Mobile money platforms can improve liquidity

Published: 25 April 2014

Mobile money platforms can help boost liquidity by formalising financial transactions within the informal sector and the unbanked segment of the country's economy, research findings have revealed.

A research titled Liqudity Challenges in Zimbabwe: Turmoil and Tenacity done by academics Ashok Chakravarti and Crispen Mawadza last month said the use of mobile money platforms could improve the amount of money circulating in the formal sector. Over $7 billion is estimated to be circulating in the non-formal market.

The country's three mobile telecommunications companies Econet, Telecel and NetOne - have introduced mobile money transfer platforms that have helped formalise financial transactions among the unbanked population, most of whom are rural with no access to banks. Econet, with a subscriber base of over three million on its mobile money transfer system, has created a savings platform called EcoCash.

"The informal sector can play a very key role if trust was built and the sector could start using formal banks again," the research said.

"Use of mobile money could enable liquid assets to move into the formal financial sector. The sheer volumes of mobile money transaction by the low income people, most of whom are in the informal sector, points to a significant amount of money transfer and savings that is available in the informal economy," said the report.

In Zimbabwe, there are less than one million bank accounts. That means the rest of the population is deemed unbanked. This has created tremendous opportunities for the mobile money transfer platforms that can offer e-wallets on which the banked and the unbanked can store and transfer digital balances, offering greater convenience in the process and improve liquidity in the formal sector.

The rise in Mobile Money Transfer System (MMTS) uptake across the country has seen mobile e-wallets eclipsing banks. Within a short period of time, telecommunication firms have aggressively rolled out their services, enrolling agents even in far-flung areas where banks find it uneconomic to set up branches.

Zimbabwe formally dollarised in February 2009. The move curtailed the hyperinflationary situation that had decimated corporate and individual savings. But more Zimbabweans became skeptical of the formal banking system and this has hamstrung deposit mobilisation by the country's banking sector. The research said in a dollarised economy, it was inevitable that a liquidity crunch would ensue if there is no United States Treasury support.

"All countries that have dollarised have had US Treasury support. Zimbabwe's version of dollarisation is unofficial in that there was no agreement to get support from US Treasury. Zimbabwe's limited export earnings and high import bill is not making things easier," said the report.

This, the report said, had resulted in an outflow of foreign exchange or alternatively financing of imports through high cost debt. The report said dollarisation was introduced with no plan as to how to grow liquidity. This was the cause of the liquidity problem in the country. It is noted that Zimbabwe's under-performing real economy had compounded the liquidity crunch because there was a symbiotic relationship between the real sector and the financial sector.

A largely well-performing real sector builds the financial sector in that it places profits and reserves into the financial system and it honours obligations it has with banks. In turn, a well developed financial sector essentially builds the real economy in that it can underwrite transactions in the productive sector. Unfortunately in Zimbabwe these two cogs essential to development are not working in sync. An industrial sector that is working at below 40 percent of capacity cannot generate enough money to cover production costs and then have a surplus to place with banks.

The ripple effect is that banks are starved of deposits and when lines of credit are extended to the private sector it can hardly pay back. This creates non-performing loans which suffocate the financial sector and starve industry of more lines of credit.

The report says the country was not generating much savings given the low levels of incomes. Potential government savings are further being squandered on non-productive expenditure like salaries. The government wage bill gobbles over 70 percent of the government revenue. The upwards review of civil servants salaries will worsen the situation.
- fingaz