The regulation of mobile money in Malawi. (Introduction through III. Enabling Approach A. Coordination Among Regulators and Between Regulators and Industry, p. 435-464)

• Published date: 22 September 2015
• Author: Buckley, Ross,Greenacre, Jonathan,Malady, Louise
• Date: 22 September 2015

TABLE OF CONTENTS
                INTRODUCTION
                I. MOBILE MONEY--A NEW FRONTIER OF FINANCIAL SERVICES
                 A. The Promise of Mobile Money: Tackling Financial
                 Exclusion
                 B. The Regulatory Challenge: An Enabling Approach and
                 Proportionate Regulation
                 1. An Enabling Approach
                 2. Proportionate Regulation
                 C. Malawi: Implementing an Enabling Approach and
                 Proportionate Regulation
                II. BACKGROUND ON MALAWI
                 A. Telecommunication Infrastructure & Mobile Phone
                 Penetration
                 B. Mobile Money Providers in Malawi
                 C. Challenges to Growth
                 D. Regulators Involved in Mobile Money
                 E. Regulatory Coordination
                 F. Strategic Development for Mobile Money
                 G. Main Regulatory Framework for Mobile Money
                 H. Additional Regulations Pertaining to Mobile Money
                III. ENABLING APPROACH
                 A. Coordination among Regulators and between Regulators
                 and Industry
                 1. Best Practice
                 2. In Practice
                 3. Analysis
                 B. Regulatory Mandates
                 1. Best Practice
                 2. In Practice
                 3. Analysis
                 C. Understanding and Building Consumer Demand for Mobile
                 Money
                 1. Best Practice
                 2. In Practice
                 3. Analysis
                IV. PROPORTIONATE REGULATION
                 A. Regulatory Arrangements for the Use of Agents
                 1. Best Practice
                 2. In Practice
                 3. Analysis
                 B. Applying a Risk-Based Approach to Implementing
                 AML/CFT Measures
                 1. Best Practice
                 2. In Practice
                 3. Analysis
                 C. Protection of Customers ' Funds
                 1. Best Practice
                 2. In Practice
                 3. Analysis
                 a. Method 1: Fund Isolation
                 b. Method 2: Fund Safeguarding
                 c. Method 3: Reduce Operational Risk through an
                 'Active Regulator'
                 D. Regulatory Implications of Partnerships Between MNOs
                 and Banks/MFIs
                 1. Best Practice
                 2. In Practice
                 3. Analysis
                V. CONCLUSION
                VI. APPENDIX: LIST OF ACRONYMS
                

INTRODUCTION

Mobile money describes the use of mobile phones to pay bills, remit funds, deposit cash, and make withdrawals using e-money issued by banks and non-bank providers such as telecommunication companies. This service currently exists in over 80 developing countries and is growing rapidly, particularly in Africa. It is enabling many people without access to financial services--known as the unbanked--to access an increasing range of financial services, from payments, to savings and loans.

Mobile money enables customers to use e-money, which is issued by an 'e-money issuer'--usually a telecommunication company but sometimes a bank. While precise terminology tends to vary across countries and literature, e-money is typically defined as a type of stored value instrument or product that: (i) is issued on receipt of funds; (ii) consists of electronically recorded value stored on a device such as a server, card, or mobile phone; (iii) may be accepted as a means of payment by parties other than the issuer; and (iv) is convertible back into cash. (1) The concepts of stored value and convertibility distinguish e-money from credit cards, retail gift cards, airtime, and other payment instruments that are not readily convertible. Customers can make payments and transfers by sending short message service (SMS) mobile notifications to each other. E-money accounts are credited when e-money is received from others and debited when payments are made. Customers convert their cash for e-money at cash merchants, which tend to be retail outlets such as shops and petrol stations. These customers can then use this e-money to make payments to each other and can later convert any remaining balance on their e-money account for cash. (2)

Mobile money was launched in Kenya in 2007, and has grown very rapidly throughout many developing countries, particularly in Africa. Between 2007 and 2013, mobile money grew from nothing to a thriving sector with 219 live mobile money services with 61 million active accounts in 84 countries. (3) In the month of June 2013, mobile money customers performed 431 million transactions totalling $7.4 billion. (4) There are more registered mobile money accounts than bank accounts in nine countries and there are now 886,000 registered agents. (5)

