Working around roadblocks; money by phone in Africa

By Ken Griffith

I moved to Kenya in 2011 at the invitation of a friend who runs an NGO from Nairobi. He had acquired a farm of historical significance (Juja House) and wanted someone to help manage it. At first I was not interested in moving to Africa. But I read about MPESA, Kenya’’s mobile money system, and was fascinated to see that mobile phone payments were thriving in Kenya and were being run by a non-bank — the telephone companies. This has long been an area of professional interest for me.

MPESA is short for “mobile pesa”. “Pesa” is the root word for money in Swahili, similar to peso in Spanish. It comes from the Latin “pensum” meaning something weighed.

Digital and alternative currencies

I had been involved in the digital currency movement in the late 1990s and early 2000s. In that industry we recognized even then that as soon as the phones became powerful enough to process cryptography needed to secure transactions  we would see money on the phones. Strangely, it first happened in Kenya.

Why? The banking establishment in the first world is so entrenched that real time gross settlement transaction systems have nearly all been crushed by the banking cartel using the levers of government. (Think about e-gold, e-bullion, Bernard van Nothaus and Liberty Reserve, if you doubt this.)

The banks have a vested interest in delaying money’’s movement so they can play games with the float. Real-time transactions that increase money’’s velocity undermine their system, so they have used their pull with the government, i.e., the U.S. Treasury Department, to crush such initiatives unless, like PayPal, they are merely a layer built over the top of the banking system.

In the early 2000’s I worked at e-Bullion.com and there learned that a real-time gross settlement transaction system can make the same kind of returns on the monetary base that a regular bank makes on float, but with one difference: It can be done with 100 percent reserve, eliminating the risk of fractional reserve banking.

E-bullion and e-gold both had transaction systems with real-time gross settlement. In both of these companies the turnover was about 80-100 times per year. This generated more revenue in transaction fees than a bank could generate from lending at interest. Sadly, the U.S. Treasury Department destroyed both companies via the USAPATRIOT Act, and several more in the same vein.

Real-time gross settlement allows a much larger economy to exist on the same monetary base. Under the legacy banking system, each merchant transaction takes a minimum of 24 hours to clear. But imagine if the merchant could be paid, and then turn around and place an order for replacement inventory immediately. This would multiply the rate of transactions in the economy and therefore multiply the GDP of a country without increasing the money supply at all. It would produce business growth with zero inflation.

Juja House.

Money innovation starts at the margin

In that field we recognized more than a decade ago that as soon as we could get real-time gross settlement payments on phones we would see a monetary revolution.

Therefore, when I read about MPESA in Kenya I was amazed that it happened in Africa. I was amazed that it happened in a third-world country, and of all the possible third-world countries, it happened in what is reputed to be one of the most corrupt countries in the world — Kenya.

But then I realized, of course, it makes sense. This type of innovation must begin at the edges of the developed world, because the control systems at the center are deliberately preventing it.

After realizing this, I accepted my friend’’s invitation, sold everything I owned, and moved from Virginia to Kenya. Within a week of landing here, I moved to his farm about one hour outside of Nairobi in the Kikuyu hinterlands. The fact that the estate was a mansion in which Teddy Roosevelt and the Prince of Norway had stayed made it a little bit easier.

But it was 1920 luxury, not what I was accustomed to living on a farm in Virginia. You know, little things like showers instead of bathtub make a big difference. To take a hot bath I had to build a fire in the water heater outside, let it heat up for 30 minutes, and only then could I run a hot bath!  Did I mention the bathwater was muddy brown water from the River Ruiru?  Yes, it took some getting used to.

I took up beekeeping, with African killer bees!  I only got stung once.

Rural, friendly

Kenyans are young and friendly.

I moved to Kenya from Virginia in July, and was shocked to find myself freezing to death at the equator because I did not bring enough warm clothes. Kenya is the African version of the South American altiplano. Nairobi is 7,000 feet above sea level. A few weeks ago I got up at 5 a.m. and discovered it was 38F degrees outside.

