is done but also to promote financial inclusion in most developing countries. One positive aspect of MM has been the capacity of countries to leap-frog the financial development stages, which some developed world went through, by utilising technological innovation. Financial services can now be offered to outlying and marginalised areas without need for establishing physical banking institutions. Technology has also enabled integration of markets across countries, shortening of distances between points of transactions, and more importantly brought efficiency in financial transactions. Whilst there has been such positive development, its existence has forced the inter-linkages and inter-operability of previously unrelated economic segments. Such a fusion is now occurring between the banking industry and the telecommunication industry, creating a concept called mobile banking, which would enable transaction cost reduction and increase in outreach to enable poor unbanked people to access micro financial services. For example, Mobile Money has brought together people, ICT, Mobile Network Operators (MNOs) and financial institutions.

This fusion is necessitating a change in the regulatory and institutional environment to accommodate and adapt to this synthesis. Traditionally, banks use network platforms of telecommunication companies to carryout financial transactions with little if any involvement of these companies in financial service provision. The current developments, where even telecommunication companies are also actively involved in financial matters, inevitably have some implication on the policy and regulation. Policy and regulatory frameworks are required not only to enable provision of financial services like MM, but also to enable supervision and control of providers of the service. However, regulation, by its nature, reacts to innovation and there are trade-offs which occur there-of. The regulatory framework has an impact on the reach, type, nature and extent of MM products which could be offered.

This paper determines the policy and regulatory frameworks which enable provision of the MM products by banking institutions and mobile phone companies in Zimbabwe. Specifically, the paper determines the current policy and regulatory framework, establish its adequacy, assess its impact on future development of the MM products, determine its current challenges and propose policy recommendation on the regulatory framework. The paper also establishes the regulatory formulation process, institutions involved and the possible impact on the efficient operation and adoption of MM products. In order to ascertain this, the study carried out an interview with the regulator of the financial sector, the Central Bank, to establish provision of the current policy for the establishment,

regulating and controlling MM. Interviews were also held with MM providers to assess the impact of regulatory framework on operation of companies and banks offering MM services and establish challenges and constraints being faced by providers of MM. The study identifies international best practices on MM regulation, especially of countries where Mobile Money has been successful, and draws lessons for Zimbabwe. The paper gives recommendations on the necessary adjustments which the country does to the current regulation in order to promote MM.

It envisaged that this research would benefit both the regulator and service providers in coming up with the more favourable regulatory environment for Mobile Financial Service. To the regulator, the research would help in highlighting some of the challenges which service providers are facing as well as highlighting some of the weakness and shortfalls of the current policy. It would assist the regulator in coming up with appropriate regulation and in refining existing policy frameworks. To the service providers, this research provides them with a deeper insight into the MM issue, especially from the regulation side. It gives them clarity on issues and they may use it for lobbying of policy refinement or on any policy review advocacy initiatives.

1.1 Basics about MM and Financial Inclusion

Mobile Money refers to a suite of financial services offered through mobile phones and other hand-held mobile devices. These services can include 1) person-to-person transfer of funds, such as domestic and international remittances, 2) person-to-business payments for the purchase of a range of goods and services, and 3) mobile banking, through which customers can access their bank accounts, pay bills, or deposit and withdraw funds (Dolan, 2009). Simply put, Mobile Money is a service that enables money to be transferred through a mobile phone. Mobile Money provides unbanked mobile phone users with a secure platform, which introduces easy to use menus on their phone to send messages through an audited system and is an ideal medium of storage of money for both the banked as well as unbanked subscribers (Akinkugbe-http://234next.com).

Financial inclusion means that the majority of the population has broad access to a portfolio of quality financial products and services. Financial inclusion, include the following core elements:

Broad access to a range of financial products and services;

Financial literacy and financial capability initiatives, and a consumer protection framework; and

Minimum requirements for these financial products and services in terms of availability, quality, cost and sustainability (Reyes, Cañote, and Mazer, 2011).

According to CGAP, harnessing the power of technology could dramatically increase access to financial services for poor people around the world. Promoting financial inclusion requires creating or enhancing market incentives to develop and provide financial products and services focused on populations with low levels of access. It also involves use of other types of financial products and services, as well as empowering financial users with the tools needed to better understand financial products and services offered. Mobile money is one channel through which financial inclusion can be attained. The significance of mobile banking goes well beyond developing countries and financial inclusion. By providing a clear disaggregation of the components of banking, it throws light on the nature of financial services in general. By identifying the different components of financial services so clearly, mobile banking helps to establish where the focus of regulation should lie in all financial systems (Klein and Mayer, 2011).

2. MOBILE MONEY IN ZIMBABWE

Mobile Money is one of the many branchless banking products which are being offered in Zimbabwe. In Zimbabwe, and most probably in most countries, Mobile Money (MM) is offered through two ends, that is, through banking institutions and through Mobile Network Operators (MNOs). Bank based Mobile Money products were the first to be introduced before MNOs introduced their own products. Banking institutions, from commercial banks, building societies and merchant banks, offer MM products, mainly anchored on money transfer and payments.

