Islamic Finance

Why mobile money growth remains stunted in Nigeria

Published 12 Aug,2020 via The Nation - In 2012, the Central Bank of Nigeria (CBN) published the Financial Inclusion Strategy (FIS) setting financial inclusion target of 80 per cent realisation this year. Due to challenges within the system, the apex bank revised it last year to 95 per cent by 2024. Mobile money, a veritable tool for achieving this ambitious goal, remains in the limbo because of certain factors, reports LUCAS AJANAKU.

To achieve financial inclusion, the growth of mobile money is vital. The importance of this was not lost on the Central Bank of Nigeria (CBN), when about a decade ago, it licensed mobile money operators to enable people carry out financial transactions via their mobile phones.

The model adopted by the apex bank was bank-led while the model adopted in Kenya was telecoms-led.

M-Pesa was the platform through which mobile phone-based money transfer service, payments and micro-financing service, was carried out successfully.

It was launched in 2007 by Vodafone Group Plc and Safaricom, the largest mobile network operator.

The CBN has also idenitifed finaacial technology (Fintech) as critical element to achieve financial inclusion.

Globally, ‘fintech’ is among the fastest growing and more appealing sectors for investors looking for the next wave of disruptive innovation. Digital “neo-banks” are expanding their market share, especially among younger consumers, while apps and platforms are taking once-elite financial services, such as stock market investing, into the mainstream.

Tax is one of the obstacles on the way of the implementation of mobile money on the continent.

According to telecoms industry association, Global System for Mobile Communications Association (GSMA), to meet public spending commitments and to finance broader development goals, developing countries are facing external and internal pressures to broaden their tax base.

In its latest report entitled: State of the Industry Report on Mobile Money 2019, the group said this increased focus on domestic revenue mobilisation (DRM) comes at a time the tax-to-GDP ratios of developing countries significantly trail those of the developed world. Falling commodity prices, increasing debt and the current COVID-19 pandemic are putting further pressure on government revenue.

However, in trying to close the gap, developing countries face substantial challenges when raising domestic revenue, including the dominance of informality, the rise of the digital economy, and low capacity within their tax policy and administration functions.

“One development success story for many developing countries over the past decade has been that of mobile money. Having amassed more than a billion registered accounts, mobile money has financially included underserved groups who previously had neither the required identity documents nor the sufficient minimum funds to hold a formal bank account.

“However, this success has seen mobile money attract the attention of tax administration authorities looking to plug budget spending deficits,” GSMA said.

It said the resultant sector-specific taxation has taken several forms, from excise duties on service fees to sector taxes on total revenues or transaction taxes on the underlying amount. It is this latter transaction tax that is gaining favour among some sub-Saharan countries, adding that little is known about the impact of these taxes, particularly on mobile money users. The group said although they offer additional revenue for governments, there is a risk they may negatively impact the underserved groups who typically use the service, potentially reversing the gains achieved in financial inclusion to date, increasing inequality, and undermining the attainment of development goals.

It studied the impact of mobile money taxation across four sub-Saharan countries where transaction taxes have been recently proposed: Uganda, Côte d’Ivoire, Republic of Congo, and Malawi.

It found that while informality and political economy factors are ever present in their formulation, the taxes typically don’t extend to equivalent banking services and, furthermore, the impact on mobile money users is rarely considered.

On mobile money’s contribution to development, GSMA said it plays an important financial intermediation role by permitting savings to be invested into the local economy, increasing business productivity, stimulating job creation and boosting economic growth.

With over one billion registered accounts, mobile money assists in the attainment of global development goals, contributing to the economic empowerment of individuals and communities, including marginalised groups and businesses.

“As developing economies embark on their own digital transformation agendas, mobile money is set to provide the payments backbone to a broad range of public services, including healthcare, education, and social protection. This, in turn, helps those countries deliver upon the 2030 Agenda for Sustainable Development by reducing the cost of international remittances. With formal remittance flows exceeding foreign direct investment (FDI) into developing countries for the first time in 2019, the low cost of mobile money remittances allows developing country households to save over $20 billion per annum.

