Sunday Observer Online


Sunday, 25 September 2016





Marriage Proposals
Government Gazette

Cellphones, not banks, may be key to finance in the developing world

SAN FRANCISCO - The increasing digitization of finance, and the move away from cash, could add 6 percent to the annual economic output of the world’s developing nations over the next 10 years, according to a new report from the McKinsey consulting firm’s research arm.

The report, released on Wednesday, says that developing nations — and to a lesser extent developed economies like the United States — lose enormous amounts of economic potential from the continuing reliance on cash and the difficulty many businesses and individuals encounter when trying to gain access to the financial system.

The mobile phone, however, has provided a new and cheaper way to provide basic financial services to nearly everyone in the developing world. The 124-page report from the McKinsey Global Institute says that 80 percent of the people in the developing world currently have mobile phones, and by 2020 that will rise to 90 percent.

A growing number of start-ups are already providing financial services through cellphones, often without a bank being involved.

In Kenya, for instance, more than 70 percent of adults are using a digital money system known as M-Pesa that started less than a decade ago. Susan Lund, one of the co-authors of the McKinsey report, said that as her team crunched the numbers on the impact of digital finance, even she was surprised by the impact it could have on the broader economy — some $3.7 trillion in additional annual economic activity by 2025. “I thought this was about financial services,” Ms. Lund said. “I now think of this more like basic infrastructure for a modern economy, as opposed to just something that banks do.”

Any effort to provide more financial services to the developing world is likely to encounter both resistance and skepticism, given the somewhat spotty record of past financial projects aimed at helping the poor.

The flow of financial investments into emerging economies has, in the past, played into currency and financial crises around the world.

In the more recent past, elite institutions like McKinsey have also promoted the use of microlending in the developing world, which was aimed at bringing people out of poverty by giving them credit.

But academic research has found that microlending has ultimately been less transformative than many of its boosters had hoped.

Ms. Lund acknowledged the lackluster results from microlending. She said that the economic growth projected by McKinsey did not rely much on expanded credit to individuals.

Instead, she said, most of the opportunity comes from the transition to digital payments from cash, which can significantly increase productivity and open up a whole set of economic opportunities that aren’t available when people rely on cash.

The McKinsey report said that for individuals, the average cash transfer can require three or four hours in developing countries, because of the time required to travel to, and wait at, a financial institution.

For businesses and governments, reliance on cash leads to lost time, the “leakage” of money — read theft — and missed opportunities to transact with the broader world.

-The New York Times


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