Figure 1: Banks involvement in Mobile MoneySource: Tarazi and Breloff, (2010)

Banking institutions uses the MNOs platforms to enable account holders to access banking services through their mobile phones. Generally, financial institutions which offer MM products offer the following, account access (inquire/check bank balance), bill payments, payments at registered merchants (retail shops), money transfer and air time purchase.

On the other hand, MM products are also offered by MNOs, which currently are restricted to transfer of funds only, given that MNO based MM is still at its infancy stage1. Most MNO driven MM products are still on the early stages of implementation and hence caution is still being observed before rolling out of more advanced products. The MNO based MM product concept is by and large modeled around the M-PESA concept. As such, mobile money in Zimbabwe has developed to the extent which mobile banking has gone. However, according to Tarazi and Breloff, (2010), while the distinction is often made between bank-based and nonbank-based models of branchless banking, the reality is both banks and nonbanks typically play roles in any branchless banking scheme (see Figure 1). In a bank-based model, customers have a direct contractual relationship with a licensed financial institution (even though a customer may deal exclusively with nonbank agents who conduct transactions on the bank’s behalf). In a nonbank-based model, the customer does not have a direct contractual relationship with a licensed bank, and instead exchanges cash for electronic value recorded in a virtual account on the server of a nonbank, such as an MNO or an issuer of stored-value cards.

1 With the first MNO to offer such products being Telecel which introduced its Skwana Product in 2010

Bank-Based Model Nonbank Based Model

Nonbank issues electronic value and

holds matching-value assets in pooled

account in regulated banke.g

EcoCash (Econet), Onewallet (Netone)

Bank(s) issues electronic value which is purchased from bank

and redistributed by nonblank directly to

customerse.g

Cell Card, Kingdom Bank

Bank(s) offer individual accounts accessed through nonblank-

managed agent networks and /or

technology platformse.g. Emali Card (Tetrad Bank)

Bank(s) offer individual accounts

that can be used through bank-

managed branchless channels

e.g CBZ Mobile Banking

2.1 MM and Financial Inclusion in Zimbabwe

The wide-spread use of mobile phone technology has opened new markets across the world, most notably in the financial sector with mobile phones widely used to provide financial services (AFI, 2011). The use of Mobile Money (MM) is one avenue through which inclusive financial development is being promoted in Zimbabwe. This is a fairly recent phenomenon which has a potential to increase financial inclusion. Zimbabwe is one country which, despite having an arguably well-developed financial sector, still has high levels of financial exclusion2. Building an inclusive financial sector serving the asset poor households and marginalized communities, remains a key task of policy (XLRI Jamshedpur, 2011). Zimbabwe has a high mobile penetration rate, standing at 66% in 2011, and is the third in Southern Africa after Botswana, 125%, and South Africa, 102% (The Zimbabwe Independent, 13 October 2011). In Zimbabwe, there are more people with cellphone than with bank accounts, as such, mobile phones provides a good avenue to push for financial inclusiveness in the country. All the three mobile network operators in Zimbabwe have created platforms which enable carrying out of banking services without need for getting into the physical bank. For example, Netone, has “One Wallet”, Telecel has “Skwama” and Econet has “EcoCash” and all these products have mobile money transfer features similar to those offered through banks. The use of MM is one phenomenon which needs great support by policy makers, service providers and consumers given its potential in reducing financial exclusion (Bankable Frontier Associate, undated).

3. POLICY AND REGULATION OF MM IN ZIMBABWE

3.1 Overview

Mobile Money is still at the early stages of development in Zimbabwe, as such, the accompanying specific regulation which governs provision of MM has not yet been fully developed. All ‘licencing’ and supervision of MM is done by the Central Bank, given that MM product is a financial product. Within the RBZ, supervision of MM is resident in the National Payments Systems (NPS) Division. The Division oversees the operation of the MM products, particularly its compliance with the National Payment System Act of the country. The Central Bank uses a set of internally developed operational guidelines and policy frameworks, to regulate MM products. The RBZ, however, abides by international standards in regulating mobile money and branchless banking. Specifically, the RBZ indicated that they draw much from the EU, the Bank of International Settlements and Bankable Frontiers Associates guidelines in creating the operating policy frameworks. Besides, Mobile Money has, by and large, been structured along the Kenyan’s M-PESA Model. The policy guidelines currently being used by the Central Bank have not yet been made public.

On the electronic money model, the RBZ is following a bank-based model on the e-money products and innovations, even on those which are offered by non-bank institutions. The Central Bank’s primary focus when regulating e-money is on risk of the products and compliance of the underlying bank to financial regulations. In the current arrangement, the RBZ has a direct relationship with banks, and the banks are partnering the network providers, thus RBZ has an indirect relationship with the network providers. Under its policy on MM, the RBZ has relaxed the Know Your Customer (KYC) requirements on MM in order to allow the marginalised people to participate in these products. However, the MNOs themselves have registration details of mobile phone users as per POTRAZ requirements that all mobile lines be registered, a platform which the RBZ rides on. In addition, the RBZ works together with POTRAZ and the

2A survey conducted by the National Task Force on Microfinance between December 2005 and March 2006 showed that 70 percent of the economically active population in Zimbabwe are excluded from access to formal financial services. In the Financial Inclusion Index (IFI) modeled by Sarma (2007), Zimbabwe is ranked number 38 out of 45 countries measured.

