MOBILE MONEY SERVICE
Introduction
The government of Ghana has been concerned with low savings culture, low financial inclusion as well as high cash-based transactions in the country. In the year 2005, the government decided to pursue policies to grow the financial services industry (FSI) since it was indispensable to the accelerated economic growth required to make the country middle income country. The key service providers include banks, non-bank institutions, and mobile network operators (MNOs). By the close of 2017, 52% of the population would remained excluded from any form of financial services
There is generally high cost of credit in the country as the banks complain of difficulty in mobilizing deposits. Ghana is said to have one of the highest lending rates to the world, placing second in the latest ranking released by Trading Economics, a development which has been identified as a disincentive for the business community. The government budget deficit as a percentage of Domestic Product (GDP) decreased from 8.7% in 2010 to 8.5% in 2016 respectively. In the past, the government relied on external capital markets to fund the budget deficits but, following the worsening deficit figures, international financial organisations have raised concerns about the need for the government to ensure fiscal discipline.
The major development that revolutionized the FSI was the launch of mobile money solution in 2009 by the four MNOs. Mobile money rides on the backbone of the mobile telephony infrastructure of the mobile networks operators. This allows mobile money to be operated from wherever there is network coverage. It is estimated that there is 65% mobile network coverage in Ghana.
The MNOs deliver mobile financial services largely through thousands of registered mobile money agents throughout the country. This effectively makes agents closer to the customers than traditional banks and non-bank financial institutions. Most of the traditional banks’ branch networks are concentrated in the urban centres to the exclusion of peri-urban and rural communities. The combination of these two factors enables mobile money services to be administered quickly and efficiently, and in the most remote areas. The capital requirement for registration as mobile money agent is GH¢4,000 and the daily transaction limit is currently at GH¢5,000. On the average, agents operate one network mobile money, while very few agents have signed up to two or more different mobile money solutions. The total number of agents have increased from about 17,467 in 2013 to 93,376 as at close of 2016, and National Communication Authority (NCA) has projected rapid annual growth for the next three years (2017-2019).
The Environment
Mobile money started in the country largely with two products – airtime purchases and domestic remittances for small amounts. With the passage of time, mobile money service offerings have expanded to include bill payments, Point of Sales (POS) payments, fund transfers in increasingly larger amounts, and deposit collection by banks and non-bank financial institutions. The
expansion of the product offerings from mobile money makes it more appealing to a broad spectrum of mobile subscribers in the country. Customers are, therefore, keeping larger amounts in their wallets than they used to, and are using the expanding offerings from mobile money at the expense of existing products from the banks. There is growing mobile phone penetration rate as increasing number of mobile phone users are subscribing to more than one mobile network.
Furthermore, mobile money has become very popular among middle and lower income earners who make up about 80% of the population. The operation of mobile money on the handset is very easy and convenient and can be done from the comfort of one’s location. All that prospective mobile money customers require are a registered SIM card on the network of choice and a valid national ID. With these they can be set up and ready to use their mobile wallets within minutes. The processes for setting up and using bank accounts are however more complex due to stricter Know Your Customer (KYC) requirement by the Central Bank. Remittances through mobile money is instant at a fee of 1% of amount remitted or received. Mobile money transactions in Ghana reached GH¢679.17 million by the end of June 2016, according to the Bank of Ghana’s Payment Systems Department and it is expected to hit GH¢35 billion by the close of 2017. Until very recently, the income from mobile money was not taxed but the Minister of Finance in his 2017 mid-year review hinted of plans to impose a tax on the fees from mobile money operations.
The mobile money operations face the issue of network instability and system downtime as mobile network operators have not correspondingly expanded their infrastructure to match the growing subscribers. Sometimes, the agents are unable to meet cash demands of the customers due to mismatch in net remittances. This is more pervasive in the rural communities. Due to the weaknesses inherent in the issuance of valid Identity Cards (IDs), there are many fake ID cards and this has resulted in fraudsters having a field day. Some agents and customers have lost sums of money to fraudsters.
The customers and other players in the FSI have expressed concerns about their inability to carry out mobile money services across the various networks. Accordingly, the Central Bank has tasked its Payment Systems Department to ensure interoperability of mobile money across all networks in the country by June 2018. The government believes that mobile interoperability will deepen financial inclusion.
Regulation
Mobile money services it has operated without any regulatory framework. The industry players, according to a recent survey, suggested that the long-term survival of the mobile money service require stringent regulation. The Central Bank has now published guidelines for mobile money operators to be licensed as Dedicated Electronic Money Issuers (DEMI). The provisions include stringent KYC on the agents before registration, monthly returns on the activities of the agents, prosecution of the agents for mobile money fraud, etc. The mobile network operators are required to pay interest at the rate of 6% p.a. on the float on the mobile wallet.
Proposal
The Board of Directors of Excellent Telephone Service Ltd at a recent meeting discussed the possibility of opening a new unit to provide mobile money service to take advantage of the newly regulated industry. The Finance Director has presented a five-year estimates for the new venture as:
For taxation purposes, capital allowances will be available against the taxable profits of the venture, at 25% per annum on a reducing balance basis and in year 5 any balance would be granted as additional capital allowance. The rate of tax on taxable profits is 25% and tax is paid one year in arrears. The capital assets will have a zero-salvage value at the end of 5 years. The after-tax weighted average cost of capital is estimated to be 24% per anum.
Required:
Assess THREE environmental factors faced by Excellence Telephone Service Ltd. (6 marks)
View Solution
Assessment of the macro-environment
The case study under consideration has a number of environmental influences or variables to be considered, including the following: Economic, Legal, and social-cultural factors.
Economic Factors
There are a number of economic factors in Ghana that pose serious threats to business operations and these include:
- High interest rates – the interest rate regime in the country is high, second highest in the World. This means that businesses looking to raise debt capital would have to pay high cost and this can negatively affect businesses relying on debt.
- Growing budget deficit – the increasing budget deficit coupled with the government heavily relying on domestic money and capital markets to make up for shortfall, the government is essentially competing with the private sector for limited credit. This will crowd out the private sector and push up cost of credit and this will deprive businesses of needed capital for investment.
- Concerns raised by international financial organisations about the need for financial discipline. The government need to contain expenditure so as to reduce worsening budget deficit.
Legal
There are some issues that have legal underpinnings and these include the following factors: - Introduction of taxation – the introduction of taxes on the mobile money services will obviously increase the cost of doing business. For the agents to remain profitable as before the introduction of taxes they may be forced to increase the charges on remittances.
- Law to regulate operations of mobile money– With the passage of new law the KYC requirements have been made stringent and this places higher burden on both the agents and operators. This to some extent is likely to limit the number of people who can do agency since if you have prior criminal record you may not be allowed to be an agent.
Socio-cultural Factors
A number of factors can be considered here: - Low Savings culture – there is generally low savings culture among the citizens of the Ghana. This has implication of capital formation and deposit mobilization by the financial sector. This limits amount of credit that will be available to deficit/spending units in the country.
- Financial Inclusion – a sizeable number of the citizens of Ghana remained outside financial services sector. This could be one of the factors accounting for low savings culture in the country.
Technological factors - Inadequate technological infrastructure – the mobile network operators have failed to match the growing subscribers and the attendant demands on the mobile infrastructure resulting in network instability as well as down time. This is impacting mobile money service negatively.
- Innovation – Mobile money started in the country largely with two products – airtime purchases and domestic remittances for small amounts. With the passage of time, mobile money service offerings have expanded to include bill payments, Point of Sales (POS) payments, fund transfers in increasingly larger amounts, and deposit collection by banks and non-bank financial institutions.