Moving to rural Kenya was a total immersion culture shock. I was the only “mzungu” (white person) living within about 25 km. The fact that Kenya’’s official language is English made it much easier for me to adapt. Even so, it was difficult for the first year to understand people, especially on the telephone.

After I had been at Juja House for about six months I was befriended by the local expert on organic farming. He invited me to his house on the Athi River Plain, which was about three kilometers away from mine. We walked to his house, which was a one-room shack, with a barn nearby, and his lovely wife, who was dressed to the nines, prepared supper for us.

After dinner, as we were looking at the stars, my host opined, “We really love those excellent singers, Michael W. Smith, and especially that wonderful Christian lady, Dolly Parton. Have you ever met them?”

Ironically, Lamu (see the Michael W. Smith song of that name) is in Kenya. Yes, country, gospel and bluegrass music is very popular in Africa. Why? Because Africans are urbanizing, and once they move to the city they feel the same nostalgia for the family farm that Americans did in the 1940’s.

Life at the base of the pyramid

Living in a poor rural area gave me a perspective on the life and challenges of the people in the so-called “base of the pyramid” of Kenya. These are the huddled masses who live on about $60/month. Well no, they are not huddled. They are individuals like you and me who work very hard to make a living and get their children a better education than they received themselves. They do not have running water or electricity. They fetch their water from the river every day. Many of them farm vegetables.

The vegetables here are heavenly because they are not Monsanto-bred, low-sugar tomatoes with three-month shelf life. Supermarket veggies in Kenya on average are two days out of the field. The tomatoes are so sweet! Bananas are fresh. The coffee and tea are also out of this world, and pretty cheap!

Despite poverty, nearly all Kenyans, even the poorest, have mobile phones, and they dress with dignity and self-respect even in the poorest slums. I often feel under-dressed around Kenyans, even the poorest ones.

The combination of mobile phones with MPESA has transformed Kenya over the past seven years. The phone makes it possible for people in rural areas to coordinate meetings, deliveries, call for help, and receive remittances from their relatives working in the big cities and in the Kenyan diaspora worldwide. For a better understanding of how signicant MPESA has been to Kenya’’s economy, I recommend the book “Money Real Quick” by Tonny Omwansa.

The Chama, Kenya’s solution to dysfunctional financial system

After spending a year in Kenya watching for opportunities, my soon-to-be business partners and I identified a particular problem: Kenyans at the base of the pyramid have great difficulty saving capital.

The primary reasons are (1) a high-inflation rate (5-25 percent, averaging 11 percent yearly), and (2) the poor live on extremely tight margins with irregular income. There are no accessible non-depreciating assets that can be purchased in small amounts. (Think tiny gold or silver coins.)

MPESA gave the poor a “banking system” of sorts, although it pays no interest and charges high transaction fees (as high as 30 percent for the smallest transactions). Still, for poor Kenyans who want to save there is no real solution. Even the Kenyan upper class who have bank accounts cannot get a savings account that pays interest above the rate of inflation.

Chamas

Kenyans have a unique solution to this problem: a culture of cooperative savings groups. They call this “chama” which means “body.” They form a small club of 10-20 people that meet regularly (weekly or monthly) to contribute their savings to the chama. There are several types of chamas, ranging from the simplest “merry go round” to chamas that pool their money and lend it to members at 20 percent interest. Did I say 20 percent? I meant 20 percent per month.

More advanced chamas buy and operate businesses such as a kiosk or taxi. Others buy and develop real estate, and still others invest in agriculture. Chamas are responsible for 42 percent of Kenya’’s GDP. There are 300,000 registered chamas that collectively save $4 billion per year. There are estimated to be three times as many ““unregistered”” chamas in the ““grey market”” but there are no reliable statistics on those.

