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M-PESA in Europe?

Learning From “Silicon Savannah“

Nils Bruckhuisen*

From the point of view of a continental European lawyer, raised within a systematically codified legal framework, perhaps the most obvious question would be: is a mobile payment system like M-PESA able to perform only in a common law environment? Is the common law approach maybe more adaptable to new technological trends, that were not foreseen by regulators? Is an emerging market more eager to cater for the needs of the people? The success story M-PESA has written might indicate that answering all questions with a ‘yes’ should not prove to be entirely wrong. 

___STEADY_PAYWALL___Flexibility as a concept inherent to administrative law has quite recently been recognized again by the UK Surpreme court in the case of R (Sandiford) v. Foreign Secretary[1]. In the judgement it was held that legislative intent is the basis for the flexibility rule. Whenever the legislative branch provides discretionary power, it implicitly wants said power to be implemented in different ways when meeting different circumstances. Exerting a rigid policy would hence violate that intention. It had been established since British Oxygen v. Minister of Technology.[2] Many common law jurisdictions followed suit in the application of that principle.

The German concept of statutory reservation is hard to translate into English, the language of common law. Basically it provides (among some other implications that are not relevant to the scope of this article) for the requirement to have a formal law passed by legislation to enable the creation, restriction, limitation or even abolishment of individual legal rights. Flexible laws have to be abstract but at the same time clear in meaning. Altogether, aligning technology and law is a hard task for legislators and means a hurdle race for innovators.

From the point of view of a fully industrialized European Union economy, perhaps the most obvious question would be: is a mobile payment system like M-PESA able to take such deep root within the socioeconomic fabric of society as it has in Kenya?

As has been outlined in detail by Jennifer Gitiri  and Geoffrey Muchoki, M-PESA was developed and brought to success within the ecosystem of Nairobi. This is basically considered the business and financial hub of Eastern Africa. Having surpassed Berlin by population quite recently, the city hosts many regional and international banking, insurance and telecommunications companies. Safaricom, the company behind M-PESA, has around 50,000 employees in the city, which has an estimated 500,000 students enrolled in twelve different universities. Dozens of ‘iHubs[3] cater for a growing number of start-ups and fintechs. Several incubators[4] are to be found there. An estimated 180,000 jobs have been created within the Kenyan IT sector. Thus, it is overall a very conductive environment for M-PESA to come to light. This is where the term Silicon Savannah was coined.

Mostly in Nairobi, but in other big cities in Kenya as well, many dynamics of lawgiving regulation, industrialisation and urbanisation, that have taken decades to centuries in Western or European societies, are rapidly unfolding simultaneously. At the same time, rapid digitalisation is turning many aspects of life upside down. Kenyans have developed apps providing farmers with intelligence on when to fertilise or to harvest and patients on when to take medicine at which dose. Kenyans are said to have developed more apps than other African countries, although these may have a two or three times bigger population.

Why is it so hard to innovate in Germany? Because the legal framework creates more fear than optimism in creating new things. In order to reinforce the regulatory design, the German jurisdiction sides the framework with sanctions set in place for violations of said regulatory framework. The weight attached to a regulatory system can be reflected by the severity of the sanction related to it being breached. Within Sec. 54 of the German Banking Act (Kreditwesengesetz, KWG) a prison sentence of up to five years is set out for anyone conducting unlicensed banking. The licensing is regulated in Sec. 32 KWG. The application alone requires some 14 different specifications to be submitted. Even assuming the M-PESA system would not require such a banking license, it would very likely fall under Sec. 10 Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG). It also stipulates that a permission is mandatory. In order to obtain this permission, an application containing 17 different specifications has to be submitted.

As Jennifer Gitiri has outlined, M-PESA operates under a special license by the Central Bank of Kenya. Under German law, such special permission would be highly problematic, especially due to the fact that Germany has implemented European law. Going one’s own way, i.e. not applying given laws would not only possibly violate German law, but also European regulations, i.e. the European Commission would possibly inquire as to how far this may constitute a violation of the European legal framework.

