Islamic Finance and Mobile Banking: Could, Would, Should

Originally Published by Huffington Post

Islamic Banking has developed rapidly over the last 30 years. Islamic Banks have proliferated in number and in geographic reach, with services now offered regularly on four continents. A number of innovative, successful financial products have also been developed, enabling Shariah compliant bonds, mortgages and savings accounts. The values of assets held by Islamic Banks are expected to top one trillion by 2010. Perhaps most important, millions of clients now have access to services which serve their financial needs without placing them in a religious dilemma.

While this success should be lauded, it should not lull Islamic Banks into complacency. Rather, the banks should remain vigilant for new opportunities that enable equally vigorous growth over the next 30 years. One key opportunity for Islamic Banks has emerged in the dynamic growth of mobile financial services. Over the last decade mobile financial services have been transformed in offerings and scope, from niche products providing account information to a plethora of applications which enable access to bank accounts, move funds, and allow for the transfer of remittances; all from the security and convenience of mobile phone. The increasing ubiquity of mobile phones, especially in developing nations, has allowed consumers to benefit from the accessibility of the system, enabling some to open and regularly access bank accounts for the first time in their lives. Banks have benefited from the low costs of running the systems and the massive increase in their potential client/depositor pool.

While mobile financial services have been adopted widely, they have yet to be utilized heavily in many traditionally Islamic nations. This lack of use is all the more curious, given that in many of those nations high rates of mobile phone ownership exist side by side with generally minimal access to formal banking. This presents an opportunity for Islamic banks, potentially allowing them to both expand their consumer base and assist the needy in their communities. Three questions should dictate whether Islamic banks adopt mobile financial services: could Islamic Banks utilize mobile financial services, would they benefit those companies, and should, in light of their underlying philosophy, Islamic Banks adopt such services?

Could Islamic banks adopt mobile financial services? Both Islamic banking and mobile financial services share complementary, fee based business models. At an operations level, Islamic banks would have to partner with mobile network operators to provide the service, though this would not be a serious hindrance. Most, if not all, mobile phones sold today are capable of handling the technology for mobile financial services. To avoid engagement in situations involving riba, Islamic banks should investigate the finances and operations of the partnered telecom with care. However, especially when mobile network operators and Islamic banks have had longstanding relationships, this should not be a problem.

The question then is would the adoption of mobile financial service technology benefit Islamic Banks? The cost of providing mobile financial services is radically lower than that of operating traditional ‘brick and mortar’ branch sites. In Karachi, it is estimated a traditional ‘brick and mortar’ branch office costs around $28,000 to run per year. In contrast, the provision of mobile financial services in the same city costs the operator a mere $300 per year. While the adoption of mobile financial services may be a large investment initially, the sharp difference in operating costs enables a banks to quickly recoup their initial investment and soon generate significant, Shariah complaint, profit.

The adoption of mobile financial services will also enable Islamic banks to radically expand their depositor pool. The percentage of banked individuals in major Islamic nations, such as Egypt and Pakistan, is estimated to stand at 10-15%. In contrast, mobile phone ownership is many Islamic nations is extremely high; above 50% in Pakistan, and a staggering 120% in the UAE. The adoption of the full spectrum of mobile financial services by Islamic Banks will enable many of the currently unbaked to enjoy accessible, safe, and Shariah-compliant financial services for the first time. Increased deposits, a good in their own right, will also increase the pool of funds with which the banks can provide Shariah compliant finance to businesses, individuals, and even governments.

Finally, at a philosophic level, should Islamic Banks provide mobile financial services? One of the original focuses of the Islamic banking movement was the promotion of development throughout the Islamic world. While Islamic Banking has succeeded in enabling large project finance, it has had less success in promoting small scale, pro-poor growth. The general lack of access to basic financial services in Islamic majority nations has inhibited economic growth, especially amongst the poorest and most needy members of society. Mobile financial services will allow for Islamic banks to reach and assist those in need in their nations. Those same banks could consider the provision of mobile services to the poor at reduced, or no cost, in order to better help the population.

