Ministry of Finance Audit Findings on M-Pesa Money Transfer Services

1. Since its inception in 2007, M-Pesa has rapidly developed to become one of the most dynamic innovations for delivery of financial services using modern Information and Communications Technology (ICT). This innovation makes Kenya a world leader in the use of mobile phones to transfer money.

To appreciate its rapid growth in popularity, it is important to note that the number of registered Kenyan using the M-Pesa service regularly has grown rapidly to reach close to 5 million persons last year.

2. However, the adoption and growth of M-Pesa services has not only continued to draw public attention but has also generated a lot of debate as to the safety and reliability of these kinds of payments and transfer systems and what the government is doing about it. Among the questions in the minds of many Kenyans are: How does the M-Pesa money transfer service really operate and is it safe and reliable? Does M-Pesa compete with commercial banks? Should it be regulated?

3. It is for this reason that it has become necessary for the Treasury to provide an audit of the M-Pesa system in order to clear any doubts in the minds of the public regarding its safety and reliability, and provide information about its effectiveness as well as the soundness of the operating platform for M-Pesa and other similar services wishing to enter the market.

4. The purpose of this note is to therefore, provide insights as to how this innovative money transfer service has developed, how it has enabled the transfer of funds to the unbanked and how the Central Bank of Kenya (CBK) continues to oversee its operations in order to ensure their safety and efficiency.

5. M-Pesa is an electronic money transfer product that enables users to store value on their mobile phone or mobile account in the form of electronic currency that can be used for multiple purposes including transfers to other users and conversion to and from cash. One clear advantage of M-Pesa is that it offers the prospect of providing money transfer services to people who are not in a position to open a bank account. Moreover, these services can be offered in any part of the country where there is mobile phone service. In this way, the M-Pesa service has been able to reach the unbanked Kenyans including those in the marginalized areas where formal banking services are non existent.

6. Today, many Kenyans are using the M-Pesa service to conveniently transfer money safely, efficiently and effectively. They use it for paying field staff their allowances and expenses so that they do not need to travel to the Head Offices for payment, sending a long haul truck driver money for spare parts, sending money to family members for consumer purchases, school fees payment, sending pocket money to students in schools, and sending emergency medical payments among other purposes. A taxi driver wishing to be offered prepaid services due to security reasons could request for payment via M-Pesa service. In many instances today, Kenyans traveling up-country deposit cash before the start of the journey to pick it up upon arrival to their destination thus avoiding the risk of loss through theft or robbery that has increased in Kenyan highways today.

7. Prior to the launch of M-Pesa services in Kenya, Safaricom sought authorization from the Central Bank of Kenya (CBK) to undertake the money transfer service. In evaluating the proposal, the CBK considered the request on the basis of safety, reliability and efficiency of the service. In addition, precautionary measures were put in place to ensure that the services did not infringe upon the banking services regulatory framework as provided for under section 2(1) of the Banking Act. The M-Pesa service therefore does not:
  • Accept from members of the public money or deposits that are repayable on demand or at the expiry of a fixed period or after notice;
  • Accept from members of the public money for current account purposes that is used for payment and acceptance of cheques; and
  • Employ money held or any part of the money for purposes of lending and investment or in any other manner for the account and at the risk of the person so employing the money.
8. In M-Pesa, money collected by agents is deposited in a trust account in one of the leading commercial banks in Kenya. This trust account provides the legal protection for the beneficiaries. The money in this trust account is not under the control of Safaricom and cannot be employed for purposes such as lending, investing or in any other manner for the account and at the risk of Safaricom as per Section 2(1) of the Banking Act. Legal protection of the money in the trust account is provided for in the trustee deed. Various legal instruments pertaining to this service, including the trustee deed have been presented to the Central Bank and reviewed accordingly. Further to this, funds in the trust account deposited in the designated commercial bank are regulated by the Central Bank of Kenya under the Banking Act.