On the other hand, having in mind the free movement of capital within the EU a payment service could in almost no thinkable scenario be confined to national borders. Therefore the size of the market to be conquered is quite huge, which causes further implementation hurdles.

Obviously, the rate of underbanked consumers within the EU is marginal, since the EU parliament enacted the Directive 2014/92/EU in 2014. Every EU citizen has guaranteed access to a personal bank account through this legislation.

As Geoffrey Muchoki has outlined, by now the majority of the Kenya’s GDP is channeled through M-PESA; some estimates indicate that more than the equivalent of $50 billion were transferred within one year. Given the recent outcry in German public debate over the replacement of cash by electronic money, a major shift in public opinion would be required for many citizens to turn towards a system like M-PESA. Currently, according to Sec. 14 para. 2 Bundesbank Act (BBankG) physical Euro notes are the only unlimited legal payment method; no business is legally required to accept mobile or credit card payments.

Since the amount of underbanked population in EU markets is way lower than in Eastern Africa, the question remains, as to if and where a need for a service like M-PESA might exist. Is there an advantage over book money or even a cryptocurrency such as Bitcoin?

M-PESA is a money transfer system processing the official currency, i.e. Kenya Shilling. As has been outlined by Muchoki regarding the network of numerous M-PESA agents, the balance of the respective account can be cashed almost anywhere and anytime. It is therefore the practical alternative to the European book money and the banks’ network of ATMs. In addition, given the scale and scope of the supervision exerted by the Kenyan authorities, which Gitiri introduced us to, there is not too much left of the peer to peer concept, labeled P2P. [5]

A Bitcoin or similar blockchain entails several functions of P2P-communication between a multitude of actors. However, although implemented in a communication network, a payment system like M-PESA serves first and foremost the sole purpose of transferring the official currency. It does not aim at becoming an alternative payment instrument. The economic value of the M-PESA balance is at all times determined by the official currency value, which the central bank is able to safeguard under its fiscal policy.

Considering the Kenyan people’s need outlined by Muchokiand their tech-savviness it does not surprise too much that exactly there M-PESA came to light. Although legislative difficulties still exist as Gitiri points out, the Kenyan legislator has taken the right approach to the new technological development, when creating a special license and thereby enabling a permutation of the way the urban and rural underbanked population is transferring money. In this regard, it has helped to bridge a major gap, to fulfill a literally wide spread need.

The exact same need cannot be found within the EU. However, an additional money transfer system like M-PESA could possibly serve the need for less complicated and faster transactions and also, having in mind the banking crisis of 2008 and the people’s will to protect their savings from system collapses, more financial independence. Bitcoin could be regarded as a proof for this need.

However, while the success of a money transfer system similar to M-PESA within the EU is fairly difficult to estimate, the growth in emerging markets in Eastern Africa will thrive. Time will tell to what extent M-PESA’s growth will continue.

Twende kazi! (Let’s go to work)



* Nils Bruckhuisen is an advocate admitted to the Cologne bar. Previously he served in Nairobi‘s Delegation of German industry and commerce. He escapes to NBO during German winters.

[1]  https://www.supremecourt.uk/cases/uksc-2013-0170.html – last reviewed on 22 October 2018.

[2]  http://www.bailii.org/uk/cases/UKHL/1970/4.html – last reviewed on 22 October 2018.

[3]  Notwithstanding that there are several others, https://ihub.co.ke/ should get a mention here.

[4]  From a German perspective, the one brought to life by Merck might be of closer interest. Please compare https://innovationcenter.merckgroup.com/get-involved/accelerator/african-satellite-programs/nairobi/ – last reviewed on 22 October 2018.

[5] Compare Otto in Ri 2017, 86.

Titelbild: © Jezper via Adobe Stock, #42874084

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