Monetary Theory and Electronic Money: Reflections on the Kenyan Experience

40 Pages Posted: 16 Dec 2012

See all articles by William Jack

William Jack

World Bank

Tavneet Suri

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Robert M. Townsend

MIT - Department of Economics

Date Written: 2010

Abstract

This article uses a class of models of money and the payments system to inform an analysis of "mobile banking" in the context of the rapid expansion of M-PESA, a new technology in Kenya that allows payments via mobile phones (even without any access to a bank account), and currently reaches close to 38 percent of Kenyan adults. The separation of households and firms in space and time suggests, in theory, from various separate models, a number of implications. These include (i) the potential gain, under some circumstances, from allowing net e-money credit creation, (ii) the impact that the associated enhancement of credit markets can have on monetary policy and on the real economy, (iii) the roles that e-money could play not only in credit but also in insurance, unrelated to its payment function, (iv) the potential role for an activist monetary policy and e-money management, (v) the role of e-money as a circulating private debt and as a store of value though with potential coordination problems associated with achieving balanced security transformation, (vi) the potential welfare losses from insisting on continuous net clearing of cash and e-money and the difficulty, in any event, of achieving this in practice, and (vii) the management of shortages in the context of fixed rates of exchange of e-money for cash. We provide some summary statistics from data collected on M-PESA agents and users that are reminiscent of the environments of the models and that support some of these implications. Other implications of the models suggest reforms to enhance the system's efficiency.

Suggested Citation

Jack, William G. and Suri, Tavneet and Townsend, Robert M., Monetary Theory and Electronic Money: Reflections on the Kenyan Experience (2010). FRB Richmond Economic Quarterly, vol. 96, no. 1, First Quarter 2010, pp. 83-122. Available at SSRN: https://ssrn.com/abstract=2189122

William G. Jack (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Tavneet Suri

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Robert M. Townsend

MIT - Department of Economics ( email )

Bldg. E52-252c
50 Memorial Drive
Cambridge, MA 02142
United States
617-452-3722 (Phone)
617-253-1330 (Fax)

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