Summary

I looked at Ethiopia’s current business climate for mobile payment solutions that is financially inclusive. The current reach of mobile money has left the unbanked population that would’ve greatly benefited from the services, untouched. During the course of the paper, I look at regulatory reforms following 2018’s government change and other regulatory reforms to establish ground for additive services between EthioTel and mobile money incumbents to include unbanked population. Then, I look at the economic viability, market size, and economic considerations of the symbiotic relationship established on the telecom giant’s infrastructure. Finally, I look at how current sociocultural complexes could be navigated and benefit from the solutions suggested. \

Introduction

Saying Ethiopia’s economy is cash-dominated would be an understatement. Only 31% of the population has bank accounts, making financial services in rural areas close to impossible. Borrowing money and other financial services take place through mediocre Micro-Financing Institutions (MFIs) and local savings clubs. (A) Mobile money is making a significant impact in bridging the digital divide between the developed and the developing countries, making millions of poor people use devices to transfer money, pay for goods, and access sophisticated financial services. (Dermish, 2007) The recent regulatory climate of the Abiy revolution facilitates the formation of mobile money services that don’t require bank accounts. In this midst, partnership with EthioTel and incumbents would create great potential. Along with the right endorsement and orientation, it could reach unbanked regions, improve saving, and fuel growth in Ethiopia. 1 Regulatory Environment

Regulatory Environment

Since coming to power mid-2018, Ethiopia’s Prime Minister Abiy has promised to “openup” the economy and loosen its monopoly on state-owned enterprises. (A) Ethiopia’s highly regulated macroeconomic environment includes state ownership of the sole telecommunication provider – EthioTel. The commitment to liberalization started with partial privatization EthioTel and Ethiopian Airlines - Africa’s biggest flagship carrier. (A)

PM Abiy’s move also included an extensive overhaul of the financial sector. To boost noncash payments, the government announced the successful Kenyan mobile payment solution - MPesa would enter Ethiopia. (A) However, government doors were shut before completion of the deal. The sudden move was directed at excluding foreign fintech from reaping the business benefits and potential of the Ethiopian market. Plus, M-Pesa was considered to stifle local innovation. (A) Soon after, The House passed a bill September 2019 authorizing non-financial institutions, including EthioTel, to engage in mobile money services. The liberalization of EthioTel to private investors and newfound ability to participate in financial services allows partnerships with existing mobile money companies to emerge. A symbiotic relationship would morph the widescale network and userbase from EthioTel’s side; with payment infrastructure, institutional bank relationship, and payment agents from MBirr/CBE-Birr’s side. There are multiple advantages of employing existing local firms for mobile money solutions. One is the ability to prioritize unbanked regions, as urban regions are already within their userbase. Second, these firms participate in developing social values of saving and investing. All the while, transaction trend data could be used to inform policy decision making in the future.

Economic Considerations

Ethiopia’s economy has been growing with double digits over the past 10 years and will continue to thrive in 2021-24. (A) It also has high levels of FDI that will incentivize the government forward with similar reformist agendas. However, operational mobile payment platforms have had limited growth. All service providers have no banking license, which allows them to provide the service directly to customers – essential for unbanked citizens. So, platforms have been targeting banked, urban users that saw limited utility. M-Birr, Ethiopia’s first mobile money based on two banks and state microfinancing firms, only has 1.2 million users. Similarly, CBE-Birr (affiliated with Commercial Bank of Ethiopia), Hello Cash ( from Cooperative Bank of Oromia) (A), and Amole (operated by Awash Bank)(A) have had hampered growth. (A)

Amidst all of this, EthioTel has been growing tremendously over the past 7 years, reaching 44% of the population, while smartphone internet penetration lags. EthioTel’s widely available SMS SIM will have a hand in deriving better reach and inclusion of financial services – even without internet access. However, conflicts of interest will arise if Ethio-Tel decides to proceed with mobile payment services on its own – even after partial privatization. Instead, Ethio-Tel’s partnership should provide the SMS infrastructure needed to support M-Birr, CBE-Birr, and others in providing financial inclusion to non-banked. Mobile money has the potential to reach unbanked people with phones, most of whom are under the government safety net. Ethiopia’s Ministry of Finance could see significantly better efficacy from delivering Productive Safety Net Program’s financial assistance through mobile payment - contrary to cash where funds often get embezzled. The bill passed also requires a minimum of 50mill Birr and at least 10 shareholders to apply for a mobile money service license. This hurdle makes entrants more trustworthy, accountable, and sizable enough for healthy competition. Thus, strong capital markets and venture money going into mobile money, which has proven a lucrative investment in other African nations, will be of great benefit. To compete with more prominent incumbents (M-Birr and CBE-Birr), startups should form coalitions and agree with banks. That would strengthen their reach and potential to support transactions backed with assets.

Social and Cultural Considerations

Ethiopians are generally skeptical of innovation. They have a hard time trusting newer institutions, and legacy ones prevail – even with sub-par offerings. A past survey done in rural banked communities indicates that most people would rather walk an average of 3-4 miles for bank locations to find that ATMs are non-functional than use mobile payment methods. Mistrust emanates from thinking mobile money is independent of government control. Thus, endorsement from financial institutions, backing from EthioTel, and advocation from government bodies goes a long way in assuring communities.

Plus, Ethiopian’s are recognized for their short-term-orientation, especially in rural areas. The saying “Worrying doesn’t take away tomorrow’s troubles; it takes away from today’s peace” is usually taken out of context to oppose saving culture. Lack of financial inclusion doesn’t help. The government’s repeated trials to improve saving could benefit from mobile money solutions. Past studies on other African countries with mobile money solutions have shown an improvement in the likelihood of saving by 10.9%. (A)

Finally, entrepreneurship has been growing over the past five years due to increased backing from the government, a high number of STEM graduates, and jobless rates going up. Technological innovation has been on a steep climb, building Addis Ababa’s Sheba Valley. However, a major impediment in the new ecosystem is the lack of payment gateways that support audiences these startups are targeting. Current API’s don’t support the non-banking population, significantly limiting the market size and ability to develop economies of scale. The start of this service wouldspur growth in companies that offer online services, including e-commerce and delivery, fueling growth.