Conference PaperPDF Available

Digital Financial Services regulations: Their evolution and impact on financial inclusion in East Africa

Authors:
Ochen, Ronald; Bulime, Enock Will Nsubuga
Working Paper
Digital Financial Services regulations: Their evolution
and impact on financial inclusion in East Africa
KBA Centre for Research on Financial Markets and Policy Working Paper Series, No. 73
Provided in Cooperation with:
Kenya Bankers Association (KBA), Nairobi
Suggested Citation: Ochen, Ronald; Bulime, Enock Will Nsubuga (2023) : Digital Financial Services
regulations: Their evolution and impact on financial inclusion in East Africa, KBA Centre for Research
on Financial Markets and Policy Working Paper Series, No. 73, Kenya Bankers Association (KBA),
Nairobi
This Version is available at:
https://hdl.handle.net/10419/271534
Standard-Nutzungsbedingungen:
Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen
Zwecken und zum Privatgebrauch gespeichert und kopiert werden.
Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle
Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich
machen, vertreiben oder anderweitig nutzen.
Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen
(insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten,
gelten abweichend von diesen Nutzungsbedingungen die in der dort
genannten Lizenz gewährten Nutzungsrechte.
Terms of use:
Documents in EconStor may be saved and copied for your personal
and scholarly purposes.
You are not to copy documents for public or commercial purposes, to
exhibit the documents publicly, to make them publicly available on the
internet, or to distribute or otherwise use the documents in public.
If the documents have been made available under an Open Content
Licence (especially Creative Commons Licences), you may exercise
further usage rights as specified in the indicated licence.
Digital Financial Services Regulations: Their
Evolution and Impact on Financial Inclusion
in East Africa
Ronald Ochen and Enock Will Nsubuga Bulime
May 2023
73
WPS/10/23
KBA Centre for Research on Financial Markets and Policy®
Working Paper Series
Working Paper Series
Centre for Research on Financial Markets and Policy
The Centre for Research on Financial Markets and Policy® was established by the Kenya Bankers Association in
2012 to offer an array of research, commentary, and dialogue regarding critical policy matters that impact on
financial markets in Kenya. The Centre sponsors original research, provides thoughtful commentary, and hosts
dialogues and conferences involving scholars and practitioners on key financial market issues. Through these
activities, the Centre acts as a platform for intellectual engagement and dialogue between financial market
experts, the banking sector and the policy makers in Kenya. It therefore contributes to an informed discussion that
influences critical financial market debates and policies.
The Kenya Bankers Association (KBA) Working Papers Series disseminates research findings of studies conducted
by the KBA Centre for Research on Financial Markets and Policy. The Working Papers constitute “work in progress
and are published to stimulate discussion and contribute to the advancement of the banking industry’s knowledge
of matters of markets, economic outcomes and policy. Constructive feedback on the Working Papers is welcome.
The Working Papers are published in the names of the author(s). Therefore their views do not necessarily represent
those of the KBA.
The entire content of this publication is protected by copyright laws. Reproduction in part or whole requires
express written consent from the publisher.
© Kenya Bankers Association, 2023
1 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
Digital Financial Services Regulations: Their
Evolution and Impact on Financial Inclusion
in East Africa
Ronald Ochen and Enock Will Nsubuga Bulime
Abstract
Digital Financial Services such as mobile money provides immeasurable benefits for
financial inclusion and intermediation in East Africa. In this paper, we use a Fixed Effects
panel model and annual data collected from 2007 to 2021 to examine the evolution of
Digital Financial Services regulatory frameworks and their effects on conventional banking
and Financial Inclusion in East African countries – Kenya, Tanzania, and Uganda. Results
indicate that digital financial services regulations positively and significantly affect
conventional banking services and mobile money (financial inclusion). Also, during the
COVID19 pandemic period when the different governments instituted COVID19 policy
response measures in the digital payments space to circumvent the use of cash and physical
contact, positively affected digital financial services, thereby enhancing financial inclusion
in the region. Also, an increase in lending rates and the consumer price index causes mobile
money to decline. Therefore, digital financial services regulations are pivotal in advancing
financial inclusion and intermediation through mobile money and conventional banking
services in East Africa. Also, Central Banks should be concerned with mobile money in the
economy because it forms part of the loanable funds by banks thus, stabilizing lending
rates and prices in the economy is crucial for financial inclusion.
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 2
1.0 Introduction
Digital Financial Services (DFS), such as mobile money, are critical
for financial inclusion, gender equality, and inclusive growth in
Africa (Hedricks 2019; World Bank 2020). They are also critical in
lowering conventional banks’ cost-to-income ratios and enhancing their
protability (Ochen & Bulime 2021). DFS play a crucial role in making
banking services accessible, promoting savings and investment, driving
economic activity, and increasing access to nancial services (Ndung’u
2022). Relatedly, the evolution of DFS provided a means of managing bank
accounts at minimal cost, thus enabling commercial banks to reach more
customers and grow deposits (Ndung’u 2022). However, they also disrupt
traditional nancial services and challenge incumbent service providers
(Disrupt Africa 2021).
First launched in 2007 as M-PESA by Safaricom in Kenya, mobile money quickly
spread across all East African Community (EAC) countries, especially Kenya,
Uganda, and Tanzania, though at different levels. This is explained by the growth
in digital platforms, technological advancements and the improved access and
utilization of mobile phones. To meet the growing demand for DFS, Mobile
Network Operators (MNOs) are intensifying efforts to diversify their digital products
and services through public and private partnerships (Shapshak 2020). Moreover,
during the coronavirus pandemic period, the use of DFS further enhanced financial
inclusion by enabling digital payments and credit creation (ECA 2020), they also
smoothened household consumption needs (Suri & Jack 2016). For example, we
observe an increase in some financial inclusion indicators in Tanzania and Uganda
during the pandemic albeit in Kenya, the change was negligible (Figure 1).
Conversely, although numerous factors influence DFS, regulation plays a more
prominent role in the uptake and use of DFS (Evans & Pirchio 2015). Several studies
have examined the role of regulation on DFS and financial inclusion; however,
3 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
these studies do not provide quantitative analysis.
Further, these studies only review the literature on
the regulations in the different countries. For instance,
some studies (Ondiege 2015; Gibson et al. 2015;
Mhella 2019; Castri 2013; Maina 2018; Pazarbasioglu
et al. 2020; Muthiora 2015; Ndung’u 2017; 2019;
and International Telecommunication Union 2016)
found that regulatory frameworks and an enabling
environment backstop DFS and financial inclusion but
they neither explain the magnitude of the effect nor
do they provide an in-depth empirical analysis.
To the best of our knowledge, only two studies
(Klapper et al. 2021 and Bahia et al. 2020) attempted
to measure the effect of regulation on DFS and
financial inclusion. They found a positive and robust
relationship between mobile money account
ownership (and usage) and the GSMA Mobile Money
Regulation Index in developing countries. These
studies, however, focus on mobile money account
ownership as a proxy for financial inclusion. In this
study, we go beyond owning a mobile money account
and use mobile money transactions or balances as an
indicator of digital financial inclusion.
