M-PESA and the Appeal of Hawala

While not perfect, the Kenyan P2P service can serve as a model for allocating public and private resources worldwide.

Text Reva-Ifeoma Ochuba
illustrations DALL-E
Published 09 Dec 2022

Financial access can represent the difference between simply having money and having an economy which can sustain an entire society. But history reveals that access isn’t necessarily immune to restriction and elite capture. The agoras of Ancient Greece were not just sites of literal monetary exchange, but destinations where art, culture, and philosophy could be accessed and from which new societies could flourish. This meant, however, that agoras also needed to be centralized, which set a precedent for the nature of financial exchange to come: that participation in the local economy would be contingent upon a single location.

It’s not hard to trace a throughline between agoras, which introduced the belief that financial exchange works best under centralized conditions, and traditional banking. More than a thousand years before blockchain technology, history had its nascent DeFi advocates who disagreed with this very premise. During the 8th century AD, Islamic communities circumvented the descendants of Ancient Greece’s formalized banks through the practice of Hawala, a model for money transfer facilitated by a network of brokers in different cities. The recordless transactions relied entirely on thorough “trust” between the receiving and lending brokers to be successful. In other words, Hawala was informal, peer-to-peer (P2P) banking at work.

The appeal of Hawala has endured up to the present because it provides an easier and more open means of financial access. Not surprisingly, it also poses a threat to the legitimacy of major financial establishments, which is why Hawala is banned in the United States, India, Pakistan, and numerous other countries on the grounds of preventing money laundering and funding terrorism (not unlike the standard arguments made against Bitcoin). But where, if at all, is it permitted? The DeFi movement would benefit from understanding the P2P service known as M-PESA, the predominant means for financial exchange in Kenya since 2007—predating Satoshi Nakamoto’s creation of the bitcoin network. 96% of all Kenyan households rely on this service for their daily financial needs.

M-PESA—M is for mobile, and pesa is Swahili for money—is a technology that allows any citizen with a cell phone and a SIM card to access its virtual banking service. Owning a smartphone isn’t required; any cell phone will do the trick. To register with the service as well as complete deposits and withdrawals, citizens can visit any of the 160,000-plus M-PESA outlets distributed across the country. Anyone can become an official agent with their own outlet location by meeting a few basic resource requirements, such as having an internet connection, a printer, and an email address. Before M-PESA, Kenyans were dependent on a series of defective financial services. The protocol has overcome nationwide financial insecurity and formal remittance practices that are too difficult or expensive, easing the difficulty of monetary exchange while increasing possibilities for Kenyan citizens to achieve economic prosperity. M-PESA is built with the specific needs of Kenyan citizens in mind, namely agrarian communities who don’t live near formal banks.

In a typical hawala transaction, money is deposited with one broker who then contacts another with the instruction to release the sum to the intended recipient, who is verified by a unique passcode. The system relies entirely on trust between the two brokers, who settle their accounts periodically.

And yet, despite being an essential public good, M-PESA embodies stark tensions within its peculiar ownership structure. M-PESA is a project of Safaricom, the largest telecommunications company in Kenya, and a subsidiary of the mega communications corporation Vodacom, which is based in the United Kingdom. As a semi-corporate entity that’s owned by a multinational as well as the state-operated Central Bank of Kenya, M-PESA is prone to conflicting profit motives between the citizenry and the market. While it’s far from a perfect product, perhaps it could be a successful model for the allocation of public and private resources worldwide. Then again, its P2P functionality isn’t entirely authentic because it remains under the domain of multinational ownership. Vodacom, which retains majority shareholding power, can theoretically enforce restrictions at will for the sake of driving up profit margins, such as increasing transaction fees and shutting down outlets in less populous areas. These contradictions indicate that M-PESA’s potential both within and beyond Kenya boils down to the question of decentralization. Will its future more closely resemble Hawala or the agora?

When cryptocurrency first gained traction in Africa almost a decade ago, M-PESA reacted with hostility towards the emergent technology, which might seem curious given the key similarities between the two. Both technologies are workarounds to the drawbacks of traditional banking practices, and both increase their legitimacy in terms of how distributed they are—that is, the more Kenyans who open M-PESA outlets making the service easier to access; and the more nodes that participate in validating and securing the blockchain. The simultaneous lack of crypto regulations and lack of mainstream familiarity in crypto possibly contributed to M-PESA’s resistance, though its attitude has clearly changed, as it now permits crypto trades via certain third-party exchanges. A closer look, however, reveals that early blockchain applications in Kenya excelled in areas where M-PESA otherwise proved deficient.