Mobile money creates novel regulatory challenges because it enables a variety of non-banks to perform functions traditionally provided by banks. In particular, mobile network operators (MNOs) are increasingly providing payment services with little direct involvement of banks. Retail outlets such as shops and petrol stations arc serving as 'cash merchants' that enable customers to convert their cash for e-money and vice versa, a conversion function traditionally provided by bank branches or automatic teller machines (ATMs). Prudential regulation is generally designed for traditional banking institutions and therefore cannot be easily applied to these non-banking service providers because they do not intermediate deposits. This raises the question of how mobile money service providers should be regulated.

Regulatory frameworks need to respond to mobile money in two particular ways. First, regulators need to take an 'enabling approach', which involves a variety of activities that aim to help mobile money to grow safely. For example, in designing mobile money-related policy and regulation, a regulator should work closely with government departments (particularly those that relate to finance and development), regulators from other sectors (particularly telecommunications), and the mobile money sector.

Second, regulators need to adopt a 'proportionate approach' when designing regulation. This means the costs of regulation to the regulator, market participants, and consumers should be proportionate to the benefits and risks of mobile money. A proportionate approach aims to guard against overly burdensome regulation that may stifle the development of this sector.

This Article explores the challenges of translating an enabling proportionate regulatory approach into actual regulatory practices and substantive rules, using Malawi as a case study. In doing so, the Article aims to enrich our understanding of how we can design effective regulatory frameworks for mobile money.

The Article is in five parts. Part I introduces mobile money and the research surrounding the enabling approach and proportionate regulation. Part II of this Article provides background on mobile money in Malawi. From there the article examines the practical challenges Malawi has faced in using an enabling approach and implementing proportionate regulation. Part III examines Malawi's efforts at using an enabling approach, focusing on co-ordination among regulators and between regulators and industry, regulatory mandates, and understanding and building consumer demand for mobile money. Part IV explores Malawi's efforts to (i) implement proportionate regulation in relation to the use of agents, (ii) apply a risk-based approach to implementing anti-money laundering/countering the financing of terrorism (AML/CFT), (iii) protect customers' funds, and (iv) regulate partnerships between MNOs and banks. Part V concludes by explaining how Malawi's experiences enrich our understanding of how regulators can use best practice approaches such as an enabling approach and proportionate regulation to design effective regulatory frameworks for mobile money.

I. MOBILE MONEY--A NEW FRONTIER OF FINANCIAL SERVICES

A. The Promise of Mobile Money: Tackling Financial Exclusion

Mobile money is an important tool for poverty reduction because it offers a means of addressing the impasse that exists between banks and poor households. Many banks do not find it economically attractive to make banking infrastructure and financial services available in poor communities. (6) This is because high transaction costs relative to small transaction value sizes make it unprofitable for banks to service this population. (7) Similarly, poor people can be reluctant to access formal financial services due to the inconvenience and high cost involved in accessing these services relative to the more local and informal alternatives they have traditionally used, as well as issues of mistrust of formal banking institutions. (8)

For this reason, around 2.5 billion adults are currently excluded from the formal financial system and are subject to 'financial exclusion.' (9) This group tends to be described as the 'unbanked.' (10)

Providing the unbanked with access to financial services, known as 'financial inclusion', is now recognised as an important mechanism for alleviating poverty and promoting a country's broader economic development. (11) Financial inclusion aims to provide the unbanked, and low-income households and business more generally, with a range of financial services that they can use to smooth their consumption and insure themselves against 'economic shocks', such as illness, accidents, theft, and unemployment. An economic shock can be severely detrimental to the unbanked's already precarious financial position, making it more difficult for them to move out of poverty. In many developing countries, economic shocks can take a wide variety of forms beyond traditional financial or economic crises; they can also be health-related emergencies, crop failures, livestock deaths, and farming-equipment expenses. (12) Financial inclusion also aims to assist the unbanked and low-income groups to save and borrow which in turn can enable them to invest in education and asset-generating activities, such as enterprises. (13)

Proponents of...