Previous studies demonstrate that mobile money
transactions or balances facilitate financial inclusion
and intermediation (Nampewo et al. 2016; Levin
01
ONE
Source: Authors’ construction using Global Findex data (2014, 2017 and 2021)
Figure 1: Selected nancial inclusion indicators in East Africa (2014 – 2021)
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 4
2005). Besides, none of the aforementioned studies
analyses the effects of conventional banking services
and the COVID-19 period on DFS and financial
inclusion, which presents a novelty in our study. Our
study builds on the existing empirical evidence on
regulation by examining the effect of digital financial
inclusion on regulation and conventional banking
services on financial inclusion in the EAC.
Using panel data analysis techniques, we examine
the evolution of digital financial services regulatory
frameworks and their effect on conventional banking
services and financial inclusion in EAC. Relatedly, we
seek to answer the following research questions; What
is the effect of DFS regulations on financial inclusion
and conventional banking services? What is the effect
of the COVID-19 pandemic on DFS and financial
inclusion? Out of the seven EAC countries, our study
focuses on Kenya, Tanzania, and Uganda because they
are the main DFS hubs, pivotal in the evolution of
digital financial services (mobile money) and digital
services regulatory frameworks such as the National
Payment Systems Acts in the region. Also, data for
undertaking the analysis is readily available for these
countries. Notably, the study’s findings provide policy
insights on the importance of DFS regulations for
financial inclusion in the EAC.
In the follow-up sections, we present the evolution
of DFS regulations in East African countries in section
2, a review of literature in section 3, methodology
and data are presented in section 4, empirical results
and discussions in section 5, and the conclusion and
recommendations in section 6.
5 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
02
TWO
Kenya:
The Central of Bank (CBK) supervised the
National Payment Structure implemented in
2003.
In 2011, the National Payment Systems (NPS)
Act was
enacted by the Parliament of Kenya.
In 2014, NPS regulations are implemented by
the Central Bank of Kenya.
In 2015, Safaricom partnered with CBA to
provide Bank
to mobile Wallet services.
In April 2018, implementing of the Mobile
Money Interoperability services across MNOs
launched by the Central Bank of Kenya.
In March 2019, Call for Fintech start-ups by the
Capital Markets Authority of Kenya.
In April 2022, Implementing the Merchant
Interoperability amongst MNOs like Airtel
Networks Kenya Limited, Safaricom PLC, and
Telekom Kenya by the CBK.
Tanzania:
In 2012, a draft of Mobile Money regulations
was created in the National Payment Systems
Draft by the Bank of Tanzania (BOT).
Box 1: Summary of the of the evolution of digital financial services regulations in East Africa
2.0 Evolution of digital
nancial services regulations
in East Africa
Digital financial services regulations evolved at different rates
across Kenya, Uganda and Tanzania. This could partly explain the
dierences in the uptake and utilization of DFS and nancial inclusion
(See Box 1 for details). As a regional leader in DFS, other EAC countries have
closely monitored and mirrored the Kenyan experience, albeit at dierent
adoption rates. Notably, all three countries adopted an adaptive regulatory
approach that aims to balance enabling nancial inclusion and ensuring
nancial stability and consumer protection.
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 6
However, though Kenya has taken the lead in
developing and implementing DFS regulations,
a recent mobile money regulatory index (MMRI)
report by Groupe Speciale Mobile Association (2022)
suggests that Tanzania is doing better than Kenya and
Uganda in terms of providing an enabling environment
for DFS such as mobile money (Figure 2). The MMRI
is a tool that measures the extent to which a country’s
regulations provide an enabling framework for
sustainable mobile money services. It comprises 26
indicators clustered in six dimensions: Authorization,
Consumer Protection, Transaction Limits, Know Your
Customer (KYC), Agent Networks, and Investment and
Infrastructure. The details of the performance of the
countries across the six dimensions of the MMRI are
provided in the Annex (Table A1).
All the countries experienced improvements in their
performance between 2020 and 2021 amidst the
COVID-19 pandemic. This is mainly because of the
increased cooperation among the regulators and
the mobile money providers and the changes in the
different regulations to facilitate mobile money use
since mobile money played a critical role in supporting
livelihoods. In all the countries, the regulators issued
and implemented COVID-19-induced measures,
which are likely to be adopted permanently.
In September 2014, Mobile Money
Interoperability was created resulting into
Bilateral agreements within MNOs Tigo,
Airtel, Zantel and Vodacom birthed A2A
interoperability.
In 2015, the National Payment Systems Draft
regulations led to the enactment of the Electronic
Money Payments Systems Act, also known as
the NPS Act, by the Parliament of Tanzania and
implemented by the BOT.
Uganda:
In 2013, the Bank of Uganda and Uganda
Communications Commission launched
Mobile Money guidelines including, Uganda
Communications Commission (UCC) regulated
the MNOs and the Bank of Uganda supervised
the MNOs.
In 2018, Mobile Interoperability was launched
amongst Mobile Money Account 2 Account
across Mobile Network Operators.
In September 2020, after drafting of Mobile
Money regulations with stakeholders, the
Parliament of Uganda enacted the NPS Bill,
which was accented to by the President.
In 2021, the Bank of Uganda gazetted and
implemented the NPS Act as law.
In May 2021, the Bank of Uganda established
the regulatory Sandbox by the Capital Markets
Authority of Uganda and Bank of Uganda. Also,
launched a call for testing of the Fintech start-
ups and digital payment space.
7 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
Figure 2: The overall mobile money regulatory index for select EAC countries
Source: Author’s construct based on data from Groupe Speciale Mobile Association (2022)
Despite the opportunities above, the pandemic is also
associated with financial stability and cyber security
risks that have become prominent due to the increase in
the uptake of DFS. Therefore, these might require more
changes and/or reforms in the DFS regulations in the
post-COVID-19 period. Furthermore, the competition
in the mobile money market is likely to boost further
financial inclusion, especially with the emergence of
new operators. Therefore, governments have a more
significant role in ensuring healthy competition in
mobile money markets. Ochen & Bulime (2021)
argued that Uganda’s National Payment Systems Act
(2020) is likely to limit competition unless some of the
guidelines regarding the minimum capital (reserve)
requirements are relaxed to allow smaller players into
the mobile financial services space.
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 8
3.0 Literature Review
We review thematic literature linking DFS to financial inclusion,
conventional banking services, monetary aggregates,
regulation, and the COVID-19 pandemic.
3.1 Digital Financial Services and Financial Inclusion and
Conventional Banking Services
DFS aids financial inclusion; thus, an increase (decrease) in DFS implies financial
inclusion (exclusion). Several studies, such as Lyimo & Mbesigwe (2022), Gujral
and Kumar (2021) and Peterson (2018), show that DFS has a positive relationship
with financial inclusion. Regarding conventional banking services and DFS, most
MNOs hold accounts with the banking system where they deposit their outstanding
mobile money balances (Shirono et al. 2021). Nampewo et al. (2016) argued that
commercial banks facilitate financial intermediation through mobilizing deposits
from economic agents and reallocating them as credit.
Indeed, MNOs and other DFS service providers established and strengthened their
partnerships with traditional banks, giving rise to several innovations and business
models. These partnerships include MNOs leveraging the banks’ experience in
complying with regulations and navigating the regulatory environment, while
traditional banks are tapping into the MNO’s network and innovations to get more
customers. Therefore, despite the increasing competition between traditional
banking services and DFS, there seems to be stronger complementarity between
the two services.