As Islamic banks adopt and innovate within the mobile financial services model, it is likely Islam specific applications will be developed. Future zakat may be provided to the needy electronically, via mobile technology, enabling continuous, secure provision of assistance to the needy of society. Future calls for assistance on specific projects, or for disaster or war stricken areas could go out electronically; giving would flow back across the same channels.

To their benefit, some Islamic Banks have begun to provide mobile financial services, primarily for those who already hold accounts. However, the banks should expand such services, tailoring the products offered to benefit both banked and previously unbanked members of society. Mobile financial service technology offers Islamic banks an unprecedented option to grow as business and to fulfill their social mandate. It is time they embraced the technology, and brought Islamic banking to a new level.

How m-banking can reduce laundering

Originally Published in Africa Business Daily

The last decade has seen telecommunications companies and banks offer secure, affordable, and simple mobile banking (m-banking).

Internationally, customers have enthusiastically adopted the technology, in many cases enjoying access to financial services for the first time. The various m-banking services, coupled with the ingenuity and energy of newly enfranchised users, have assisted individuals and nations in advancing themselves economically.

Kenya is a prominent example of this success, with six million M-Pesa — the money transfer service offered by Safaricom — accounts activated in the last two years. M-Pesa’s rapid growth will likely continue, with customers choosing its security and accessibility.

Governments, however, have had more difficulty in adapting to the new technology than their constituents. Governments have generally appreciated the economic benefits enabled by mobile banking, and, in some cases, have pushed for adoption.

However, governments have reacted with much less surety in adapting to the perceived security and users safety threats posed by that same technology. High on the list of concerns is the potential for m-banking systems to be exploited by money launderers and other criminals.

Such concern is not without merit. Criminal groups are often at the forefront of technology adoption and exploitation. It would be surprising if some criminals did not attempt to exploit the benefits offered by m-banking systems.

However, in assessing the threat, it is important to focus on the opportunities that m-banking systems offer to government agencies in the anti-money laundering struggle.

In tackling money laundering, officials generally seek to identify persons of concern and to discern patterns in their transactions. Both goals are predicated on the collection and storage of information. M-banking systems, including M-Pesa, already use extensive safeguards to identify users of their network.

In order to send funds, M-Pesa requires the physical device, a PIN, and official identification. The receiver must present at least an SMS confirming receipt and official identification when collecting funds.

It is possible to store and later analyse such information. Thus, records exist, which can be used by the government to identify and track the financial activity of all users.

This can, if properly used, greatly assist law enforcement and regulatory agencies in identifying and tracking nefarious users.

The opportunities M-Pesa, and other m-banking systems, present for information gathering contrast with that of informal value transfer systems, now likely to be replaced. Informal value transfer systems consist of hawala type transferal services, as well as the use of bus drivers to deliver funds to a given town.

While the exact mechanics of these systems differ, their commonality is the informal, trust based nature of the transaction, and the difficulty governments have in gaining information on their operations. Such transfer systems have proved ideal for criminal groups.

Compared to informal value transfer systems, m-banking provides exponentially more information to detect, trace and to deter the operations of criminal and terrorist organisations.

The government of Kenya should embrace mobile banking as an anti-money laundering opportunity, rather than as a money laundering threat.

The security of M-Pesa-like systems, its accessibility and its low costs are likely to draw increasing numbers of subscribers, allowing for better information collection, analysis, and law enforcement.

At the least, the shift of customers from informal value transfer systems into the formal financial sector will lessen the number of informal customers and transactions.

This in turn will allow governments to focus their resources on identifying individuals interested in informal systems only for their secretive nature. In this way, the increase in m-banking popularity may serve to doubly enable government efforts against criminals and money launderers.

Regulatory hurdles will continue, and will provoke intense and meaningful debate. Law enforcement agencies will have to adapt, and create mechanisms to monitor the increasing m-banking traffic for potential signs of criminal acts.

However, it is important to remember that m-banking is a net boon for government anti-money laundering efforts.

The challenge of mobile banking for governments is to design regulatory systems that allow for criminal detection, without squelching attributes that have allowed it to thrive.