Index Financial Inclusion- Using Three DimensionsCountry D1

(Depth*)

D2(Availability**)

D3(Usage***)

IFI IFI Rank

Switzerland 0.73 1 0.89 0.873 1India 0.167 0.154 0.308 0.2096 21Bangladesh 0.071 0.105 0.196 0.124 33Zimbabwe 0.050 0.073 0.179 0.101 38Uganda 0.002 0.000 0.078 0.027 45

Key 0.6 < IFI < 1 – high financial inclusion 0.4 < IFI < 0.6 – medium financial inclusion

0 < IFI < 0.4 – low financial inclusionSource: Sarma M (2007), Index of Financial Inclusion (A concept note)

Registrar General’s Office to ensure that no lines are registered under dead people’s name. Besides, minimum KYC are met during opening of MNO based MM accounts and during cashing–out since a National Identification Document is required for every transaction. Furthermore, for MNO driven products, it is a requirement by the RBZ that the amounts sitting in the network provider’s e-money virtual account be equal or less than the amount (baking the e-money product) in the trustee account. There is a limited to the trustee account which must not be exceeded and in the event of reaching the limit, MNOs need to open another trust account with a different bank. This is done in order to avoid concentration of risk on one bank.

MM products offered by Banks are not very much difficult to regulate since the primary institutions offering them are already regulated under by RBZ under the Banking Act. Banks are, however, required to apply for ‘permission’ to offer such products and the RBZ do regular checks to see if the products complies with the National Payments Systems Act requirements. For example, the RBZ checks on the security features and potential risk of the products to the whole National Payment System and the financial sector at large. At the end of each week, banks are required to provide returns to the RBZ on daily balances, volume and value of transactions which were done through the mobile money platform, among other regular bank submission to the Bank. Hence, the regulation of MM offered directly by banks is not a major issue as it is covered by current regulation. The only challenge which may be to the RBZ is to assess the robustness of the system and telecoms platforms on which banks operate their MM products. In that regard, the RBZ has to rely on the principal regulator, POTRAZ, in providing adequate regulation since these platforms is beyond the Central Bank’s mandate and capacity.

MM products offered by MNOs pose some regulatory complexities, since the Central Bank does not deal directly with MNOs and there are no specific regulations which have been developed to rationalise that. This is because, MNOs are

primarily regulated under the telecommunications sector, but they are now offering financial products which are regulated in the financial sector. In Zimbabwe, MNOs are regulated by the Post and Telecommunication Regulatory Authority of Zimbabwe (POTRAZ), which falls under the Ministry of Transport, Communication and Infrastructure Development. POTRAZ allows MNOs to offer what it regards as Value Added Services (VAS) and MM is one such service. POTRAZ regards MM as a VAS, and as such, its regulation lies in the line ministry or authority under which such a service primarily lies. In this case, MM is supervised under the financial sector and by the RBZ. MNOs do not meet the requirements to offer financial products, as per financial sector standards. As such, all MNOs are required to partner a Banking Institutions which provides the financial service to the MM product. The RBZ would ensure that MM products do not create ‘credit’, do not store value, and that MNOs do not offer other products outside the regulated ones. By and large the operation of MNOs in provision of MM products is modeled in the form and structure which the Central Bank of Kenya did when it authorised rolling out of M-PESA (see Figure 2).

Figure 2: Flowchart of a Case of MNO Provided Mobile‐MoneySource: Citigroup (2010) 3.2 Issues Raised by MM Service Providers3

In conversation with some Mobile Money service providers around the country, some common issues emerged as they were discussing their concerns about Mobile Money. Although most service providers indicated that they do not have any challenges

3 Appendix 1 gives detailed information for each service provider interviewed.

with the current regulations and policy on MM, there are still some implicit challenges which are affecting operators. Fundamentally, service providers hindered on the delays and difficulties in getting licences or authorisation to offer their MM products. This was common among MNOs who noted that the Central Bank took a lot of time in assessing their applications and granting of permission. It could have been due to the need for assessing suitability of MNO in offering banking products since they are not regulated under the financial regulations. Current regulation also gives indications on the ceiling amounts which could be send per each transaction. Service providers indicated that the set limits, which vary from one operator to the other, are determined by the Central Bank guidelines on anti-money laundering. Providers are going to face similar challenges again as they expand their MM products or introduce more e-money products.