Furthermore, Jenkins (2008) argues that mobile money promotes financial
inclusion and the long-term impact of enabling excluded populations to save and
borrow. Weil et al. (2014) argue that mobile money complements the banking
sector because it stimulates demand and access to products such as credit. While
Jack et al. (2013) strongly associate mobile money with a disproportionate credit
expansion through the credit creation hypothesis. Empirical evidence from studies
9 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
(Nampewo et al. 2016; Mawejje & Lakuma 2019; and
Wiafe et al. 2022) substantiated this; they found a
positive and significant relationship between private
sector credit from banks with mobile money in
Uganda and Ghana, respectively.
Conversely, Agufa (2016) found no association
between financial inclusion and Kenya’s banking
sector. The study argued that banks implement
DFS to lower operational costs associated with
opening and operating branches to increase their
profitability and financial efficiency. Finally, the
literature here motivated the research question on
how conventional banking services affect DFS and
financial inclusion.
3.2 Digital Financial Services and
Monetary Aggregates
The channel through which DFS, like mobile money,
influences inflation is explored by Simpassa and Gurara
(2012) who argue that mobile money could prove
to be inflationary if it affects the velocity of money
circulation. However, Aron et al. (2015) found that
mobile money improves productivity and economic
efficiency, leading to lower transaction costs, higher
output, and consequently a lower or non-existent
effect on inflation. On the other hand, mobile money
could affect interest rates through its effect on money
demand and the supply of private-sector credit. If
mobile money increases money demand and inflation,
then monetary authorities might respond by pursuing
tight monetary policies leading to high-interest rates
(Mawejje & Lakuma 2019). The relationship between
mobile money on inflation and interest lending rates
has been examined by Nampewo et al. (2016),
Mawejje and Lakuma (2019), Waife et al. (2022) and
Adam and Walker (2015).
Nampewo et al. (2016) found a negative and significant
effect of the consumer price index on mobile money
in the short and long run but insignificant in the long
run, while lending rates of interest were found to have
a negative and insignificant effect in the short run
and a positive and significant effect in the long run.
On the contrary, Mawejje & Lakuma (2019) found
positive moderate effects of consumer price index and
a decline in mobile money balances with a positive
shock in interest rates. Likewise, the findings of studies
(Waife et al. 2022 and Adam & Walker 2015) support
those of Mawejje & Lakuma (2019). They found that
shock in mobile money raises inflation in the short run
but declines in the long run while interest rates decline
in the short horizon, then the impact evens out in the
long run.
3.3 Digital Financial Services and
Regulation
The rapid development of DFS greatly depends on a
robust and flexible regulatory framework and sound
financial literacy, as witnessed in Kenya and South
Africa (Ochen & Bulime 2021). As highlighted in
Chapter 2, DFS regulations evolved at different rates
across Kenya, Uganda and Tanzania. These regulations
cover authorisation, consumer protection, transaction
limits, and know your customer and agent networks,
among others.
03
THREE
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 10
One of the most significant risks with mobile money
usage is the loss of customer funds, which can arise
due to insufficient liquidity or insolvency of the MNOs.
This concern is more pronounced for MNO-led mobile
money services as these are operated by non-banks,
which lie outside the scope of banking regulations
(Shirono et al. 2021). Countries adopted mobile
money-specific regulations to mitigate these risks,
and the National Payment Systems (NPS) Regulations
have evolved.
The NPS regulations covered several regulatory
practices, including safeguarding customer funds,
licensing, and AML/CFT (Shirono et al. 2021; Pelletier
et al., 2019). Mobile money is held in bank accounts
as deposits. Depending on a country’s legal system,
this type of account may be called a trust, escrow,
fiduciary or custodial account (Kerse & Staschen
2018). This is because most regulations require MNO-
led mobile money services to hold their mobile money
liabilities as deposits at regulated financial institutions
(Shirono et al. 2021). Most empirical evidence has
found that regulations and an enabling environment
enhanced mobile money usage (Castri 2013; Gibson
et al. 2015; Mhella 2019; Maina 2018; Pazarbasioglu
et al. 2020; Muthiora 2015; Ndung’u 2017, 2019; and
International Telecommunication Union 2016).
Furthermore, Pazarbasioglu et al. (2020) find that
regulations facilitated the development of mobile
financial services in Kenya and Tanzania. For instance,
in Tanzania, they attributed the rapid growth
of mobile money to having a sound and highly
competitive and collaborative market (with industry-
led interoperability arrangements) and the regulatory
flexibility of the Bank of Tanzania. For Kenya, the
authors highlight the existence of a private-sector-
led model (a partnership between Safaricom and the
Commercial Bank of Africa), the regulatory flexibility
of the Central Bank of Kenya and the adoption of
simplified customer due diligence.
However, evidence on the effect or magnitude of
mobile money-specific regulations on DFS and
financial inclusion is still scanty. To the best of our
knowledge, the available studies (Klapper e,t al. 2021;
Bahia et al. 2020) attempted to measure the effect of
mobile money-specific regulations on mobile money
usage and ownership. They found a positive and
strong correlation between mobile money account
ownership (and usage) and GSMA Mobile Money
Regulation Index in developing countries, respectively.
As such, this also motivated our research question
on the effect of digital financial services regulations
(National Payment System Acts) on digital financial
services (mobile money) and financial inclusion.
3.4 Digital Financial Services during
the COVID-19 Pandemic
The COVID-19 pandemic forced radical changes in
customer behaviour, moving significant portions
of the economy online and increasing customers’
willingness to engage digitally (Deloitte, 2021).
Further, before the COVID-19 pandemic, the uptake
of DFS such as payment for utilities, Bank to Wallet,
Wallet to Bank, insurance, and credit extension was
11 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
low, but with the advent of the COVID-19 pandemic
and its containment measures, traditional approaches
to banking in Brick & Mortar Financial Institutions
were constrained (Groupe Speciale Mobile Association
2021; and Machasio 2020; ECA 2020; Ochen & Bulime
2021).
Due to the constraints and incentives by Mobile
Money Service Providers (MMSPs) such as reduced
services costs, there was an increase in the uptake
in DFS (Ssonko & Kawooya 2020). For example,
in Uganda, the use of digital payment products
picked up further in the year to June 2020, partly
driven by actions taken by financial institutions
to promote the use of cashless transactions to
reduce the risk of COVID-19 transmission (Ssonko
& Kawooya 2020). Bazarbash et al. (2020)
conducted a descriptive analysis on mobile
money and the COVID-19 pandemic. They found
that mobile money usage increased in low and
middle-income economies during the pandemic.
Likewise, Mugume & Bulime (2022) found a
significant and positive effect of DFS usage during
the COVID-19 pandemic in Kenya and Uganda.
In addition to incentives by the MMSPs, government
responses also boosted the uptake of DFS. Some of
these measures are highlighted in Table B2 in the
annex. Regulatory authorities are responsible for
ensuring effective competition in the evolving mobile
money market, especially with the emergence of new
players because of the pandemic. This will enable
the consumers to access and utilize a range of high-
quality products and services.
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 12
4.0 Methodology and Data
4.1 Theoretical underpinnings
The increase in the use of mobile money reduces the amount of
money in circulation. It also increases deposits within the banking
system because outstanding mobile money balances with the mobile
money service providers, in most cases, are transferred as deposits with
conventional banks (Shirono et al. 2021). For example, Kipkemboi and
Bahia (2019) found that the use of cash declined while bank deposits
increased in the use of mobile money in Uganda and Kenya. As such, since
mobile money is part of the deposits held up in conventional banks, we
leverage the quantity theory of money advanced by Irving Fisher to develop
a theoretical framework for mobile money demand. Using Fisher’s model
MV = PT, where MV denotes the demand for mobile money, PT
denotes the total value of mobile money transactions, and PT/V is the
average value of mobile transactions, which is also the dependent variable
of our study. Thus, the average value of money in circulation held as mobile
money transactions is M=PT/V.