“Providing a means of digital remittance becomes especially important during national emergencies, including the current global pandemic, when cash liquidity points can dry up; improving resilience in the face of poverty. Mobile money acts as both a savings vehicle and a means of transferring funds during times of economic or environmental shock; strengthening the formal economy. For many micro, small and medium enterprises (MSMEs), opening a mobile money account can facilitate access to formal financial services. Mobile money is well placed to address the issue of informality that blights many developing economies and hampers domestic resource mobilisation efforts facilitating economic growth. Mobile money has been shown to contribute to economic growth by increasing both productivity and per capita incomes; and Improving DRM. By digitising revenue collection and permitting revenue authorities to identify where economic activity occurs, mobile money can both widen the tax base and improve the efficiency of revenue collection,” GSMA said.

For many developing countries, mobile money has enabled a ‘leap-frog’ in financial infrastructure by bypassing antiquated payments systems and putting financial services into the hands of those previously excluded. It connects buyers and sellers and, together with mobile services more broadly, addresses information asymmetries that have traditionally undermined participation in the formal economy by marginalised groups. This in turn permits a deepening of revenue collection activities within developing countries which are often constrained and underdeveloped.

However, for this trajectory to continue an enabling policy and business environment is required. The success of digital financial services (DFS), and mobile money especially, has caught the attention of governments and revenue authorities, not necessarily to improve the depth and efficiency of collection, but as a direct source of taxation revenue, which potentially risks undermining the development gains seen to date.

Mobile money and its users

Mobile money has been a primary tool for reaching financially underserved and underrepresented groups.

Within developing countries, traditional banks have tended to exclude those segments of society that can neither provide the elevated proof of identity required to open an account nor afford to hold the minimum account balances necessary to keep those accounts open. Meanwhile, low bank branch requires travelling long distances in order to transact, particularly in rural areas. While the emergence of the microfinance sector initially attempted to address some of these shortcomings, operating models were rarely cost effective nor sufficiently scalable to maintain long-term sustainability. Mobile money redefined the economics of financial service provision within developing countries by leveraging wide-reaching and low-cost agent networks, affordable feature phones, and mobile network connectivity to overcome problems of costly banking infrastructure. This in turn allowed the mobile money industry to serve the mass market in a commercially sustainable way. The mobile money business model differs from traditional banking in that deposits cannot be monetised through on-lending, for instance. As such, transaction fees are the main driver of revenues.

Mobile money first emerged in the Philippines in 2001, although its most successful and well known instance, M-Pesa in Kenya, did not launch commercially until 2007. In many sub-Saharan countries, much of the progress made in financial inclusion has been attributed to the growth of mobile money. In 2019, the number of registered mobile money accounts reached 1.04 billion, an almost 30-fold increase in 10 years. In sub-Saharan Africa (SSA), mobile money’s traditional stronghold, registered mobile money accounts are expected to reach half a billion by the end of 2020.

Comparing the use of mobile money versus economic and financial inclusion data shows the service is predominantly successful in low-income countries with low levels of financial inclusion, suggesting that it reduces inequality in access to financial services. These themes are supported with other data; for instance, mobile money is available in 96 per cent of countries where less than a third of the population have an account at a formal financial institution. In a World Bank study of eight leading mobile money economies, all were found to have an income gap in formal account ownership (when considering both bank and mobile money), but that gap disappeared when only mobile money accounts were considered.

For marginalised groups traditionally excluded from the formal financial system, such as women, young people, rural poor and displaced persons, mobile money offers safety and privacy improvements over cash. Evidence shows that mobile money services help these vulnerable groups access basic public services, including healthcare, education, utilities, and social welfare, that might otherwise be out of reach. In those countries where services are available, the gender gap for mobile money account ownership tends to be lower than for traditional financial account ownership. In the same World Bank study, all eight countries had a gender gap for general financial account ownership but in only two of those countries did a gender gap persist for mobile money. In economies where services are more mature, such as Senegal, Uganda and Zimbabwe, women are either as likely or more likely to own only a mobile money account than men. In Senegal, 59 per cent of women who are financially included only own a mobile money account. Mobile money is more likely to be used by young people in developing countries.

