Digital Economy, Cashlessness and Access to Credit: Case Studies of India and Kenya

Anit Mukherjee, Policy Fellow at the Center for Global Development, Washington DC USA.

Photo by Anit Mukherjee

Across the world, digital technology is transforming how citizens interact with the State and with each other (Gelb, Mukherjee & Navis, 2020; Misuraka, Pasi & Viscusi, 2018; Milakovich, 2012). Moving towards a digital economy creates possibilities for governments to consider a wider array of policies and ways to implement them. This paper draws from two case studies which show that the collective impact depends on how these technological tools are harnessed for better, more efficient and inclusive interactions between different agents in the economy, society and polity. 

Digital technology has transformed the financial sector both in terms of regulation and access, the latter being the focus of this paper. Two thirds of world’s adults now have access to a financial account, compared to less than half a decade ago (World Bank 2017). The gains have been most significant for developing countries such as India, Bangladesh, Indonesia, and Kenya. As per the latest edition of the Global FINDEX database, 82 percent of adult population in India now have access to a financial account, an increase of 27 percentage points between 2014 and 2017. The story is similar for Bangladesh and Indonesia, where financial accounts increased by 19 and 13 percent respectively in the same period. Kenya is considered as a hub of innovation in digital financial services, especially the use of mobile technology for digital payments. These changes are happening at greater pace than has been the trend in the past with important implications for the global political economy as a whole (Cohen, Rubinchik, Shami 2020; Maurer, Musaraj & Small, 2018).  

Taken together, the three digital pillars – ID, financial inclusion and mobile technology – work in tandem to expand the role of digital transactions and reduce that of physical cash, moving towards a so-called “cashless economy”. Digital ID, including the use biometrics, is making it easier for businesses and governments to target their products, services, subsidies and transfers. Financial systems are enabling payments directly to beneficiaries, reducing transactions costs and leakages. Mobile telecommunications and social media are being increasingly used to disseminate information and soliciting feedback, as well as a tool for social and political mobilization against fuel subsidy reform programs, for example (Gelb and Mukherjee, 2018).

Countries also seem to be following two distinct strategies vis-à-vis financial inclusion, with important implications for cashlessness and new forms of credit. We classify them as bank-led and mobile-first models, with India and Kenya as representative countries in the two categories. Below, we document the observations from fieldwork undertaken in India and Kenya between 2017 and 2019. In the India case study, we explore the impact of cashlessness, its use and persistence, and how digital payments are perceived by the population at large. In the Kenya case study, we document Kenya’s experience with mobile money and explore the potential impact of new forms of digital debt and credit, especially for the poor.

1. Cashlessness by compulsion: Demonetization and its aftermath in India

As noted above, India has rapidly increased the proportion of the adult population with access to bank account within the last five years. This was possible largely due to a government supported financial inclusion program known as Jan Dhan Yojana (JDY) which has opened nearly 320 million new bank accounts starting in 2014. As bank account coverage became almost universal, the announcement of demonetization (banning of high-denomination currency notes) in November 2016 forced citizens to move towards formal banking channels and use digital cashless payments, especially through mobile phones.

India has an elaborate system of social safety net, including monetary transfers, administered both by the federal and state governments. These have long been plagued by mismanagement, corruption and “leakage” – the phenomenon of public funds that never reached intended recipients, or were diverted to fictitious (ghost) beneficiaries, benefitting corrupt officials and politicians. With the rollout of India’s biometric ID system, Aadhaar, and opening bank accounts through the Jan Dhan Yojana (JDY) – as well as linking the two – the government moved towards a system of digital payments for beneficiaries of public subsidies and transfers known as the Direct Benefit Transfer (DBT) scheme. This policy preceded demonetization, but the latter gave a boost to the coverage of DBT across the country.

Bhamro Bai, a widow, lives in a mud hut without electricity or clean drinking water in Mahendwara village in the northern state of Rajasthan. The village, located in Karauli district, is a collection of farming families, landless agricultural labor and men who commute to nearby towns for daily wage work as well as migrants to larger cities such as Jaipur and Delhi to work mainly in construction sites. Karauli is also on a national list of poor districts and therefore has a multitude of government funded poverty alleviation programs, including old-age and widow pensions, house building, public works and provision of LPG cooking gas. Bhamro Bai is illiterate with no record of birth but remembers historic events such as India’s independence and the visit of Prime Minister Nehru to the nearby town. This qualifies her to receive both an old-age and widow pension amounting to around $20 per month, which is her only source of income. Being destitute, she is also entitled to receive a monthly ration of 25 kilograms of wheat and pulses from the Public Distribution System (PDS) at Rs.1 per kilogram which is paid in cash to the PDS shopowner. She lives on the margins of society with no family to depend on but her neighbors pitch in to support when she needs financial or medical help.

