THE EFFECTS OF MTN MOBILE MONEY TO THE DEVELOPMENT OF FINANCIAL INSTITUTIONS IN UGANDA (A CASE STUDY CENTENARY BANK, UGANDA)

BY

Hidaya REG NO:

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF MANAGEMENT, FACULTY OF BUSINESSES AND MANAGEMENT ISLAMIC UNIVERSITY IN UGANDA

FEBRUARY 20154

Table of ContentsABSTRACT1CHAPTER ONE21.0 Introduction21.1 Background of the Study21.2 Problem statement.21.3 Research Objectives.21.4 Research Questions31.5 Significance of the study.31.6 Scope of the study.3CHAPTER TWO4LITERATURE REVIEW42.0 Introduction.42.1 Cost Control42.2 Cost Control Applications42.3 Control Reports62.4 Standards72.5 The Role of Accounting82.6 Data Collection.82.7 Budget and Control Administration.82.8 Strategic Cost Control82.9 Summary9CHAPTER THREE10METHODOLOGY103.0 Introduction103.1 Study Design103.2 Data Collection103.6 Research Methods103.7 Data Analysis Methods11REFERENCES:12

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ABSTRACTFinancial institutions have been in the process of significant transformation. The force behind the transformation of these institutions is innovation in information technology. Information and communication technology is at the Centre of this global change curve of mobile and internet banking in Uganda. Rapid development of information technology has made banking tasks more efficient and cheaper.This study sought to determine the effect of mobile money specifically MTN mobile money services on performance of financial institutions in Uganda specifically Centenary Bank. Where the survey will be conducted on this financial institution in Kampala Main branch. The study also sought to identify the extent of use of mobile and internet banking in financial institutions.

CHAPTER ONE1.0 Introduction This chapter will peruse through the background of the study, the problem statement, objectives of the study, general objectives and specific, research question, the scope of the study and the importance of the study.1.2 Background of the Study Financial Institutions Inclusion with mobile money services, which is the process of ensuring access to appropriate financial products and services at an affordable cost to the underprivileged and low income groups has become a key pillar of development policy in a number of developing countries. The driver of this as a salient feature in development policy was the recognition by national and multinational bodies that exclusive development was not sustainable. For instance, the former United Nations (UN) Secretary General Kofi Annan observed on December 29, 2003 that The stark reality is that most people in the world still lack access to sustainable financial services, whether it is saving, credit, or insurance. The great challenge before us is to address the constraints that exclude people from full participation in the financial sector together; we can and must build inclusive financial sectors that help people improve their lives. Consequently, a number of monetary authorities and finance ministries across the world have sought to address this imbalance. Different approaches have been used across the globe because Financial Exclusion (FE) is a result of a myriad of factors ranging from attitude through to infrastructural limitations. Some of the approaches that have been used across the globe include microfinance arrangements; moral suasion to urge financial institutions to embrace commitment to financial development; regulatory frameworks that require commercial banks to open up a rural branch for every branches opened; and utilization of Information Communication Technology (ICT) to reduce costs associated with financial service delivery. Innovations in ICT have revolutionaries the financial sector resulting in novel delivery channels for financial products and services such as Automated Teller Machines (ATMs), cell phone banking, PC banking, and internet banking (Ahmad, 2006). These developments leveraged against ICT are termed as electronic banking (e-banking) which is a subcomponent of electronic commerce (e-commerce). E-banking has been very instrumental in improving the quality of 3 service individuals with bank accounts receive from their financial institutions as well as lowering the costs of transactions. For example an electronic withdrawal of cash across the ATM costs between 5 US cents to 25 US cents in a Ugandan commercial bank compared to over-the counter withdrawals that cost between US$ 1.00 to US$ 2.00 per transaction. The individuals with bank accounts continue to enjoy the benefits associated with e-banking but the poorest of the poor who cannot open up bank accounts remain excluded. As a result, the lack of banking services has forced many people in the developing countries to rely on an often insecure cash based economy. The desire by many developing countries governments to increase access to financial services as a tool of enhancing savings mobilization to reduce poverty has seen a number of solutions emerge. Apart from the traditional solution of microfinance, use of mobile phones to access financial services has been proposed and adopted as a means of expanding financial services to the poorest of the poor. The adoption of the mobile phone as a means of accessing financial services has been driven by the growing number of low income earners who own cellular phones, the pre-paid billing system sensitive to users incomes and improving technology. The number of cellular phone subscribers in Uganda has risen from 3000 in December 1996 to 8,200,000 in December 2008 (Uganda Communication Commission, 2009; Mulira, 2009), representing a 26 percent coverage given Ugandas population of 32 million people. On the other hand, as at December 2009, the number of bank accounts in the country is estimated at slightly over 5 million representing a 16 percent penetration. The growth rate of mobile telephony in Uganda is exceptional given that it started in 1996 while commercial banking operations date back to the 1950s. In fact, over the past decade, far more people in Uganda have gained access to mobile phones than to banking services. The exceptional growth of mobile telephony in Uganda provides an opportunity that can be harnessed to expand access of financial services to the under-served and un-served segments of the population. As Ndiwalana and Popov (2009) point out, mobile phone payments present a significant opportunity to integrate more users within Ugandas financial system at a reasonable 4 cost. With the liberalization of the telecommunications sector and the commitment to the Government of Uganda to e-government and overall utilization of ICT in fostering national development (Mulira, 2009), the onus is on the telecommunication companies and financial institutions to exploit the opportunity. In this paper, the potential role that can be played by mobile money services (MMS) using cellular telephony to foster financial inclusion is explored. A thorough understanding of the role can help policy makers design appropriate policies to integrate the mobile payments (m-payments) into the national and regional integrated payment systems as well as devise mechanisms for reaching the under- and un-banked citizens. In addition, it opens up opportunities for government to minimize transaction expenditures, embezzlement, and fraud when paying large groups of civil servants like primary school teachers. 1.2 Problem statement. Financial Institution inclusion with mobile money services which is a key component of social inclusion and consequently a necessary ingredient for fostering inclusive growth remains a major concern of government authorities and a major hindrance to economic development. While Ugandas financial sector has experienced a profound transformation since 2000, the financial industry remains shallow and a large proportion of Ugandas population remains unbanked. Generally, financial depth measured as a ratio of broad money (M2) to GDP is low. The ratio increased from 11.2 percent in 1995 to 20.7 percent in 2008 (WDI and GDF 2010). In addition, financial intermediation is low playing a limited role in the provision of funds for development finance and dominated by commercial banks (Mugume, 2008). The advent of the cellular phone and the appropriate underlying technology that has enabled transmission of money provides Ugandans with an opportunity to be integrated into the financial sector. and with this research, the researcher seeks to explore the potential mobile money services can play in enhancing financial Institutions development in Uganda. Specifically, it addresses issues regarding services provided by the MMS, transaction charges, registered customers, number and volume of transactions, stakeholders, user interfaces and security, institutional relationships, policy and regulation, as well as appropriateness of the current business model(s). 1.3 Research Objectives. The primary objective of the study is to establish the effects of mobile money on the Development of Financial institutions in Uganda, specifically Centenary bank Uganda. 1.3.1 Specific Objective To establish the effects of mobile money on the development of financial Institutions in (Centenary Bank, Uganda).To establish the extent of use of mobile money banking in financial Institutions in Uganda.The loopholes or problems and suggested on which Mtn Mobile Money attains while attaining the development of financial institutions 1.4 Research Questions How Mtn Mobile Money does affect the development of financial institutions specifically Centenary bank, Uganda?To what extent is MTN mobile money used in financial institutions in Uganda, centenary bank specifically?What are the problems and suggested solutions faced by Mobile Money in sustaining financial institutions development?1.5 Significance of the study.The study will be crucial to emerging financial institutions as it will provide answers to the factors against the implementation of Mobile banking in Uganda, prove of the success and growth associated with the implementation of Mobile banking and highlight the areas of banking operations that can be enhanced via Mobile Money.It is equally significant for bank executives and indeed the policy makers of the banks and financial institutions to be aware of Mobile banking as a product of internet commerce with a view to making strategic decisions.The study is also expected to give an insight on the state of mobile money services as a competition to the commercial banks in Uganda and the factors that have greatly influenced its growth. Players in the financial institution sector and telecommunications industry will find the study useful as they can use the findings to strategize on how they can mutually benefit from this development. Finally, the study adds to the existing literature, and is a valuable tool for students, academicians, institutions, corporate managers and individuals who want to learn more about mobile and internet banking. 1.6 Scope of the study. Since, the bounders of Money in financial organizations are not easily drawn; this study is concerned primarily with those aspects on effects of MTN mobile money to the development of financial instituitions which are immediately tied-up with financial performance as direct and those that relate to the component inputs which together make the transaction safe and healthy as indirect regulation will be the coverage.