It also came out that banks are advocating for MM to be bank-based with MNOs only providing the platform, while MNOs are arguing that they are equally capable to providing MM service. As a result, policy requires all MNOs to partner a banking institution which provides physical backing for the virtual accounts held at the MNO. For example, if there is $2m worth of balances in the virtual accounts there should be an equivalent $2m in the trustee account held at the Bank. The MNOs, just like banks, provides weekly reports to the central bank detailing the volumes/values that have been made through their facility and also corresponding information about the trustee account held at the backing bank. This lack of clarity on whether to pursue bank-based or telcom based mobile money may present future regulatory challenges on the part of the regulator. Banks believe that having MNOs offering MM products brings unfair competition since MNOs have an urge on the mobile gateways which they own and they are not regulated by the strict financial regulations like banks.

3.3 Regulation Effect on Financial Inclusion

Whilst financial inclusion is the net beneficiary of any mobile money or mobile banking initiative, the current regulation and policy seem not to drive towards that. The restrictiveness in terms of products range which MNOs can provide and the periodic returns requirements by the central bank do not promote reaching into deeper areas. More-so, the requirement that the KYC procedures, though relaxed, still needs to be followed by MM providers still likens MM provision to provision of ordinary banking service since KYCs are some of the restrictive practices which makes exclusion of the poor from the banking sector increase. KYC also makes service provision costly given the documentation which is required. Whilst the advent of technology could have eased the challenge, the current regulation still need to be changed in order to accept, for

example, electronic copies of identification particulars and move away from current hard copy requirement.

3.4 Shortcomings of Current Policy and Regulation

Mobile money models are still in their infancy, but as these models gain traction and expand, other regulatory challenges will arise, including (i ) whether to treat e-money as savings products (rather than as simply funds transfer) and (ii ) how to level the playing field among different kinds of entities offering similar services (Tarazi and Breloff, 2010). The scenario is currently prevailing in Zimbabwe. Whilst there currently are no clear cut dire regulatory framework challenges on Mobile Money, as the sector develops, more and more challenges are posed.

The RBZ currently faces some challenges in regulating MM and one of them is perception. The RBZ indicated that some banks believe that by offering MM, MNO providers are now into banking, hence they must be regulated just like banks, or be stopped altogether. The RBZ’s position, however, is that all MM products are bank products, with MNOs just being agents for marketing a bank product. As such, there is no need for MNOs to be treated like banks. The other challenge is on pricing of MM products. Banks in Zimbabwe are accused, by the banking public, for having high service charges and the transacting public want the RBZ to regulate the prices. The same is being said about the current charges of MM products, which even the RBZ feels are too high for the common people. Nonetheless, as it stands the RBZ does not regulate bank charges and policy does not provider for control of service charges. The other challenge is that currently there is no an Electronic Money Act in place, making it difficult for the Central Bank to effectively regulate e-money products. The RBZ uses internally developed guidelines and the biggest challenge with internally developed guidelines is that they can be changed by the regulator at any time and to suit any situation hence it can be subject to abuse. Furthermore, the legal enforceability of such polices is always subject to interpretation as there is no direct relation of such policy to existing Acts.

To cover policy gaps caused by lack of a specific and comprehensive legislation, the RBZ is using moral suasion. For example, the current policy and regulations does not enforce interoperability of the institutions in MM provision. The RBZ is using moral suasion to try and talk with banks and MNOs to use platforms which enables inter-linkages of banks and transfer of funds across all MNOs without change of existing infrastructure and systems in use. Currently banks and MNOs are making self-negotiations to try and ensure interoperability of the systems. The banks and MNOs are currently working on using the already existing ZIMSWITCH gateway to offer a mobile money product which is accessible across banks and across all network

operators, through the ZimSwitch Instant Payment Interchange Technology (ZIPIT) system. Lack of backing regulation renters the RBZ ineffective in enforcing banks to corporate on the infrastructure and compete on service provision. Below we explore some of the general short comings of the current policy and regulation on MM.

Policy is not providing for potential conflict of regulators. It is not uncommon to have clashes and conflict of regulators, especially where there is overlap in areas of influence. In this case, when MM is being driven by MNOs, primarily regulated under telecommunications, there is likely to be conflict of there are policy changes in the sector, which could affect provision of financial products. In some instances conflicts could even arise on which authority to attribute success of the products. Should success be attributed to the financial sector or the telecommunication and ICT sector?

Policy is not addressing potential conflict between Banks and MNOs. Banks relay heavily on MNOs to offer MM products and at the same time MNOs are offering the same products being offered by their clients. As such, there is likely to be conflicts given that there is temptation that MNOs may not give equal up-time to gateway platforms which banks are on as compared to the platform on which its product is resident. Although in Zimbabwe, there are agreements between banks and MNOs which require MNOs to fairly treat banks; there is always scope for cheating or breaching, besides such agreement at times not legally binding. The RBZ, however, indicate that ever since the introduction MM products, no bank has brought in a complaint of unfair treatment by any MNO regarding uptime of their connectivity ports.