9. The Trustee holds funds on behalf of all M-Pesa System participants under a Declaration of Trust (the Trust Deed). Highlights of the Trust Deed are:
  • The Trustee holds all amounts which constitute the Trust Fund on trust for the System Participants.
  • The beneficial entitlement of each System Participant to the Trust Fund at any time shall be to such amount of the Trust Fund in conventional money as is equal to the amount of e-Money in the M-Pesa Account of such System Participant at such time.
  • Safaricom is entitled to levy certain charges on System Participants for the operation of the service. Where it does so, the M-Pesa Account of the relevant System Participant will be debited by the amount in e-Money of the relevant charge and a M-Pesa Account of Safaricom shall be credited with the relevant amount.
  • The amounts constituting the Trust Fund shall be held by the Trustee in a reputable commercial bank.
  • Safaricom undertakes to the Trustee and to the System Participants that it will not issue any new e-Money other than in return for an equal amount in conventional money being paid to and received by the Trustee.
  • Safaricom shall also not effect any transfer of any e-Money from any M-Pesa Account of an amount which exceeds the credit balance of e-Money in the relevant M-Pesa account.
10. A number of critical issues and risks that have been reviewed include: liquidity management, settlement risks, the reliability of the system, the registration of users, system audit trail, anti-money laundering measures and consumer protection issues that could compromise the safety, efficiency, integrity and effectiveness of the M-Pesa system. These risks have been mitigated through a number of measures which the Central Bank and the Communications Commission of Kenya (CCK) monitors regularly.

11. For example, there is no credit risk because M-Pesa agents prepay before offering services customers. Also, CBK has placed a maximum limit of KShs 50,000 per M-Pesa account per day and a transaction limit of KShs 35,000 per day in order to mitigate against settlement risk. Moreover, Safaricom, is part of the Vodafone group, an international and reputable multinational in the provision of mobile phone services. The M-Pesa product benefits from the research and development of Vodafone and as such, the operational risks are minimal if not non existent.

12. The Central Bank of Kenya has continued to oversee the service in line with its Oversight Policy Framework document on payment systems in Kenya which is available at the Bank's website, For instance, whereas the system transacted about kshs. 17 billion in August 2008, the net deposit/residual value per customer (i.e. deposit less withdrawals) was kshs. 203 thus demonstrating that M-Pesa has not been regarded as an alternative bank account with sums of money staying in the system.

13. To further provide a sound legal basis for payment systems in Kenya, the CBK and the Treasury have been refining several legal and regulatory measures aimed at promoting safety, efficiency and effectiveness of payment systems in Kenya. One such effort is the review of the Central Bank Act in the year 2003 to include section 4A1 (D) that mandates the CBK to promote such policies as to best promote the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems. Currently, the Bank has proposed and formulated the enactment of the National Payment System Bill that will strengthen the above mandate by inter alia expressly providing for the oversight of all Payment systems including money transfer services. This Bill will soon be tabled in Parliament for enactment into Law.

14. It is also noteworthy that the recently enacted Kenya Communications (Amendment) Act 2008 expanded the functions of the CCK in relation to electronic transactions and provides legal recognition of electronic transactions. The Act not only legalizes electronic transactions but it also enables the CBK and CCK to work together and support this system including other such products that may come in future to the market.

15. With respect to competition with the commercial banks, there is no evidence to support such an allegation. In any case, there is nothing wrong with competition as long as it underpinned by a level playing field.

According to a study funded by the Department for International Development (DFID) of the UK, while 55 percent of adult Kenyans have access to a mobile phone, only 19 percent are banked. There is therefore a huge market that has access to mobile phones but not financial services and M-Pesa is helping to fill this gap. It is also laudable to note that some commercial banks and other service providers are now partnering with M-PESA with a view to complementing each other and leveraging on the M-PESA outreach.

16. This audit by the Central Bank on M-Pesa system provides comfort to the Treasury and I would like to assure Kenyans that this innovative idea of money transfer through the mobile telephones is safe and reliable. I wish therefore, to reiterate that the Treasury and the Central Bank of Kenya are committed to promoting safe and efficient innovations that enhance access to financial services thereby addressing the challenge of financial exclusion occasioned by infrastructural constraints to formal banking services. At the same time, the Treasury and the Central Bank will continue to oversee its safety and reliability as the innovations in the system and outreach progresses.

Joseph Kinyua
Permanent Secretary Treasury.
January 24, 2009

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