Many places across the planet lack basic commercial infrastructure. Kenya is serving as a case study of how banking by mobile phone seems to fill (or leapfrog?) the gaps. Since a phone-text bank service called M-PESA was introduced in 2007, almost 40% of Kenyan households have one user, while only 22% of adults have traditional bank accounts.

M-PESA charges fees for transfers, and doesn’t pay interest on savings. It might, though, spur development by making it easier to move capital around. The impact of the system is being watched by Tavneet Suri (MIT/Sloan) and William Jack (Georgetown U.).

In a 2008 survey of 3,000 households in areas representing 92% of Kenya’s population, Suri and Jack found that despite M-PESA’s fees, large numbers of Kenyans are using it for basic banking functions. About 38% of money transfers originated in rural areas. According to Suri, farmers are one group that employs the technology to lend each other money in lean times.

“Many of these people work in agriculture where you have highly variable incomes because of the weather,” explains Suri. “That means banks also don’t want to lend to them because the risk is much higher. So people insure risk, by making informal agreements: ‘I’m going to lend you money if you need it.’ And if you were not able to feed your family, you would receive transfers from people in your network. This happens in a lot of developing countries.”

The researchers’ data also shows that 41% of M-PESA money transfers are sent to parents, and only 8% to children, which also strongly suggests that M-PESA fills a classic role in a developing economy; children who leave home to work may be sending money back to help their parents.

The physical separation of people has always made money transfers difficult in developing countries, however, notes Suri, a Kenya native whose family lives outside Nairobi, the capital. Sending money from one place to another has often been “hard to do, costly, not very safe. You might send money with a bus driver and it wouldn’t get there, because he might get robbed. Now it gets there within five seconds, as soon as it takes a text message to arrive.”

And despite their inability to earn interest, Kenyans appear to use M-PESA as a savings tool. In a current working paper summarizing their results, “Mobile Money: The Economics of M-PESA,” Suri and Jack note that 77% of Kenyans say they keep money “under the mattress” at home, so to speak. About 11% of households say they have had savings stolen or become lost, though, meaning that tucking cash away is a money-losing strategy. By contrast, under 2% of M-PESA users believe they have lost money through the system (by sending it to an unintended recipient). That means Kenyans without access to banks should, on aggregate, retain more of their savings through M-PESA.

The next wave of research will look at whether M-PESA really does speed the spread of capital. Freeing up small packets of wealth makes a difference where it’s needed, as Nobel Prize winner Muhammad Yunus, or Heifer International, can attest. (And maybe writers, artists, or musicians, wherever they are, need to see if they can get their 1,000 fans on Twitpay.)

[Mobile Phone With Money in Kenya by whiteafrican]