The current policy does not enforce Financial Inclusion as the primary reason for MM provision. The current drive is seemingly initiatives by private institutions which want to make more profits by tapping into the unbanked markets. For banks it is mainly increasing client and deposit base and broadening of markets. The RBZ generally is not driving provision of MM to promote financial inclusion. Rather the issue of financial inclusion is just an added benefit or spill over benefit of MM products. If financial inclusion is at the centre of provision of MM in Zimbabwe, then the e-money model would have been driven by the Central Bank and regulation would have been crafted to include incentives to those institutions which provide such service.

Current policy on MM in Zimbabwe does not allow MNOs to offer more products apart from funds transfer. Despite the RBZ indicating that current licences of MM provides for more products, like international remittances and payments, the Central Bank still needs to assess the success of local money transfer first before allowing expansion into other services.

Current policy also does not provide for a legal framework to deal with problems and challenges which may emanate from systems and service provision.

Agents which would be used by MNOs to reach out to the clients (cash-in and cash out agents) are also regulated under a varying legislation, depending on the nature of business of the agent, but are supposed to provide financial service without supervision of the financial regulator (at least with the current set up where MM is mainly funds transfer, there is not much financial service involved, as such, agents are able to handle these simplified transactions. But the fact still remains that their operations remain outside the radar of the monetary authorities).

3.5 Regulation and Policy Formulation Process in Zimbabwe

In Zimbabwe, the financial legislation, just like any other legislation, is formulated through the Parliament where a Bill is debated, in both Houses of Parliament (The Parliament and Senate), and when passed and is signed by the country’s President, it then becomes an Act. There are also some regulation and policy directives which are designed by the financial regulator, the RBZ, mostly in consultation with the parent ministry, Ministry of Finance and these are announced during Monetary Policy Statements. Such policies are mostly in line with the primary mandate of the Central Bank which is enshrined the RBZ Act. On the other hand, the Ministry of Finance can make some regulatory changes or additions to the current Act and announce these through Statutory Instruments (SI). The long process of establishing legislation normally forces regulators to use internal guidelines and policy frameworks to regulate new developments. As the sector develops, there is need for a separate Act which details all operational issues regarding provision of the service.

4. MM AND REGULATION IN OTHER COUNTRIES: LESSONS FOR ZIMBABWE

Central banks worldwide are constantly reviewing their regulatory position with regard to e-money in its various forms (SARB, 2009). Currently, policymakers and regulators in countries like Namibia Indonesia, Mexico, Philippines, Kenya and Pakistan are drafting regulations for the era of mobile money. They struggle with adapting banking regulation to mobile banking (Klein and Mayer, 2011). More specifically, central banks are continuously investigating the impact e-money products will have on the regulatory and operational requirements that are necessitated by these means of payments (SARB, 2009). CGAP indicated key regulatory trends the organisation had identified over the last 12 months in the mobile money market. These include on-going development of ‘e-

money’ regulation, consumer protection, and competition and interoperability4.

KenyaM-PESA was launched in 2007 into a vacuum of clear guidelines and precedents that dictated how money could move around a mobile ecosystem. This was due to a loophole in the banking regulations and the service did not, at that time, require a banking license to operate (Collings, 2011). By 2008, the regulation of M-PESA’s services was not yet formalized by the Central Bank, which had agreed to allow the transactions under the assumption that “remittance is not banking” (CBK; 2008) and should be viewed as a payment service. The agreement, apart from M-PESA’s strict control and supervision of transactions and float, there were restrictions on the size of transaction (Bångens and Söderberg, 2008). The coming on board of M-PESA and lack of clear regulation on its operation created conflict with banks which viewed M-PESA as competition. Clearly the established retail banks in Kenya viewed the upstart mobile operator-led service that acted like a bank, as a threat. There were efforts to make M-PESA be regulated just like other banks.

As Mobile banking developed in Kenya, The Central Bank of Kenya launched draft regulations to guide on, electronic retail transfers by banks and non-banking institutions while ensuring that risk management is adhered to and at the same time protecting customers. Under the regulations, for the provisions of the electronic retail transfer, a payment services provider other than a bank or financial institution, are required to apply to Central Bank for authorization before commencing such business. The draft offers guidelines for payment service providers and electronic transfers such as capital requirements, risk management tools, execution of payments and rules on outsourcing. The rules were made in accordance with Section 4A of the Central Bank of Kenya Act. The regulations come at a time when the National Payment System Bill that will help to encourage innovation in products such as mobile banking and allow non-banking institutions perform stand-alone functions, among other things, is before parliament (CBK,2011).

