A recent article in Business Daily Africa cites a report from the African Development Bank (AfDB) attributing recent inflation in Kenya to M-Pesa, Kenya’s mobile money transfer/payment service. As a result of the rise in inflation, the Central bank of Kenya has tightened the flow of money by hiking interest rates.

An M-PESA customer can use his mobile phone to move money quickly, securely, and across great distances, directly to another mobile phone user. With M-Pesa—owned by Safaricom, Kenya’s leading mobile network operator—account holders pay bills, transfer money to peers, and even top up funds and get cash from Safaricom dealers.

According to the report, the ease and speed of M-Pesa has increased the pace of Kenyan monetary transactions—increasing the amount of cash in circulation and increasing demand for goods and services. In other words, M-Pesa has put more money in circulation.

It’s fascinating to think that this service has grown so big that it is actually affecting the monetary policy of a sovereign country. Will we see this happen in other markets? It’s hard to say. Countries with a poor banking infrastructure but a strong telecom infrastructure offered by one dominant provider seem ripe for this type of success. Only time will tell if it will have the same impact. You’d have to be Milton Friedman to answer the obvious question: if this is what happens with a closed-loop system, what would be the effect of an open-loop with real clearing and settlement?

Topics: Prepaid