Chamas grew out of a legal structure brought here by the British –– the Cooperative Societies. The British passed the Cooperative Societies Act when Kenya was still a colony. After independence, native Kenyans adopted this platform with gusto.

Consequently, cooperative societies are both regulated and protected under Kenya law. [See some of my work on using a cooperative society in Chattanooga to amass capital from small investors for local companies. — DJT]

Despite the success of the chama in East African culture, there are also endemic problems — mismanagement of funds by the officers, mal-investment, and for the poor, usury.

Even better, the gold Chama: Chama Dhahabu

In Kenya electronic money by phone is the routine.

Recognizing a potential solution to this problem, I contacted my friend Ian Grigg in Australia, who had developed a software suite called Ricardo, a payments and accounting system that manages financial instruments. I asked him if he thought it possible to port his software to the Android phone and to use it in Africa. He came to visit Kenya last October for a week, along with another friend of mine from the USA who provided the seed money, and we formed a venture which we have branded “ChamaPesa,” Swahili for““group money.”

Over the last eight months we have been developing the ChamaPesa app to manage and do accounting for chamas on a phone or Android tablet. But we also needed a financial instrument to offer to the chamas as an alternative to lending their most vulnerable members money at usurious rates. So we started a pilot chama and opened a gold account with www.gold.ae in Dubai. (One of us traveled to Dubai in person to check them out first.)

We now have one chama whose members are saving into their own gold accounts and we will soon add the ability to fund and liquidate their accounts directly from MPESA. Our plan is to allow existing chamas to join our gold chama and make our gold savings accounts available to their members.

Gold is already a part of Kenya’’s wedding culture, and by enabling Kenyans to save in quantities as small as one dollar through their chama, we are providing them with a reliable means to accumulate capital and get ahead of their future needs for cash.

We started this gold chama in April 2013, just as the gold price crashed. However, our members did not notice at all, because the Kenya shilling was weakening at the same time, so the gold price in Kenya shillings barely changed. [Current exchange rate is about 88 Kenyan shillings to one U.S. dollar. – FS]

For the past ten years, gold has averaged 36 percent gain per year against the Kenya shilling. If you think inflation in America is a problem, try Africa, my friends, but this also means we have an excellent opportunity. Africa is full of opportunities to replicate businesses that have worked in America, but have zero competition here. You just can’’t believe the level of opportunity that exists here.

Under the Moi Regime (1978-2002) gold was illegal in Kenya. However, the Somali community in Kenya (about 4 percent of the population) has always used gold regardless of what the government has to say about it. The Somali women in Eastleigh (Nairobi’’s Somali-town) put all their savings into 21K gold jewelry. Gold has always been and always will be an integral part of Kenyan culture, and especially, Kenya’’s wedding culture.

When the Kibaki Regime won the election in 2002, it legalized gold so that it is now considered a currency and regulated as foreign exchange, and VAT-free, but surprisingly, there are no official sector gold traders in Kenya.

The gold market in this country was pushed into the black market by the Moi Regime and never bothered to come out again even after it was legalized. Thus we see an opportunity to provide a high quality gold savings system for Kenya with good internal governance and keeping most of the gold outside of Kenya. [By “good internal governance” Ken means a wholly transparent chain of custody to ensure that the gold storage company actually maintains the gold it claims to have. — FS]

Our ChamaPesa platform supports multiple financial instruments (see chamapesa.com), so we anticipate eventually making other investment options available to Kenyans through unit trusts in real estate, the stock market, and agriculture.

The Silicon Savannah

MPESA has provided a payment system for Kenyans, and now there are lots of websites, businesses and mobile apps being created like ours that take advantage of MPESA to enable e-commerce.

Nairobi has earned the moniker “Silicon Savannah” because of the Silicon-Valley-like startup culture that is rapidly developing here. You might say that our venture was hatched in the iHub, www.ihub.co.ke, an accelerator started by an African-born American named Erik Hersman, the son of two Wycliffe Bible Translators in Sudan.