Deducing from economic theory, the demand for money has often been modelled
with indicators such as interest rates, inflation, income and exchange rates that
stance an opportunity cost for holding money. Notwithstanding, several studies
(Nampewo et al. 2016; Mawejje & Lakuma 2019; Wiafe et al. 2022), modelled
mobile money transactions using the aforementioned indicators/variables. For
example, Nampewo et al. (2016) found a negative and significant relationship
between mobile money and the consumer price index and a positive but
insignificant link with lending rates on loans. Conversely, Mawejje and Lakuma
(2019) found a moderately positive link between mobile money and consumer
price index and negative interest rates.
Nonetheless, mobile money is a financial innovation that expands the depth and
breadth of financial intermediation (Levine, 2005). Commercial banks facilitate
13 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
financial intermediation through mobilizing deposits
from economic agents and reallocating them as a credit
(Nampewo et al. 2016). For example, mobile money
deposits from households with bank accounts consist
of a portion of the loanable funds that banks use to
extend credit in the economy. Empirical evidence has
shown a positive and significant relationship between
mobile money and private sector credit (Nampewo et
al. 2016; Mawejje and Lakuma 2019).
Shirono et al. (2021) argue that mobile money poses
inherent risks of loss of customer funds, which can
arise due to insufficient liquidity or insolvency of the
MNOs. Thus, mobile money-specific regulations are
deemed necessary to mitigate these risks. The mobile
money-specific regulations, the National Payment
Systems (NPS) Regulations adopted by countries and
MNOs cover several regulatory practices, including
safeguarding customer funds, licensing, and AML/
CFT (Shirono et al. 2021; Pelletier et al. 2019).
Notwithstanding, enabling policy and regulatory
frameworks create an open and level playing field for
banks and nonbank providers to foster competition
and innovation and promote customer adoption
(Castri 2013).
4.2 Econometric model and
empirical approach
We employed panel data analysis techniques to
examine the effects of digital financial services on
conventional banking and regulatory frameworks and
their influence on enhancing financial inclusion and
innovations in East Africa. We adopted a panel data
analysis technique because of its merits. One, they do
not require a very large sample size for macro panels,
i.e. T>N. Henceforth this technique suits the scope of
our study and 3 East African countries were chosen
from the other 7 countries in the region due to scarcity
of data. Two, it has enormous potential for addressing
complex interactions amongst variables (Biørn 2016).
Three, they allow analyzing data using variables from
many countries simultaneously in a series (Petersen,
2004). Four, panel data analysis provides accurate
inferences of model parameter estimates (Uthman et
al. 2021). We employed linear static panels because
they popularly assume the effects of the observed
explanatory variables are identical across cross-
sectional units and time while the omitted variables
can be decomposed into individual specific effects and
time-specific effects (Hsiao, 2003). Our general linear
static panel equation is expressed as follows.
04
FOUR
Mobile Moneyit01 Private Sector Creditit2 Lending Ratesit
+ β3Consumer Price Indexit4 NPSActit + β5 COVID-19it+vi
...................................(1)
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 14
Where; i is the entity (in this case countries, Kenya, Tanzania and Uganda), t is the period from 2007 to 2021,
β0 is the constant or intercept term, and β1 to β2 are coefficients for the independent variables (private sector
credit, lending rates, consumer price index, NPS Act and COVID-19) while Mobile Moneyit is the dependent
variable and vi is the error term.
We then decomposed the error term vi in equation (1) into a cross-sectional unit-specific error term and an
idiosyncratic error μi as shown below:
vi= αii ............................................ (2)
From equation 2, the cross-sectional unit-specific error term does not change over time while the idiosyncratic
error term varies over the cross-sectional units and time (Greene, 2003; Gujarati, 2003; Wooldridge, 2006). After
incorporating equation 2 into 1 we obtain a Fixed Effects equation as follows:
Mobile Moneyit01 Private Sector Creditit + Lending Ratesit+
Consumer Price Indexit+NPSActit+ COVID-19itiit .................................. (3)
Where αi is the estimated fixed parameter of the model. In the event of the Random Effects panel model, μit
becomes εit from the random drawing from a probability distribution the model would be estimated as follows:
Mobile Moneyit = β01Private Sector Creditit2 Lending Ratesit + β3
Consumer Price Indexit4 NPSActit5 COVID-19itiit ......................... (4)
However, using the Hausman test criteria shown in
Table 5, we reject the Random Effect model and
adopt the Fixed model in equation 3 for our study.
Furthermore, the expected economic apriori for our
study variables β1 >0, β2 >0, β3 >0, β4
>0 and β
5>0 are guided by the works from
studies (Nampewo et al. 2016; Mawejje & Lakuma,
2019; Ssonko & Kawooya 2020; Bazarbash et al.
2020).
4.3. Data
Our analysis used annual data from 2007 to 2021
for Kenya, Tanzania and Uganda. The study’s scope is
important for three reasons; (1) it captures the period
when mobile money was introduced in the three East
African countries, with Kenya as the pioneer in 2007,
and (2) the data covers the COVID-19 period between
2020 and 2021 when the different governments
instituted COVID-19 response measures in the financial
sector to avert the spread of the virus by facilitating the
15 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
use and access to digital financial services (Annex:
Table B1) and lastly, it covered the different timelines
when the national regulatory frameworks for digital
financial services were implemented.
Relatedly, the variables used in the study were
informed by empirical literature, which guided
the construction of our theoretical framework (see
Nampewo et al. 2016; Mawejje & Lakuma 2019;
Waife et al. 2022). Our study variables are mobile
money transactions, private sector credit, lending
rates, consumer price index, and two dummies;
the National Payment Systems Act (NPS Act) and
COVID-19 (Annex: Table B3 for more details).
Notably, the discrepancies in the local currency values
of mobile money transactions and private sector credit
were standardized into constant US dollar values using
a constant base year of 2015.
Also, note that mobile money is the proxy for digital
financial services hence digital financial inclusion. At
the same time, private sector credit was used a proxy
for conventional banking services since these loans
were from the banking sector.
The dependent variable of our study, mobile money,
was transformed into natural logarithms. In contrast,
the independent variables included: private sector
credit also transformed into natural logarithms,
lending rates (%), consumer price index transformed
into natural logarithms and two dummy variables
(National Payment Systems Act [NPS Act] and
COVID-19). More so, the data used in the study is
illustrated graphically in Annex Figure B1.
4.3.1 Descriptive statistics and exploratory
data analysis
From the summary statistics in Table 1, we observe
that the mean of mobile money transactions for the
three countries from 2007 to 2021 is 11.17 per cent,
private sector credit is about 9 per cent, lending rates
are about 18 per cent, and the consumer price index
is about 5 per cent. There is a wide variation between
mobile money transactions and independent
variables, while the dispersion between private sector
credit and lending rates is small compared to the
consumer price index; this is shown by the standard
deviation.