South AfricaIn a move to promote both financial inclusion and mobile banking, in 2004, the South Africa Government established an

enabling regulatory policy framework called the Financial Sector Charter (the “Charter”). The Charter requires existing banks to provide effective access to first order financial services to 80% of the low income population by 2008. The government committed itself in the Charter to amend regulations that hinder the extension of financial access by private financial institutions. The Charter enabled the creation of low cost accounts targeting the poor, the Mzanzi Accounts. In addition, all large retail banks offered mobile phones as an additional access channel to existing bank accounts. South Africa has also seen the emergence of two mobile banking models, WIZZIT and MTN MobileMoney. With these models, the mobile phone is not only used as an access channel to existing bank accounts, but the bank account application is fully integrated with the mobile phone, enabling the customer to use the mobile phone itself as a payment instrument. WIZZIT is a start-up founded by two independent entrepreneurs in 2004 to target the almost 50% of unbanked South African adults and it operates in partnership with the Bank of Athens. MTN Mobile Money is a MM product offered by MTN, one of South Africa’s two largest mobile operators since 2005 as a joint venture with Standard Bank (CGAP, 2008).

The Philippines: The country has been a pioneer, directly regulating and supervising MNO e‐money providers since the early 2000 (Citigroup, 2010). In the Philippines, e-money can be issued by banks, NBFIs as well as other institutions (money transfer agents). It has to be issued and redeemed at par and cannot earn interest nor have insurance attached to it. The money transfer institutions have to be large enough to be considered safe. As a result, they need to have a minimum capital of 100 million pesos (about 45 pesos to a dollar). Their activities are limited to e-money issuance and related activities such as money transfer/ remittances, but not credit. E-money issuers have to maintain the equivalent of the money issued either in bank deposits or in government securities. They also have to obtain a quasi-banking license from the central bank. In 2006, the Central Bank of Philippines passed a circular for consumer protection from electronic banking, relating to the requirements to safeguard customer information; prevention of money laundering and terrorist financing; reduction of fraud and theft of sensitive customer information; and promotion of legal enforceability of banks’ electronic agreements and transactions (Ashta, 2010).

Indonesia and Afghanistan:

4 Makin, (2010) argued that regulators in general need to give due consideration to the following principal regulatory issues around branchless banking issues: The risk of a high profile scheme failure, non-bank institutions leading schemes and suitability of KYC regulation.

Indonesia has instituted progressive e‐money policies to foster an MNO issued e‐money model. Non‐banks can issue e‐money provided that the funds are placed in accounts at commercial banks. Moreover, Indonesian regulators mandate fund isolation by disallowing the MNO to finance operations with e‐money float. Specifically, the regulation states that the float at the commercial bank must total 100% of the funds derived from sales proceeds of electronic money that represent the issuer’s liability towards e‐money holders. Afghanistan’s e‐money regulations additionally require fund isolation, stating that liquid assets must be held in a trust account at a banking organization (Citigroup, 2010).

Figure 3: The Enabling Environments for Mobile Money Source: Bankable Frontier Associates (2009).

4.1 An “enabling environment” for mobile financial services

According to the Bankable Frontier Associates (2009), an enabling environment for mobile financial service has two key dimensions: 1) Openness: new, potentially transformative, mobile money models, are allowed to start up; and 2) Certainty: clear regulatory frameworks or guidance exists in a way which reduces arbitrary regulatory discretion over new approaches and hence the risk for private sector operators (see Figure 3).

4.2 Lessons for Zimbabwe

Whilst the current policy on MM in Zimbabwe conforms to international standards and is consistent with some policies in other countries, there are a few issues which need emphasis, especially in view of the need for development of specific MM regulation. Customer Protection: Just like other ordinary financial

products, customer protection is equally important in MM products, especially issues to do with safeguarding of sensitive customer information, prevention of money laundering and addressing the issue of misdirection of funds when crafting regulation on MM.

Capitalisation of MNOs. In MM provision, especially for MNOs, capitalisation of the service provider is equally important. For example in Philippines, the money transfer institutions need to have a minimum capital of 100 million pesos (about US$45 million) to be considered safe. In addition, MNOs must not be allowed to use e-money float to fund operations.

E

nabling environment for MM is very important to the success of MM and Zimbabwe can adopt (regulatory) environment of SA and Philippines and openness of Kenyan environment and the certainty in the Indonesian environment.

5. POLICY AND REGULATORY RECOMMENDATIONS

Policies and regulations are meant not only to facilitate smooth operation of products or products concepts but, more importantly, to mitigate risks associated with provision of such products. There are many risks associated with mobile money since it borrows from both the telecommunications and banking sector risks. Some of the risks related to banking includes include credit risks, liquidity risks, interest rate risks, and reputation risks while risks involved in telecommunications include risk for the telecom operator, risks for telephone users and risks for the system (Ashta, 2010). Combing the two sectors

would result in more and increased risks5. Managing these risks depends on the ability of the government to impose financial service regulations and supervision on mobile bankers. Often it is not clear how the basic design of Mobile Money regulation might potentially differ from traditional banking regulation beyond general statements that regulation should be calibrated to the risks of a particular scheme (Klein and Mayer, 2011). In Zimbabwe, despite adopting MM in the mode which successful countries have done, there are some regulatory issues which can be recommended to further refine the development of mobile financial services. Below are some recommendations which would assist in refining the current policy and regulation on Mobile Money in Zimbabwe.