They are the most likely age group to adopt mobile money in regions where it is available, with the highest rates among those in their twenties.24 Mobile money adoption is also higher in areas with poor infrastructure, making it more accessible to the rural poor. In East Africa, 45 per cent of all ‘key users’ in Uganda, Tanzania, and Kenya live in rural areas, with 40 per cent, 72 per cent, and 32 per cent of key users respectively falling below the $2.50/day, 2005 purchasing power parity (PPP) income poverty line.

The rapid global growth of payments, transfers, and international remittances via mobile money shows that a latent demand for financial services had not previously been adequately met. The channels through which the positive externalities of mobile money can spill over and benefit the economy are many and complex, and some may not yet be fully understood. Nonetheless, existing evidence demonstrates the evolution of mobile money has been central to widening financial inclusion for the unbanked urban and rural poor and in helping ameliorate several areas of market failure on the provision of financial services in developing economies.

DRM in developing countries

Raising sufficient fiscal revenues to fund budgetary expenditure remains a significant challenge for most developing countries. Data from the Government Revenue Database28 shows that tax-to-GDP ratios of developing countries significantly trail that of the developed world. Given the size of their economies, these fiscal pressures are amplified by the fact that these countries are taking a smaller percentage from a smaller pot.

Developing countries face an array of compounding challenges in their efforts to raise revenue and strengthen the resources available for improving governance and service delivery. Increasingly, both internally driven reforms and development assistance have targeted DRM. Increasing DRM is a core Sustainable Development Goal (SDG) target and is a recognised factor in enabling developing countries to ‘exit from aid’. International fora such as the Addis Tax Initiative and the Platform for Collaboration on Tax are examples of the growing importance of domestic taxation to support the achievement of global development goals.

However, despite the emphasis placed on DRM at an international level, executing this domestically- particularly within the developing economies of SSA- is challenging. In particular, the fall in global commodity prices since 2014 has had a substantial revenue impact on even the most resource rich countries on the continent. The current COVID-19 crisis is exacerbating that effect. The shift of focus to raising domestic revenue and the ability of a country to achieve its own fiscal goals is now determined by the strength of their tax system, including both policy and administration. For several reasons, this is a difficult task.

Four principles of a well-functioning tax system33

Equity: A tax system which stresses equity is one where taxpayers that are similarly situated are also similarly taxed. Two taxpayers with equal ability to pay should be taxed equally and any differential in this ability should be accounted for. This is described as ‘horizontal equity’. The other element of this axis, ‘vertical equity’, says that the taxpayer who can shoulder a greater burden of taxation should accordingly pay more tax.

Certainty: A taxpayer must have certainty as to their liability and respective tax burden as well as when and how tax payments should be made. This improves taxpayer compliance and voluntary participation, and increases taxpayer trust in the system. The certainty principle can also include the concept of tax simplicity, which recognises that more complex tax rules can erode and compromise tax certainty.

Convenience within a tax system reflects the ease with which taxpayers can comply with the rules and mechanisms of the system. Tax assessment and payment should present the smallest burden possible on a taxpayer. Strengthening convenience has the added benefit of reducing the cost of tax administration, as well as compliance.

For instance, mobile money transactions have the potential to make significant contributions to this principle through Person-to-Government (P2G) transactions.

Efficiency: The principle of tax efficiency looks at both economic and administrative factors. Economic efficiency within a tax system reflects the need to balance revenue mobilisation with economic development and functionality. A lack of consideration for the negative impacts of tax can lead to disproportionate negative impacts such as capital flight, labour market shifts, and weakened export markets, and can negatively impact upon national development plans. Administrative efficiency reflects the need for the execution of a tax system to be inexpensive and easy to administer. The cost of tax administration to government should be limited, recognising the impact that finite resources place on the operational capacity of developing countries.

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