Unit Code Essay Example

Money and Banking in Developing Countries

Unit Code


Recent times have too seen other major global transformations that have impinged on the finance sector in the developing countries. The use of information technology, for the most part, mobile telephony has had a major impact on money and banking in the developing world. Also, the role of the central banking in developing countries has been a focus and has informed a lot of research work. Apparently, central banks in developing countries have an expanded role, which is more of a developmental role. Then there are the challenges that bedevil the finance sector in the developing countries a propos the deepness and extensiveness of the sector (Alampay & Bala, 2010: 77).

These issues form the focus of this paper. In the first part, I focus on the novel and phenomenal development of mobile banking in the developing countries. Then, the paper delves into the role of central banks in developing countries. Finally, I focus on the challenges facing money and banking in the developing countries.

Mobile Banking

Before the emergence of mobile telephones, the banking levels in developing countries were down low. Mainstay banking in developing countries was limited given that the development of branches proved to be an expensive venture. Most parts of developing countries are not easily accessible. Internet banking could as well not penetrate the market in developing countries seeing as few people have access to computers and internet connectivity is limited. Therefore, a lot of people in developing countries could not access banking services (Haas et al., 2010: 34).

The emergence of mobile phones led to the innovation of mobile banking that seemed to work well in developing countries. This is mainly because mobile banking is not physical in nature therefore people can draw on their mobile phones to access essential financial services. Mobile phones host applications that support basic functions, such as short text messaging which enable what has come to be known as ‘mobile banking’ to store and transfer money. The first formal mobile banking services were introduced on the Philippines in 2010 (Alampay & Bala, 2010: 79). These then promptly spread across the globe, particularly to other developing countries. Kenya has reported the biggest success story with the phenomenal introduction of M-pesa, launched in 2007. The Kenyan mobile operator had over 17 million subscribers by April 2013 and majority of them are registered for M-pesa (Safaricom, 2014); elsewhere, adoption has occurred at a slower pace and is less wide-spread.

Figure 1: Percentage of Mobile Phone Owners in Sub-Saharan Africa Who Use Their Phones to Make and/or Receive Payments

Unit Code

Source: Pew Research Global Attitude Surveys (2013)

On the whole, prescribed mobile banking services permit three prime connections: (1) Storage of value/currency; (2) Conversion of cash into and out of the stored value; and (3) Transfer of stored value between accounts. Commercial banks have taken advantage of this opportunity by partnering with mobile network operators where they tie SIM cards to regular bank accounts (Comninos 2012: 14). However, mobile service providers run majority of other services, including M-Pesa, independently. This has resulted in creation for jobs opportunities in form of mobile banking agents who facilitate deposit and withdrawal of cash; M-Pesa alone had 36,000 registered agents as of April 2013 (Safaricom, 2014). It has also assisted in development; Jeffrey Sachs notes that the mobile phone has developed into “the single most transformative tool for development.” Close to 90 per cent of the 7 billion mobile phones used worldwide today are in developing countries, and in the next decade there will be more mobile phone subscriptions in the world than people (The Economist, 2014a).

Central Banking

The theory and practice of central banking has dramatically changed in the past two decades (Blinder, 2004: 23). At present, global financial institutions such as the International Monetary Fund (IMF), along with lots of top economists, generally characterise the neo-liberal move towards to central banking as the best practice. This approach constitutes three facets: (1) central bank independence; (2) focus on inflation control, together with adopting official inflation targeting; and (3) exercise of indirect methods of monetary policy, which are short-term interest rates rather than the use of direct methods such as credit ceilings (Caprio $ Patrick, 2001: 10).

Central banks in developing countries engage a much wider role compared to the role they play in the developed countries. Central banks in developing countries are involved in development activities over and above their regulatory mandate (Epstein, 2005: 43). They are actively involved in creating or enabling the creation of the necessary machinery for financially supporting development activities crossways the country and in making sure that the available funds flow in the intended areas/directions. These mandates include: internal stability, economic growth, improvement of the banking system, branch expansion, development of financial institutions, and improvement of banking habits, training, and interest rate control, among other roles (Blinder, 2004: 35).

Figure 2: Role of Central Banks in Developing Countries.

Traditional Functions

Improvement of the Banking system

Development of Financial Institutions

Unit Code 1Unit Code 2Unit Code 3

Role Central Banks in Developing Countries


Economic Growth

Unit Code 4Unit Code 5Unit Code 6

Internal Stability

Improvement of Banking Habits

Unit Code 7Unit Code 8Unit Code 9

Branch Expansion

Interest Rate Control

Source: Author (2014)

Banking Challenges

The deepness and extensiveness of the financial sector in developing countries still falls back other regions. This is mainly because of poverty. For instance, in the sub-Saharan Africa, the percentage of those living on below $1.25 a day has almost not shifted between 1981 and 2005, declining from 53 per cent to 51 per cent between the two periods. On the contrary, in East Asia plus the Pacific, the head count poverty ratio at $1.25 a day went down from a high of 78 per cent in 1981 to a low of 17 per cent in 2007. In South Asia, which is a somewhat analogous to Africa, the poverty head count ratio decreased from 59 per cent to 40 per cent between the two periods (Honohan, 2004: 13).