1. There is need for policy clarity on the model which the Central bank is following. The RBZ indicated that it is following a bank-based model for MM products, even for those driven by MNOs. Lack of policy clarity is driving perceptions, some of which is very detrimental to the development of MM products.

2. Developing legislations which regulate e-money. The RBZ indicate the need to develop an Act which governs electronic money given that there are now many financial products which are e-based (inducing ATMs, Internet Banking and Mobile Money). These products are currently being governed by internal policy guidelines which have limitations and their own challenges. The Act must also ensure that it enforces interoperability of system and infrastructure so that financial institutions are left to compete on service but cooperating on infrastructure. Such an approach would reduce cost of providing e-money services, hence reduction in charges to customers.

3. Harmonisation of regulation: Zimbabwe must come up with harmonised regulation which draws from both the financial and telecommunication sectors. These regulations must address potential conflict between the sectors (both at regulator and individual player’s level), allow or promote interoperability of the sectors and institutions involved.

4. Regulation pro-activeness soon after an innovation: Innovations normally respond to market needs. Regulations follow thereafter in order to protect consumers and ensure safety and financial stability. Generally, regulation is always lagging behind innovation. Whilst that is acceptable for new innovations, there is no excuse why regulators

would not move with time to avoid delay in adoption of the innovation as well as creating an environment which promotes development of these new innovations. Monitoring and understanding financial sector innovations by policy makers and regulator is therefore critical, to enhance efficiency and access as well as ensure a sound and stable sector. The financial sector should not consider lack of legal infrastructure as an impediment.

5. Enabling technology to reach its full potential: The RBZ seemingly has a passion for promoting financial inclusion and has drafted many programmes to which promotes inclusion, but the biggest challenge is lack of effective implementation. The Central Bank must promote initiatives which are aimed at promoting financial inclusion through technology. Mobile technology has the potential to reduce the cost of financial services and expand the outreach of financial services particularly to those hitherto excluded from formal financial services.

6. Leveraging on development partners: Inevitably, the Central Bank must facilitate development of legislation on mobile financial services as more and more products are introduced and technology enable certain transactions which are currently not possible. On that mandate, there is scope for the RBZ to engage developmental partners and leverage on them in the development of sound regulations for mobile finance. The RBZ must engage partners to seek support in the development of appropriate regulations that enhance safe, sound and effective systems; consumer protection; inclusiveness and efficient oversight of mobile platforms.

7. The RBZ must look into why the M-PESA Model was not equally successful in SA and identify the similarities which could be drawn with the South African case. Zimbabwe situation is not similar to Kenya, where the M-PESA model of MM was successful, neither is it to the South African Case where the same model was not equally successful. The regulator must take into account local situation, especially the structural set up of the financial sector and the economy at large, and make comparison with other countries, when making local regulation. For example, unlike Kenya, the local environment is characterised by good network of banks and high number of banks, there is need to weigh the

5Additional risks include: High velocity of circulation of money which is not accounted for by the financial system which could be inflationary; Prudential regulation using Basle 2 or earlier guidelines, protects banks and, ultimately, their clients from the risk of banks going bankrupt but these regulations do not apply to telecoms; the billing risk in telecommunications becomes a banking transaction risk in mobile banking; The risk of fraud is based on elusiveness and rapidity. Elusiveness is because one can use hundreds of small mobile transactions to cover up huge movements of funds for illegal or purposes; the risk of privacy of information also increases; and Interoperability, so useful to network power-functions, dynamically increases mobile banking risks (Ashta, 2010).

benefits of having a bank only versus a bank-and- MNO- based MM service.

8. Linking MM to Financial Inclusion. Regulation has a unique responsibility and opportunity to provide clarity in pushing forward the financial inclusion agenda. Zimbabwe must have a vision to attract the poor to formal financial services through models that use mobile phones. Along with development partners, the Government must start supporting the model by using mobile financial services to deliver government to person transfers (CBK, 2011). The RBZ must ensure that the regulatory framework must include financial inclusion as one of the broader objective of mobile finance. Financial inclusion cannot be driven by the telecommunications sector; rather MNOs should just provide the platform through which financial institutions could reach the unbanked. The regulator should implement policies which encourages technology based financial inclusion.

6. CONCLUSION

A clear e‐money regulatory framework can help increase adoption of mobile money, and ultimately, financial inclusion amongst the poor. The challenge is to craft policies and regulations that mitigate the risks to customer funds without stifling the dynamism, creativity, and potential of these new actors. Zimbabwe’s Mobile Money product, although still at its early stages of development stage, has been offered in line with international best practice and modelled along the M-PESA Model. The major challenge is on the regulation side, where currently there is no specific legislation for MM provision. The RBZ is currently using the National Payment Systems Act and internally developed guidelines on MM provision. The major challenge, however, remains that of addressing potential conflict of regulators and institutions, risk mitigation, ensuring interoperability which facilitates development of MM service. Forward-thinking regulators in several countries have crafted innovative approaches to meet this challenge. Fundamentally, it is mainly the drive of the regulator in terms of widening of its mandate, risk taking and development of regulations which promote innovation. Zimbabwe still has a chance to refine its current policy by making comparison with international best practice, successful countries and fuse it with the peculiarities of the local environment. By and large, Zimbabwe must come up with a legislation which supports development on mobile financial service. Policies related to fund safeguarding and isolation allows regulators to meet their goals of customer protection and financial inclusion.