Until 2014, Bhamro Bai used to receive her pension in cash delivered by the postman. It was a convenient system, although the pension would often be delayed or be distributed once every two months in lumpsum and the postman (unofficially) expected a payment for his services. There are nearly 2 million old-age and widow pension recipients in the state, but it was common knowledge that many of them had passed away, resulting in “leakage” of public funds. Following the rollout of Aadhaar and JDY, the government of Rajasthan decided to digitize pension payments – first requiring every beneficiary to register with their biometric ID, open a bank account and link the two. Every enrollee was then issued a uniquely numbered card (different from Aadhaar) which held the details of the beneficiary, including their bank account and mobile phone information. It listed all programs that Bhamro Bai was entitled to, including pensions and food rations – with the caveat that access to these programs are now digitally mediated, either through electronic transfers to bank accounts (pensions) or biometric authentication (food rations).

Photos by Anit Mukherjee

Figure 1: Bhamro Bai (left) and Vimla Devi, Mahendwada village, Karauli District, Rajasthan, India

For Bhamro Bai, this compulsory move towards cashless delivery of her pension presents a particular challenge. Apart from being physically infirm, she is digitally excluded – someone who is not able to transact using digital technology. She depends on ‘digital translators’ – family and friends who act in good faith to convey information on whether her pension has been transferred to her bank account, and if so, help her withdraw cash to cover her expenses, not least to pay for her food rations. From a convenience point of view, her experience is neutral – previously she was dependent on the postman to get her money, now she depends on her social network to help her navigate the cashless economy.

It is interesting to compare Bhamro Bai’s experience with the cashless digital world with that of her neighbour, Vimla Devi, 45, married to a migrant worker and a mother of two teenage daughters with a brother living close by. Vimla Devi dropped out of school when she was ten but ensures that both her daughters go to school (a private fee-paying one because the local government school is “not good”). In the absence of her husband, she tends to her two-acre plot of land growing vegetables and pulses to sell in the local market. She receives a yearly credit from the government to buy seeds, joins other villagers to work in a public works project during the lean season and gets a subsidy to refill her LPG gas cylinder – something that she obtained recently through a government program to provide poor women like Vimla Devi with clean cooking fuel.

While being functionally illiterate, Vimla Devi can sign her name and recognize numbers. She opened a bank account several years ago to receive the agricultural credit and uses the same account to receive her other transfers from the government – which over time have all become digitized. Her husband, the migrant worker, used to bring money in physical cash when he would visit the village twice a year. However, through the financial inclusion drive of the government (JDY), he managed to open a bank account in the city where he works. He also has a mobile phone and gave Vimla Devi an old one as a present recently, so that he could communicate with his family, especially his daughters, when he was away. Needless to say, the daughters use the phone more than the mother, but it is a shared asset that brings the family closer together. More importantly, now her husband could transfer money more regularly, especially to pay for their daughters’ school fees. Although Vimla Devi needs to seek her brother’s help to take her to the bank branch to encash her benefits and remittances, she is in a better position than Bhamro Bai to take advantage of the new, more digital financial world.

This is the setting for India’s demonetization, a decision that affected the lives of millions of people like Bhamro Bai, Vimla Devi and her family. In November 2016, the Government of India banned high-value currency notes (Rs.500 and Rs.1000, approx. $8 and $16) currently in circulation until new notes were printed and distributed. This unprecedented decision, ostensibly to address the problem of unaccounted for or ‘black money’, rendered almost all cash held by people worthless overnight. People with cash holdings had to deposit them in bank accounts within a stipulated period, with strict daily withdrawal limits and penalties for non-compliance. Being a heavily cash-dependent economy, there was no alternative to people changing their behaviour and move to alternative modes of transaction, especially through digital means.

The data on financial transactions support this hypothesis, but only for a short period. In the immediate aftermath of the ‘demonetization shock’, transactions using mobile banking and point-of-sale (POS) experienced sharp increases. However, the volume and value of mobile banking and POS transactions fell significantly from their peak in December 2016 within three months, as the circulation of new currency notes began to pick up. By April 2017, digital cashless transactions resumed their regular trend, without any discernible long-term impact of demonetization (Mukherjee and Wadhwa, 2017).

The quick reversion to business-as-usual signals that people, including our protagonists, were not ready to give up cash. There are significant costs, both implicit and explicit, that is associated with a move to a cashless environment. For retail merchants especially in the informal sector, this means a greater degree of formalization and transparency in their sources of income, which reduces their chances of evading taxes. Consumers on the other hand have to transition to a new technology platform which may not be easy especially for the poor and the marginalized. India’s experience shows that a behavioral shift to digital finance cannot be coerced, but requires gradual improvements in financial literacy and formalization of the economy.  The bank-led financial inclusion model that India has adopted may be one reason for the default transaction mode to be more in the nature of cash and near-cash instruments (cheques, demand drafts etc.) than a radical shift to digital payments. In this context, the experience of Kenya can be instructive, as we shall explore in the next section.

