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With growth, development and financial inclusion high on the agenda at the recent World Bank/IMF meetings in Lima, Peru, this week's podcast looks back at an innovation that helped bring millions of people in Kenya into the financial system. Economist and former governor of the Central Bank of Kenya Njuguna Ndung'u, who is also a member of CGD's Task Force on Regulatory Standards for Financial Inclusion, discusses the changes brought to Kenyan society by the introduction of the mobile money transfer service M-Pesa.

In 2007, "15% of the currency [in Kenya] was outside the banking sector," Ndung'u said. "The first impact of M-Pesa is to bring money outside the banking system into the banking system.” Users register their SIM cards and pay cash into – or take cash out of – a single M-Pesa trust account using their mobile phones.

Since the process does not require users to open individual bank accounts, skeptics predicted crisis: "Liquidity was shifting away from the other banks to the bank that was holding the [M-Pesa] platform." But the solution, Ndung'u said, was simple enough: "Distribute the platforms."

Rather than viewing platforms like M-Pesa as a threat, Ndung'u continued, banks should view them as long-term investments that promote financial inclusion and actually help strengthen the banks themselves. By supoprting M-Pesa, the banks "increase the number of participants in their market, they increase their deposits, and the deposits give them the capacity for future growth," Ndung'u said. "Strong banks are going to weather shocks. And what makes banks strong is actually bringing in people to participate in the banking sector.”

Watch the podcast below.

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CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.