ACKNOWLEDGEMENTS

This research was made possible with the assistance of institutions which provided information used in this paper. These institutions include Econet Wireless Zimbabwe, NetOne Cellular, The Reserve Bank of Zimbabwe (RBZ), CBZ Bank, Tetrad Investment Bank and the People‘s Own Savings Bank (POSB). Mention should also go to Mr. G Chiwunze and Mr. E Mugocha of ZEPARU who assisted with collecting of information and conducting interviews.

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APPENDIX 1 POLICY REGULATORY ISSUES AFFECTING SERVICE PROVIDERS

Table A1: Policy Regulatory Issues affecting Service Providers

(1) Econet Wireless Zimbabwe: EcoCash Mobile Money Econet is in partnership with a local bank TN Bank which provides physical backing for the virtual accounts (EcoCash) held at

Econet. Thus if there is $2m worth of balances in the virtual accounts there should be an equivalent $2m in the trustee account held at TN Bank

The network provider provides weekly reports to the central bank detailing the volumes / values that have been made through the EcoCash facility and also corresponding information about the trustee account held at the backing bank.

The EcoCash product follows the central bank guidelines on anti-money laundering which the limit the value of each transaction to $200 and $500 every month.

The central bank gave a blanket approval (that is not time bound) to Econet that allows it to provide other related financial services with its EcoCash product.

POTRAZ regulates the platform that carries the virtual accounts/system. POTRAZ will seek to ensure that the network has room to carry the additional features and products that utilizes the network infrastructure. POTRAZ does not regulate the Mobile Money product but it is regulated by the Central bank since it is a financial product

There are also mechanism in place to correct the misdirected funds The company also submits regular (daily) returns to the RBZ on the transaction activities on EcoCash.

(2) E-Mali Cash Card from Tetrad Investment Bank Provision of the mobile banking facility is constrained by capacity issues with the telecommunication companies especially

with Telecel were more banks are offering their mobile facility through their platform and the same MNO offers its own MM product.

There is no interference by the telecoms regulator (POTRAZ) since the carrier in this case the mobile network operator is the one regulated.

The E-Mali product has to comply with the Central Bank Know Your Customer (KYC) requirements and the Anti-money Laundering requirements which put a cap on the value of transactions to $1000.00.The compliance issues are mainly managed by the main banking unit and not by department which runs E-Mali product.

They also have to furnish the regulatory authority with returns (MPSD 7) which states the volume, value of transactions and the number of people using the facility.

(3) CBZ Mobile Banking The launch of the CBZ mobile banking product was delayed due to the lengthy verification process that the financial regulator

had to undertake i.e. the mobile banking system is put under a stress test to ascertain its ability to withstand certain risks both internal and external.

The mobile banking system is separate from the core banking system used by the banks main arm. However the virtual accounts are backed by the creation of a suspense account in the core banking system.

The Mobile Banking Unit gets connectivity ports from the Mobile Network Operators (MNO) who only provides a platform which allows the mobile bank clients to interact with bank system. Hence the bank has no interface with telecoms regulator (POTRAZ) and is not subjected to its compliance requirements.

The Mobile Banking Unit has to furnish the Central Bank with monthly returns detailing their monthly activities.

(4) One Wallet- NetOne Cellular NetOne has partnered with a Banking Institution (FBC) which backs its virtual account held in its system. The financial

regulator has restricted the MNO to be backed by only one institution. The One Wallet product has a cap on the amount of money (placed on it by the financial regulator) that can be transferred per

transaction. It also has to comply with central banks Know Your Customer (KYC) guidelines. Net One has to furnish the Central Bank with periodic returns about the volume and nature of transactions on the One Wallet

system. The operations of the One Wallet product is not entirely regulated by POTRAZ but only as a value added product.

(5) POSB Bank The bank uses a ZimSwitch (a platform which enables inter-linkage of banks such an account holder access his bank from

another bank) Mobile platform for its Mobile Money Service. The Bank reports to the NPS Division of the RBZ on a regular basis. The type and transactional limits in place (example

$1,000 ZIPIT limit) are examples of their policy guidance. The biggest challenge was getting all MNOs to connect, as well as getting all 19 financial institutions connected to ZimSwitch

to use the shared central system to ensure minimal costs and national inter-operability Both POTRAZ and the RBZ play an active role in governing and guiding the offering of mobile money through the shared

ZimSwitch Mobile system. All products offered by ZimSwitch Mobile are for banked individuals only, thereby differing the service functionality from standard MNO based products. The MNOs play the role of “distribution channel” rather than owner of the mobile banking product.