An accelerator, in the parlance of venture capitalists (VC), is a program or school for new companies. VC funds start accelerator programs as a way of vetting potential investments. The accelerator program provides training, office space and sometimes money for start-up companies and  entrepreneurs  who think they have a great idea and a market. In America the San Francisco Bay Area, Northern Virginia, and Boston are the three areas with the greatest concentration of start-up companies and the accelerators that cultivate them.

Many children, corruption, pockets of freedom — recipe for success

Part of the reason for the sudden influx of venture capital into Africa is that, shockingly, Africans are still having babies. The demographic curve here is pyramid shaped, and this has led to double-digit economic growth across the continent.

Given the perpetual  government incompetence on this continent, this is particularly amazing. However, the mobile phones and mobile payment technology are allowing diligent and enterprising Africans to bypass their corrupt and inefficient governments.

All these factors are combining to produce tremendous growth and opportunity here even while the economies of the West have stagnated and suffocated from the welfare state central planning. Incidentally, this fulfills the predictions made by James Davidson and Lord Rees Mogg in their 1996 book, The Sovereign Individual, which I still highly recommend.

While governments in Africa are at least as incompetent as governments in the West, if not doubly so, the great advantage of African culture is that everything is negotiable.

Secondly, the governments are so corrupt that the department heads are too busy siphoning off all the money from their department to pay their staff. Consequently the cops are broke. They don’’t even have working police cars. So, yes, Kenya, like the rest of Africa, is a “thugocracy,” but at least it is somewhat open about the dishonesty, unlike America, which has the same problem, but wraps it behind a veil of morality and patriotism.

In America, you have to count the cost of legal liability in any business. In Kenya you replace liability costs with corruption costs, and you may find that it is still significantly cheaper than America.

The Central Bank of Kenya allowed Safaricom (the main telephone company) to start MPESA and gave them the latitude to try it and see if it would work. Financial regulators in America would never allow Verizon Wireless to do that. In the end, Kenya may be corrupt, but there are pockets of decency that allow interesting things to happen here. It is a lot like I imagine the Wild West used to be in the 1870’s. I confess, I love it.

African Startup Scene

For a visual on the explosion of Africa’’s start-up culture, look at this map of all the active ventures on vc4africa.biz.

If you zoom in a little you will see that Nairobi has the highest density of start-ups for the entire continent.

This week I had lunch with Pauline Vaughn, who was the head of the MPESA program at Safaricom during the first five years. She is now a director at M-kopa, a company that provides solar paneled lights to rural Africans on a payment plan.

The solar panel has a built in SIM card and credit system so the purchaser can buy credits with MPESA to keep it working. It takes one year for them to pay off the unit (which is built to last six to eight years).

M-kopa has been in business for two years and has sold 20,000 units already. This is the kind of transformational innovation that MPESA has made possible. It is giving the rural poor access to light at night, which enables them to read at night (remember we have 12-hour nights here, year round). It is Thomas Edison for Africa.

Poverty vs Gigantic Potential

Back to our venture, ChamaPesa. Now that we have gotten working software on the phones and a small base of paying customers who have proven our concept works, our venture is participating in acceleration programs sponsored by Village Capital and Venture Capital for Africa. We are currently open to discussions with accredited investors.

Many fortunes will be made in Africa in the next 40 years. This is the last continent with a positive demographic curve. Can you imagine the opportunity? There is a an entire continent where half the people do not yet have electricity or running water, but they are willing to work very hard to enable a better life for their children.

It reminds me of my grandfather’’s era in the 1950s in the coalfields of Virginia. Everyone in Kenya knows how to work really hard. The majority of Kenyans are under 24 years old.

They all want housing and transportation and furniture and food for their young families. What is the potential for sales and business development here? It is amazing.

Moving to Kenya was the best decision I ever made. I wish I had done it 20 years earlier.