2. Cashlessness by Convenience: Case of Kenya

In Kenya, digital transactions have become pervasive over the last decade. This transformation has been driven almost exclusively by the spread of mobile payment platform known as MPesa which started in 2007. By 2017, 82 percent of Kenyan adults – exactly the same proportion as India – possessed a financial account. Financial inclusion is largely through mobile money: almost 80 percent have made or received digital payments compared to only 40 percent in India. As cashless transactions became widespread, Safaricom – the mobile network operator of MPesa – started a virtual credit supply platform, MShwari, in 2012.

Kenya is acknowledged as a global leader in digital financial services. Building in the expansion of the mobile network in the country over the last decade, Kenya’s financial regulators allowed the largest operator, Safaricom, to offer an innovative digital money product, MPesa, to their customers. Starting in 2007, MPesa allowed mobile subscribers to transform cash into a store of value that they could use to transfer money to other MPesa account holders. Gradually, merchant payments were included in the system so that consumers could pay businesses directly using digital currency. They could also cash out their MPesa balances through a nationwide network of agents who provided financial services in addition to basic recharge facilities to Safaricom customers. While MPesa is not a bank account, it met the basic need of the vast majority of the people to send and receive money in a safe, reliable and convenient way.

Mary finished high school in 2006 and joined a basic computer applications course run by a small NGO as part of a women’s job training program funded by an international donor agency. To roll out, Safaricom needed local agents who would provide services to its customers. The NGO helped Mary apply to be one such agent – her basic knowledge of digital technology, in addition to having a small shop on the side of a busy road about 50 kilometers from the capital, Nairobi, qualified her to get the agency. The location was also ideal for both Mary and Safaricom: Limuru was in the middle of an urban transformation with many small businesses being opened to serve a growing local clientele, but also many residents who worked in the service sector in Nairobi as daily wage labour.

Carrying physical cash is a source of insecurity, especially during the commute in crowded minibuses and walking back home through the shantytown where many of the workers lived. This is where MPesa – and agents like Mary – came in. With a basic mobile phone, people started depositing cash into their MPesa accounts through agents dotted around Nairobi. They could then either withdraw the money through Mary, or transfer it to pay others. The seeds of this cashless ecosystem flowered rapidly and within a few years, people started paying for nearly all goods and services through MPesa, even though it involved a small transaction fee that they had to bear. Agents like Mary were at the heart of this cashless economy – providing convenient cash-in, cash-out services to people as well as expanding their businesses to become a one-stop shop for all kinds of digital services, as we see in the photo.

MPesa Agency in Kenya

Photo by Anit Mukherjee

Figure 2: MPesa Agency, Limuru, Kenya

Building on the success of MPesa, Safaricom took advantage of an enabling regulatory environment to extend digital financial services to savings and loans. The mobile phone financial services platform developed into virtual savings account and virtual credit supply platform, known as M-Shwari. Launched in 2012, MShwari currently has over 18 million customers, nearly half the adult population of Kenya. By the end of 2018, it has disbursed over $2.3 billion in micro-loans ranging from less than a dollar to a maximum of $100, or an average lending of nearly $50 per capita, which is one of the highest ratios among countries in the developing world.

The outstanding question is whether the benefits outweigh the costs for consumers. Existing evidence points to several challenges in the transition to digital credit and debt. First, digital credit is almost completely algorithmic – agents like Mary have almost no role to play, which makes the system devoid of human interaction, judgement and redress, if necessary (Natile, 2020). There are other costs that consumers have to bear, chiefly the reputational risk as a borrower. The growing numbers of clients blacklisted for outstanding loans of more days on the credit bureaus is a matter of concern. In the three years since the launch of M-Shwari, 2.7 million people (around 10% of the adult population of Kenya) are said to have been blacklisted on Kenya’s TransUnion credit reference bureau for non-repayment of digital credit loans. Of these 400,000 are blacklisted for loans of less than $2. If a defaulter repays his/her loan, it costs an additional $20 to erase their name from the blacklist.[1] For people who are attracted by the apparent lower cost of MShwari credit compared to informal sources, this has long-term consequences for accessing other avenues of credit in the future.

3. Conclusion

The two cases in this paper suggest a nuanced approach to analyse the global digital economy, cashlessness and new forms of credit and debt. With increasing financial access and use of digital platforms, especially mobile technology, there is a long-term move towards cashless transactions and virtual credit. However, the uptake of these new forms of economic activity depends on how people perceive their benefits. Cashlessness by fiat, especially if accompanied by an imposition of technological solution, inconveniences the poor and puts those in the informal economy at a disadvantage. Even when technology is not a barrier to access, designing complex financial instruments such as digital/virtual credit generates information asymmetries that adversely affect those who need it the most. Whether the emerging globalized digital economy will be inclusive or not will depend on how people access both formal and informal sources of credit, and can operate in the new digital language of the financial transactions in general.



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