Apart from the problem of poverty, inequality as measured by the Gini-coefficient in developing countries is also a challenge. Developing countries have quite a high level of inequality (The Economist, 2014b). Apparently, Africa performs better than Latin America and the Caribbean. However, there is a huge disparity of the Gini-coefficient between countries. As indicated in the table below concerning data from 2008, Cote d”Ivoire had a Gini-coefficient of 41.5 per cent, Mozambique 45.7 per cent, and Central African Republic, 56.3 per cent. In Latin America, Chile had 42.6 per cent, Ecuador 50.6 per cent, Dominican Republic 49 per cent, Mexico 48.3 per cent, and Colombia 57.2. In Asia, China had 42.6 per cent.

Table 1: Gini-Coefficient by Region (Percent)

Gini-coefficient (per cent)

Cote d”Ivoire


Central African Republic

Dominican Republic


Source: World Bank Data (2014)

The countries also have a limited access to finance also remains restricted. Generally, access to finance is lower in poorer countries than in relatively developed countries. For instance, in Botswana, there are 481.4 deposit accounts per 1,000 adults; Madagascar has 33.8 and only for the Democratic Republic of Congo has a mere 6.1. Similar conclusions come out when looking at the number of loan accounts per 100,000 adults. Countries with high levels of poverty have stumpy penetration rates of loan accounts. Such countries include Uganda, Zambia, Malawi and Ethiopia (Enowbi & Mlambo, 2010: 24).


To sum it up, developing countries still lag behind in money and banking issues. However, mobile banking is a great innovation that has come in to help boost the level of banking in these countries. Mobile phones characterise a gainful solution for users, financial institutions as well as mobile operators, enabling them to link the digital carve up in places where conventional banking and Internet services are quite costly or just nonexistent. Central banking in developing countries still conduct a more active role in the country which is more of developmental role rather that the conventional regulatory role. This is because the finance sector has not fully developed and the government has to step in various ways so as to boost the sector. Developing countries also face some challenges mainly due to low incomes and income inequalities that limit banking activities (Blinder, 2004: 5).


Alampay, E. and Bala, G. (2010), Mobile 2.0: M-money for the BoP in the Philippines, Information Technologies and International Development, 6(4): 77-92.

Blinder, A. (2004), The Quiet Revolution; Central Banking Goes Modern,New Haven: Yale University Press.

Caprio, G. and Patrick, H. (2001), Monetary Policy Instruments for Developing Countries, A World Bank Symposium, Washington, DC.

Columbus, S. (2012), Is the Mobile Phone a Disruptive Technology? A Partial Review of Evidence from Developing Economies, In N. Ekekwe & N. Islam, Disruptive
Technologies, Innovation and Global Redesign: Emerging Implications, Hershey, PA: IGI Global.

Epstein, G. (2005), Capital Flight and Capital Controls in Developing Countries, Northampton, MA: Edward Elgar Press.

Enowbi and Mlambo, (2010), How can economic and political liberalisation improve financial development in African countries, Journal of Financial Economic Policy, 2, 35-59.

Haas, S., Plyler, M., and Nagarajan, G. (2010), Outreach of M-PESA System in Kenya: Emerging Trends, Working Paper, IRIS Center, University of Maryland.

Honohan, (2004), Financial development, growth and poverty: how close is the link? Policy research working series 3203, The World Bank.

Pew Research (2014), Emerging Nations Embrace Internet, Mobile Technology: Cell Phones Nearly Ubiquitous in Many Countries, Spring 2013 Global Attitudes Survey, Viewed 7 May 2014, < http://www.pewglobal.org/2014/02/13/emerging-nations-embrace-internet-mobile-technology/>.

Safaricom, (2014), About Us, Viewed 6 May 2014, <http://www.safaricom.co.ke/about-us>.

The Economist, (2014a), How a luxury item became a tool of global development, September 24, 2009, Viewed 7 May 2014, <http://www.economist.com/specialreports/displaystory.cfm?story_id=14483872>.

The Economist, (2014b), Banking in the Developing World: The Poor are Different, April 2012, Viewed 7 May 2014, <http://www.economist.com/blogs/feastandfamine/2012/04/banking-developing-world>.