Table 1: Descriptive summary statistics of the variables used in the study
Variables Obs. Mean Std. Dev. Min Max
Mobile Money 41 11.17718 8.450915 .6931472 24.40137
Private Sector Credit 42 8.714531 3.53815 2.890372 12.75619
Lending Rates 42 17.52381 3.637462 12 26
Consumer Price Index 42 4.94157 0.2765364 4.248495 5.356586
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 16
Table 2: Pair-wise Correlation matrix of the study variables
Mobile Money Private Sector
Credit
Consumer Price
Index Lending Rates
Mobile Money 1.0000
Private Sector Credit -0.9600* 1.0000
Consumer Price Index 0.2043 0.0102 1.0000
Lending Rates 0.8718* -0.8760* 0.0900 1.0000
Note: * denotes P-Value at 5 % (0.05) level of significance
From Table 2 in the pairwise correlation matrix, we
notice that the off-diagonal elements of the variables
are unitary as expected. The relationship between
mobile money and private sector credit is high and
significant, the relationship is in tandem with lending
rates but positive unlike with private sector credit.
While, the relationship between mobile money and
consumer price is positive, it is insignificant and weak.
4.3.2 Unit Root Test
We used the Fisher test for panel unit root using
the Augmented Dickey-Fuller Test with zero lags
to determine stationarity and order of integration
of the variables. From Table 3, we observe that
mobile money transactions, private sector credit
and consumer price index are stationarity in levels.
However, lending rates are non-stationary in levels
but first difference and integrated of order one, we can
therefore proceed with our analysis with linear static
panel model since most the variables are stationary in
levels.
Table 3: Unit root panel model test using the Fisher-type tests
P-values H0: All panels contain a unit root
Levels Differences
Variables Chi2 Prob>Chi2 Chi2 Prob>Chi2
Mobile Money 204.8782 0.0000** 46.1726 0.0000**
Private Sector Credit 47.5074 0.0000** 31.6131 0.0000**
Lending Rates 5.4731 0.4847 41.8292 0.0000**
Consumer Price Index 32.1992 0.0000** 38.6381 0.0000**
Note. *** p<0.01, ** p<0.05, * p<0.1
17 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
05
FIVE
5.0 Empirical Results
and Discussions
To answer the research questions of our study, we estimated a
Fixed Effect (FE) Panel model shown in Table 4, this model was
determined using the Hausman test shown in Table 5.
First, we explore the important statistics in the estimated model. We observe an
overall high within period R-squared, about 88 per cent variation in the outcome
variable mobile money is explained by the predictor variables (private sector credit,
lending rates, consumer price index, COVID-19, and the National Payment Systems
Act). The probability of the F-test is significant at the 5 per cent level, implying
that the model is good thus, we can draw inferences from it while the coefficients
are significantly different from zero. The Rho implies that about 99 per cent of the
variance in the model is due to differences across panels, while the correlation
between the error term and the predictor variables expressed as Corr (u_i, Xb)
= 0.8839, indicates that errors are correlated with the predictor variables in the
FE model.
Table 4: Results from the Fixed Eects Model of Mobile Money
Variables Coefficient Std. Error t-Statistic Prob.
Private Sector Credit 0.6710 0.3014 2.23 0.033**
Lending Rates -0.2335 0.0771 -3.03 0.005**
Consumer Price Index -8.3476 0.7495 -11.14 0.000**
COVID-19 0.1350 0.4067 0.33 0.742
NPS Act 0.9741 0.4520 2.16 0.039**
Constant 28.0226 4.2504 6.59 0.000**
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 18
Variables Coefficient Std. Error t-Statistic Prob.
R-squared: Corr (u_i, Xb) 0.8839
Within 0.8708 (F(5,33) 44.47
Between 0.9993 Prob > F 0.0000
Overall 0.9208 Sigma_u 5.9524
Rho 0.9842 Sigma_e 0.7521
Source: Authors’ construction using model output estimates Note. *** p<0.01, ** p<0.05, * p<0.1
Our results indicate that private sector credit from
banks has a positive and significant effect (5 per
cent) on mobile money. This implies that a one per
cent increase in private sector credit from banks
leads to about 68 per cent increase in mobile
money transactions, ceteris paribus. This outcome
corroborates the findings of Nampewo et al. (2016
and Mawejje and Lakuma (2019).
The National Payment Systems Act (NPS Act)
regulations also have a positive and significant effect
(at 5 per cent) on mobile money. The findings suggest
that mobile money grew during the enactment and
implementation of the NPS Act. This could imply that
the enactment and implementation of the NPS Acts
boosted customer confidence in using mobile money
since they address consumer protection issues and
provide redress mechanisms for fraud of MNO clients
and customers. Castri (2013) argues that mobile
money-specific regulations and NPS Acts promote the
adoption of mobile money services.
The COVID-19 policy responses instituted by the
Central Banks to avert the pandemic’s adverse effects
on the financial sector had a positive effect on mobile
money, as witnessed by an increase in mobile money
transactions. Mobile money transactions increased
during the COVID-19 pandemic period as a result
of the policy responses. This is consistent with the
findings of previous studies (Ssonko & Kawooya 2020;
Groupe Speciale Mobile Association 2021; Deloitte
2021; Bazarbash et al. 2020; and Mugume & Bulime
2022).
Elsewhere, we also found that the opportunity
cost variables of mobile money, including lending
rates and consumer price index, as supported by
theoretical and empirical literature, have a negative
and significant effect on mobile money at a 5 per
cent level of significance. In other words, a one per
cent increase in the consumer price index resulted
in an 8.3 per cent reduction in mobile money,
ceteris paribus. This is corroborated by the findings
of Nampewo et al. (2016) and Wiafe et al. (2022).
However, this is contrary to Mawejje and Lakuma
19 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
(2019), who found a positive relationship between
the consumer price index and mobile money. Lastly,
a one per cent increase in lending rates resulted in a
23 per cent reduction in mobile money transactions,
ceteris paribus. This finding is supported by studies
(Nampewo et al. 2016; Wiafe et al. 2022; Mawejje &
Lakuma 2019).
5.1. Diagnostic checks
In Table 6 below, we present the diagnostic checks
to test the validity and strength of our Fixed Effects
model estimates. The tests include the Hausman
model selection test, the Cross-sectional dependence
test using the Breusch-Pagan LM test and the Pesaran
CD test, the Heteroscedasticity test, serial correlation
test, the Breusch and Pagan Lagrangian multiplier
test for random effect and normality test using the
Jarque-Bera test.
The Hausman test indicates that we reject the null
hypothesis of Random Effects model selection at a
5 per cent significance level and conclude that the
Fixed Effects model was appropriate for our study.
The Breusch and Pagan Lagrangian multiplier test for
random effects confirm the rejection of the Random
Effects model selection for our study. The Cross-
sectional dependence test using the LM test checked
whether the residuals are correlated across entities,
thus, there is no cross-sectional dependence at a 5 per
cent level of significance.
Also, using the Pesaran CD test, there is no cross-
sectional dependence at a 5 per cent significance level.
The Jarque-Bera test shows the normality of residuals,
and it confirms the normality of the residuals at 5 per
cent of significance. The test for heteroscedasticity
indicates that we fail to reject the null hypothesis of
constant variance (Homoscedasticity). While the serial
correlation test was investigated using the Wooldridge
Auto-correlation test, which failed to reject the null
hypothesis of no first-order auto-correlation at a 1 per
cent significance level.