In 2013, Danish technologist Pelle Braendgaard moved to Kenya to build Kipochi, a digital wallet and exchange which made it easy to convert Kenyan shillings stored on M-PESA into Bitcoin. Unlike M-PESA, Kipochi enabled users to send money to destinations both within and outside of Kenya thanks to the borderless nature of Bitcoin; plus it didn’t impose stringent transaction limitations (M-PESA prohibits daily transactions over 300,000 Kenyan shillings, or roughly $3,000 in USD). In order to interface with M-PESA accounts, Kipochi relied on the business-to-consumer payment processor Kopo Kopo. Appearing to sense a competitive threat, Safaricom leveraged its influence by pressuring Kopo Kopo to cut ties with Kipochi and effectively render the crypto exchange obsolete. A similar chain of events befell BitPesa, which also launched in 2013. In order to convert remittances into Bitcoin, BitPesa relied on the mobile payment platform Lipisha to function as an intermediary with M-PESA accounts. It wasn’t long before Safaricom kicked Lipisha off M-PESA completely, a move that was upheld by the Kenyan High Court. While the service has since found success in Ghana and Nigeria, BitPesa remains banned in Kenya.

Given the sweeping extent of M-PESA’s user base throughout Kenya, there’s a unique opportunity to scale cooperative ownership at the level of the entire country and quite possibly with minimal friction.

By 2021, M-PESA had established partnerships with numerous major crypto exchanges including Binance, Localbits, and Paxful. The about-face suggested that Safaricom no longer saw crypto applications as competition, where less than a decade ago the company might’ve been under the impression that Kenyans would be compelled to treat Kipochi and BitPesa as essential utilities for carrying out everyday transactions. As crypto’s volatility became more apparent, that likely quelled Safaricom’s hostile stance because crypto’s instability prevents it from ever taking the place of the Kenyan shilling. Though consumers still use BTC and ETH for international transactions, many regard them as investment opportunities for storing their savings rather than practical currencies anyways.

The addition of major exchange partnerships concedes to the ascendancy of crypto within the world of mainstream finance. But of course, more is possible with digital currency beyond providing Kenyans a new option for investment. There might even be a chance to rectify the tensions within M-PESA’s ownership model and help to turn the service into a genuine public good. Earlier this year, the Central Bank of Kenya released a discussion paper outlining its interest in developing a central bank digital currency (CBDC) and asked the public to share feedback on the matter. “Given the dominance of M-Pesa in the country, I think the key question is: What can a CBDC do that M-Pesa cannot?” one scholar told Quartz. Though this digital currency would technically be centralized because it comes directly from the Central Bank, it could potentially help to decentralize and democratize ownership of M-PESA and further materialize financial inclusion across the country.

One approach is officializing public ownership in the form of tokenized shares. Scholar Nathan Schneider has written extensively about this sort of exit strategy in the context of the startup sector: For founders who value their workers and users, instead of exiting to the market or exiting through an acquisition, Schneider proposes an exit to community (E2C). The tokenization option for a startup pursuing an E2C involves issuing unique digital tokens to its users in order to represent ownership stake in the startup. A certain amount of token supply can also be available to purchase and trade on decentralized exchanges, thus permitting the tokens to gain a specific market value. When the tokens achieve a high enough value, the founder liquidates their own share of tokens in order to complete the exit. Along these lines, the Central Bank of Kenya could peg its digital currency to the market while allocating equal shares of the currency among M-PESA’s base of users; eventually the bank could liquidate its portion to buy out Vodacom so the state fully inherits the service. Under this new framework, Kenyan consumers can vote on upgrades and policies which impact their day-to-day user experiences, and just like in Alaska, where the oil industry is wholly state-owned, any profit from M-PESA can be shared among members of the public in the form of annual dividends.

As one of the most prevalent mobile money services in the world, M-PESA has demonstrated how technological innovation can succeed in swiftly uplifting an economy otherwise neglected by the traditional financial establishment. While it rendered money more accessible for Kenyans than ever before, accessibility shouldn’t be the endpoint. Shared ownership of public goods is a growing trend in cities around the world. Given the sweeping extent of M-PESA’s user base throughout Kenya, there’s a unique opportunity to scale cooperative ownership at the level of the entire country and quite possibly with minimal friction. In this sense, M-PESA’s future might occupy both Hawala and the agora, where it is at once comprehensively distributed and socially vivacious.

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