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 20
Table 5: Results from the diagnostic tests of the Fixed Eects model
Tests P-values
Hausman test: Ho: The model is Random Effects. 0.0011**
Breusch and Pagan Lagrangian multiplier test for Random Effect. 1.0000**
Breusch-Pagan LM test of independence. (Ho: The residual across entities is not correlated.) 0.5916**
Pesaran CD test of cross-sectional independence. Ho: The residuals are correlated. 0.8405**
Jarque-Bera normality test. Ho: Normality. 0.0921**
Heteroscedasticity Test. Ho: Homoscedasticity. 0.4985**
Serial Correlation. Ho: No first-order autocorrelation. 0.0418***
Note. *** p<0.01, ** p<0.05, * p<0.1
21 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
06
SIX
6.0. Conclusion and Policy
Recommendations
Our paper adopted a fixed effects panel model technique and
annual data from 2007 to 2021 to examine the evolution of
digital financial services regulatory frameworks and their
effects on conventional banking and financial inclusion in East Africa.
Specifically, our study sought to answer the following research
questions. What are the effect of DFS and financial inclusion on
regulations and conventional banking services? What is the effect of
the COVID-19 pandemic on DFS and financial inclusion?
The findings indicate that digital financial services regulations and conventional
banking services have a positive and significant effect on conventional banking
services. Also, the COVID-19 policy responses on the digital payments space
positively affected mobile money, thereby enhancing financial inclusion in the
region. Henceforth, based on the study results, we conclude that digital financial
services and financial inclusion are supported by regulation and conventional
banking in East Africa. We hereby propose the following recommendations:
(1) Convectional banks should leverage the existing legal, and regulatory
frameworks to use mobile money digital financial services from Mobile
Network Operators (MNOs) to boost credit creation in the economy because
mobile money facilitates financial intermediation by pooling resources from
the banked and unbanked households to the conventional banks that avail
them into credit for customers.
(2) East African countries should strengthen the digital financial services
regulations to backstop further development and growth of mobile money
platforms; this will also address the inherent risks and liabilities such as fraud,
which boosts customer confidence in digital financial services.
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 22
(3) Central banks should be concerned about
mobile money since it forms part of the money
the banks lend customers, hence broad money.
Its influence on monetary aggregates is evident
thus, the macroeconomic stability of lending
rates and prices is also crucial for financial
inclusion in the EAC.
(4) Regulatory authorities should promote and
ensure effective competition in the evolving
mobile money market, especially with the
emergence of new players during the pandemic.
This will enable the consumers to access and
utilize a range of high-quality products and
services.
23 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
References
1. Adam C. and Walker S.E.J. (2015). Mobile
money and monetary policy in east African
countries, University of Oxford. Oxford: United
Kingdom.
2. Agufa M. M. (2016). The Effect of Digital Finance
on Financial Inclusion in the Banking Industry in
Kenya. The University of Nairobi.
3. Aron J. Muellbauer J and Sebudde R. (2015)
Inflation forecasting models for Uganda: is
mobile money relevant? CSAE Working Paper
WPS/2015-17. Centre for the Study of African
Economies: University of Oxford.
4. Bahia K. Taberner, A.P., Vidal, S.M. (2020).
“Exploring the relationship between mobile
money regulation and usage” Groupe Speciale
Mobile Association (GSMA) working paper
December 2020. Available at: www.gsma.com.
5. Bazarbash M. Moeller J. Griffin N.N. Villanoa
C.H. Chhabra E. Fan Y. & Shirono K. (2020).
Mobile Money in the COVID-19 pandemic.
International Monetary Fund (IMF). http://
www.imf.org.
6. Biørn E. (2016). Econometrics of panel data.
Oxford University Press.
7. Castri di. S. (2013). “Mobile Money: Enabling
regulatory solutions” Groupe Speciale Mobile
Association (GSMA). Available at: www.gsma.
com.
8. Deloitte (2021). “East African Banking Industry
Trends Report 2021/22”. www.deloite.com.
9. Disrupt Africa, (2021). ‘Finnovating for Africa
2021: Reimagining the African Financial Services
Landscape. Available at: https://disruptafrica.
gumroad.com/l/razjs (accessed 29 September
2022).
10. ECA. (2020). COVID-19 in Africa: Protecting Lives
and Economies. Addis Ababa, Ethiopia: Economic
Commission for Africa.
11. Evans D. & A. Pirchio (2015). An Empirical
Examination of Why Mobile Money Schemes
Ignite in Some Developing Countries but
Flounder in Most. Coase-Sandor Institute for Law
and Economics Working Paper no 723.
12. Gibson E. Lupo-Pasini, F. and Buckley R. (2015).
Regulating Digital Financial Services Agents
in Developing Countries to promote Financial
Inclusion. Singapore Journal of Legal Studies,
26-45. DOI: 10.2139/ssrn.2973806.
13. Greene W.H. (2003). Econometric Analysis, 5th
ed., Upper Saddle River, New Jersey: Prentice
Hall.
14. Groupe Speciale Mobile Association, (2021).
“State of the Industry Report on Mobile
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 24
Money: 2021,www.Groupe Speciale Mobile
Association.com.
15. Groupe Speciale Mobile Association, (2022).
“The Mobile Money Regulatory Index 2021”
16. Gujral. K.R., and Kumar. N., (2021). Digital
Finance and its Impact on Financial Inclusion,
International Journal of Advanced Research
in Commerce, Management & Social Sciences
(IJARCMSS) ISSN: 2581-7930, Impact Factor:
5.880, Volume 04, No. 01, January - March
2021, pp 05-07.
17. Gujarati D.N. (2003). Basic Econometrics, 4th ed.,
New York: McGraw Hill.
18. Hedricks S. (2019). The role of financial
inclusion in driving women’s economic
empowerment, Development in Practice, 29:8
1029-1038. Accessible at: https://doi.org/10.10
80/09614524.2019.1660308.
19. Klapper L. Ansar, S. and Hess J. (2021). The role
of Mobile Money Regulations: Evidence from
Sub-Saharan Africa. World Bank Findex Note 7.
20. International Telecommunication Union.
(2016). Digital financial services: Regulating
for Financial Inclusion – An ICT Perspective.
Telecommunication Development Bureau. ISBN:
978-92-61-22191-1 (electronic version). www.
itu.int.
21. Jack W. Ray A. Suri T. (2013). Transaction
Networks: Evidence from Mobile Money in
Kenya”. Am Econ Rev 103:356–361.
22. Jenkins B. (2008). Developing mobile money
ecosystems”. International Finance Corporation
and Harvard Kennedy School, Washington, DC.
23. Kerse, M. and S. Staschen. 2018. “Safeguarding
Rules for Customer Funds held by EMIs. CGAP
Technical Note, Washington, DC.
24. Levine R. (2005). Finance and growth: theory
and evidence”. Handbook Econ Growth
1:865–934
25. Lyimo J.B & Mbesigwe G.W. (2022). The
Digital Financial Services in Enhancing Financial
Inclusion in Tanzania. Olva Academy – School
of Researchers, Volume 4, Issue 1, March 2022.
pp 96 – 106.
26. Machasio N.I. (2020). COVID-19 and Digital
Financial Inclusion in Africa. How to leverage
digital technologies during the pandemic. Africa
Knowledge in Time Policy Brief. October 2020
Issue 1, NO. 4.
27. Mawejje J. & Lakuma, P., (2019).
Macroeconomic effects of Mobile money:
evidence from Uganda. Journal of Financial
Innovations, 5, 23 (2019). https://doi.
org/10.1186/s40854-019-0141-5.
25 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
28. Maina J. (2018). “Mobile Money Policy and
Regulatory Handbook” Groupe Speciale Mobile
Association (GSMA). Available at: www.gsma.
com.
29. Mugume R. & Bulime W.N.E. (2022). Post-
COVID-19 for African economies: Lessons for
digital financial inclusion from Kenya and
Uganda. African Development Review. http://
doi.org.101111/1467-8268.12652.
30. Muthiora B. (2015). “Enabling Mobile Money
Policies in Kenya Fostering a Digital Financial
Revolution” Groupe Speciale Mobile Association
(GSMA). Available at: www.gsma.com.
31. Mhella J.D. (2019). The Development of Mobile
Money and the politics of financial inclusion.
The InternacionalSocialScienceReview,1(1),2019.
http://journals.epistemopolis.org/index.php/
socialsciences/
32. Nampewo D. Tinyinondi, A.G. Kawooya R.D. &
Ssonko, W.G. (2016). Determinants of private
sector credit in Uganda: the role of mobile
money. Journal of Financial Innovations 2, 13
(2016) http://doi.org/10.1186/s40854-016-
0033-x.
33. Ndung’u N. (2017). “M-Pesa – a success story
of digital financial inclusion” Blavatnik School of
Government, University of Oxford.
34. Ndung’u N. (2019). “Digital Technology and
State Capacity in KenyaCenter for Global
Development Policy Paper 154 August 2019.
Available at: www.cgdev.org.
35. Ndung’u N. (2022). “Fintech in sub-Saharan
Africa” WIDER Working Paper 2022/101, UNU-
WIDER.
36. Ochen R. & Bulime N.W. (2021). Why a rigid
and risk-averse legal and regulatory framework
is an impediment to innovations in Uganda’s
financial sector? Annual Bankers Conference
Magazine, Uganda Bankers Association. https://
ugandabankers.org.
37. Ondiege P O. (2015). Regulatory Impact on
Mobile Money and Financial Inclusion in African
Countries - Kenya, Nigeria, Tanzania and
Uganda. Center for Global Development (CGD).
38. Pazarbasioglu C. Mora G.A. Uttamchandani
M. Natarajan H. Feyen E. and Saal M. (2020).
“Digital Financial Services” April 2020, World
Bank Group. https://pubdocs.worldbank.org/
en/230281588169110691/Digital-Financial-
39. Peterson K. O. (2018). Impact of Digital Finance
on Financial Inclusion and Stability. Science
Direct Journals & Books, Borsa Istanbul Review
Volume 18, Issue 4, December 2018, Pages
329-340. https://www.elsevier.com/jornals/
borsa-istanbul-review/2214-8450.
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 26
40. Petersen T. (2004). Analyzing panel data,
Fixed-and random-effects models. In M. Hardy
& A. Bryman (Eds.), Handbook of data analysis
(pp. 331–345). Sage.
41. Pelletier A. S. Khavul and S. Estrin. (2020).
“Innovations in Emerging Markets: The Case
of Mobile Money.Industrial and Corporate
Change 29 (2): 395-421.
42. Shapshak T. (2020). Vodacom and Safaricom
Acquire M-Pesa to Accelerate Mobile Money
ServicesinAfrica.Forbes,4April.https://www.
forbes.com/sites/tobyshapshak/2020/04/06/
vodacom-and-safaricom-acquire-m-pesa-to-
accelerate-mobile-money-services-in-africa/
43. Shirono K. Das B. Fan Y. Chhabra E. and
Carcel-Villanova H. (2021). Is Mobile Money
Part of Money? Understanding the Trends and
Measurement. IMF Working Paper WP/21/177.
44. Simpasa A Gurara D. (2012). Inflation Dynamics
in selected East African countries: Ethiopia,
Kenya, Tanzania and Uganda. AFDB Brief 2012.
African Development Bank, Abidjan.
45. Suri T. & W. Jack. (2016). “The Long-Run
Poverty and Gender Impacts of Mobile Money.
Science 354 (6317): 1288–1292.
46. Ssonko W.G & Kawooya R.D. (2020). Digital
Financial Services, COVID-19, and Future
Financial Services Landscape in Uganda, Bank
of Uganda, Working Paper No.29/2020 www.
bou.or.ug.
47. Uthman T.K. Oyenuga, F.I. Adegoke, M.T.
Onatunji P.A. and Oni V.O. (2021). Modelling
Dynamic Micro and Macro Panel Data with
Autocorrelation Error Terms. Asia Journal of
Probability and Statistics 12(4): 58-70, 2021;
Article no. AJPAS.68106.
48. Waife A.E. Quaidoo, C. & Skeyi S. (2022).
Monetary policy effectiveness in the advent of
mobile money activity: Evidence from Ghana.
Cogent Economics & Finance, 10:1, 2039343,
https://doi.org/10.1080/23322039.2022.20
39343.
49. Weil D. Mbiti I. and Mwega, F. (2014). “The
Implications of Innovations in the Financial
Sector on the Conduct of Monetary Policy in
East Africa”, International Growth Centre: WP
12/0460
50. World Bank (2020). The foundation of financial
inclusion. Understanding the ownership and use
of formal accounts.
51. Wooldridge J.M. (2006). Introductory
Econometrics: A Modern Approach, 3rd ed.,
Mason, Ohio: Thomson South-Western.
27 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
Annexes
Table A1: Performance of the East African Countries across the six dimensions of the MMRI
Authorization Consumer
Protection KYC Transac-
tion Limits
Agent
Net-
work
Infrastructure
and Investment
environment
Kenya
2018 100 100 32 100 100 62
2019 100 100 32 100 100 62
2020 100 100 32 100 100 62
2021 100 100 32 100 100 62
Tanzania
2018 100 80 92 100 100 45
2019 100 80 92 100 100 60
2020 100 80 92 100 100 60
2021 100 80 92 100 100 60
Uganda
2018 84 80 32 100 94 68
2019 84 80 32 100 94 68
2020 84 80 32 100 94 68
2021 100 80 52 100 100 62
Source: Author’s construct based on data from Groupe Speciale Mobile Association (2022).
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 28
Figure B1: Graphical exposition of the study variables in Kenya, Tanzania and Uganda
010 20 30010 20 30
2005 2010 2015 2020
2005 2010 2015 2020
Kenya Tanzania
Uganda
Mobile Money Transactions Private Sector Credit
Consumer Price Index Lending Interest Rate (%)
NPS Act Covid19
Years
Graphs by Countries
29 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
Table B1: Some of the government responses on DFS during the COVID-19
pandemic period in East African countries.
Countries Measures Taken
Kenya
On March 2, 2020, the Central bank of Kenya encouraged the waiving or reducing charges on mo-
bile money transactions to disincentive the use of cash. This policy was later reversed on January
1, 2021. Also, the transaction limits increased from KES 150,000 and KES 300,000, respectively
with monthly limits scrapped from 16, March 2020 until 31 December 2020.
Tanzania
In 2020, the daily transactions limit for mobile money operators was raised from about US $ 1,300
to US $ 2,170, and the daily balance limit was raised from US $ 2,170 to US $ 4,340 (IMF, 2020).
The daily transaction limits increased from TZS 3m to TZS 5m, and the daily balance increased
from TSZ 5m to 10m.
Uganda
From February 2020, the Bank of Uganda worked with mobile money providers and commer-
cial banks to ensure they reduced the charges on mobile money transactions and other digital
payment charges. These measures, which remained in place until March 2021, were extended
for another six months starting on April 1, 2021 (IMF, 2020). For example, no charges for P2P
transfers of transactions of up to UGX.30,000.
Sources: International Monetary Fund (IMF) Accessible via: https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-COVID-19
and GSMA COVID-19 Responses Tracker. Accessible via: https://www.gsma.com/mobilefordevelopment/programme/mobile-money/gsma-
mobile-money-regulatory-response-to-covid-19-tracker-and-analysis/
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 30
Table B2: Description of study variables measurement and their sources
Variables Description Measurement Source
Mobile Money
The total value of mobile
money transactions (cash
in and out at the mobile
money agents.
Local currencies
(Kshs, Tshs and Ushs)
Central Banks of Kenya,
Tanzania and Uganda
(2021).
Private sector
credit
Total value domestic credit
to the private sector from
the banks
Local currencies
(Kshs, Tshs and Ushs)
Central Banks of Kenya,
Tanzania and Uganda
(2021).
Lending Rates
The bank rate usually
meets the private sector’s
short-term and medium-
term financing needs.
Percentage (%)
World Development
Indicators, World Bank
(2021).
Consumer
Price Index
The index reflects changes
in the cost to the average
consumer of acquiring
a basket of goods and
services.
Indexes were developed
using the 2010=100
as base year. World Development
Indicators, World Bank
(2021).
National Payment
Systems Act
Denotes a dummy variable
capturing the digital fi-
nancial services regulatory
frameworks
1= time when the regula-
tory frameworks were
enacted and implemented
and 0 otherwise. Authors construction.
COVID-19 Denotes a dummy for the
COVID-19 period.
1= time indicates the
period of the COVID-19
pandemic era and 0
otherwise.
Authors construction
31 |
Digital Financial Services Regulations: Their Evolution
and Impact on Financial Inclusion in East Africa
| 32
Kenya Bankers Association
13th Floor, International House, Mama Ngina Street
P.O. Box 73100– 00200 NAIROBI
Telephone: 254 20 2221704/2217757/2224014/5
Cell: 0733 812770/0711 562910
Fax: 254 20 2221792
Email: research@kba.co.ke
Website: www.kba.co.ke
ResearchGate has not been able to resolve any citations for this publication.
Article
Full-text available
As coronavirus disease‐2019 (COVID‐19) and other restrictions intensified, individuals, businesses and governments turned to mobile digital platforms to reduce the financial costs and mitigate the risk of spreading the virus within the population. Drawing on lessons from Kenya and Uganda, our study examines the drivers of digital financial inclusion as a pathway for financing post‐COVID‐19 recovery. We find that digital financial inclusion is higher in middle‐aged male digital users with more SIM cards registered in their names. Results also show that users who trust mobile money agents were likely to use more digital financial platforms than others. Based on these results, we recommend the need for government to strengthen the National Identification Systems and consumer protection policies to increase trust in digital financial services. Additionally, financial sector players such as mobile network operators and commercial banks need to innovate and roll out customized digital financial products for the marginalized/unbanked population such as women, the elderly and the youth.
Article
Full-text available
Financial development impacts a country’s economic growth and development. Due to this, many nations have sought new ways to bring about financial sector development. For developing economies, innovations in the financial sector are a sure bet for the development of financial inclusion. Mobile money is one of them. However, as the financial sector innovate, the Central Bank may lose control, rendering monetary policy ineffective. Therefore, this study examines one such innovation’s effect on monetary policy effectiveness. Using SVAR and monthly data spanning from January 2012 to December 2018, the study found that monetary policy becomes less effective under mobile money growth. The study further revealed that policy rates respond to mobile money growth in Ghana. In conducting monetary policy in Ghana, the study recommends that the monetary policy authority includes mobile money activity.
Article
Full-text available
Aims: The aim of this study is to determine the best estimator for estimating dynamic panel data model with serially uncorrelated disturbances and exogenous regressors. Methodology: In this study, properties of some Dynamic Panel Data estimators are investigated. These are Ordinary Least Squares (OLS), the Anderson-Hsiao(AH(d), Arellano-Bond Generalized Method of Moment (ABGMM) one-step, Blundell- Bond System (BBS) one-step, M- estimator, MM estimators and proposed estimator, Modified Anderson-Hsiao with Arellano-Bond(MAHAB) estimator in the presence of autocorrelation. Also, this new estimator was proposed by modifying the existing estimators. Results: Monte-Carlo simulations were carried out at varying sample size (n) ranges from 10-200 and time period (T) ranges from 5-20 when autocorrelation ( ) is fixed at 0.3, 0.5 and 0.7. The estimators considered performed well except OLS and BBS for all time periods. Conclusion: AH estimator performed relatively well when the time period is small while ABGMM estimator outperformed all other estimators when sample size (n) is large for all the time periods considered. ABGMM shows the largest improvement as sample size (n) and time periods (T) increase. The MAHAB estimator outperformed all other estimators in small and large sample size irrespective of time period in the presence of autocorrelation.
Article
Full-text available
This paper analyses the development of mobile money in Tanzania and the politics of financial inclusion that enhanced it. Mobile money has played a significant part in reaching the financially unreached and excluded people overtaking banking and other financial services in Tanzania. There is no doubt that mobile money emerged at a time when financial exclusion was a major issue, and that the advent of mobile money was opposed by the banks who thought that it was entering the money business, and that the banks were in a better position to do money business better than any other institutions. For this reason, it is crucial to understand the development of mobile money and the politics of financial inclusion that allowed it to succeed. I have chosen the case study of Tanzania because not only that mobile money has thrived there, but also mobile money as we perceive it today was firstly invented by the e-Fulusi, a Tanzanian company, and failed before it was relaunched in Kenya by MPesa and succeeded. Moreover, the development of mobile money and the politics of financial inclusion have proven their importance in fighting financial exclusion and in increasing access to formal financial services for the poor, which is key to economic growth and poverty alleviation. Link: https://doi.org/10.37467/gka-socialrev.v1.2088 or https://journals.eagora.org/revSOCIAL/article/view/2768
Article
Full-text available
This article highlights why the Bill & Melinda Gates Foundation has focused on financial inclusion to advance women’s economic empowerment and drive progress on gender equality. It highlights key lessons from financial inclusion-related projects the foundation has supported within the “Putting Women and Girls at the Center of Development (WGCD) Grand Challenge” in 2015. The article also shares the logic and research informing the foundation’s strategy to close the gender gap in financial inclusion – a key pillar of its strategy on women’s economic empowerment – and improve the lives and livelihoods of millions of women around the world.
Article
Full-text available
Mobile money is a financial innovation that provides transfers, payments, and other financial services at a low or zero cost to individuals in developing countries where banking and capital markets are deficient and financial inclusion is low. We use transaction costs and institutional theories to explain the growth and impact of mobile money. Having developed a new archival dataset that tracks mobile money deployment across 90 emerging economies during 16 years between 2000 and 2015, we address the question of relative economic impact of the banking and telecoms sectors in the provision of mobile money. We show that telecom groups and not banks are more likely to launch mobile money in countries where legal rights are weaker and credit information less prevalent. However, it is when mobile money is offered via a banking channel that the spillover effects on the economy are greater. Findings have significant implications for policy and strategy.