CHAPTER TWOLITERATURE REVIEW2.0 Introduction. This chapter seeks to explore in depth the concept and mobile money banking through a review of the various theories as well as empirical studies. 2.1 Financial InclusionAccess to affordable financial services is linked with overcoming poverty, reducing income disparities and increasing economic growth. Despite our understanding of the benefits of financial inclusion, an estimated 2.5 billion people in lower to middle income countries remain unbanked. This means they lack access to the financial services needed to invest in their livelihoods and protect their assets to enable them to move out of poverty or prevent falling deeper into poverty. Not surprisingly, the poor, women, youth and rural residents tend to face even greater barriers to access. Among firms, the younger and smaller ones are confronted by more binding constraints to finance as compared to larger firms.Traditional bricks-and-mortar banking infrastructure is too expensive to serve the poor, particularly in rural areas. Innovations in technology, such as mobile payments, mobile banking, and digital identities makes it easier and less expensive for people to use financial services, while increasing financial security. More than one billion underserved people in middle and low-income countries have access to a mobile phone, providing existing infrastructure that can be used to sustainably offer financial services such as payments, transfers, insurance, savings and credit.This thereby provides an opportunity with mobile money services to create greater financial inclusion through which to increase economic prosperity for all people, but especially low-income households with microenterprises.

2.2 Technology Innovations and Economic GrowthEmpirical evidence that investigates a direct effect of payment systems on economic growth is sparse. Berger (2003) found information technology (IT) innovations to have a positive impact on overall economic growth through positive effects on banking systems and bank efficiencies. Waverman et al (2005) find investments in mobile telecommunication infrastructure to have a positive and significant impact on economic growth. Specifically, they find that a unit increase in mobile phone penetration increased economic growth of a country by 0.039 percent. They further conjecture this impact may be twice as large in developing countries as compared to developed countries due to the absence of landline infrastructure. Given payment technology and telecommunication infrastructure investments independently have shown positive effects on economic growth, it is expected that coupled together there would be an even greater positive effect for an economy.The Mobile Economy 2013, GSMA4 The positive effect of information communication technology (ICT) on improved productivity in medium and large firms is well documented in developed countries through a myriad of firm and sector case studies. However, the literature on the effects of ICT on micro and small enterprises is limited. On the basis of field research in Botswana, Duncombe and Heeks (2002) find that poor rural entrepreneurs rely heavily on informal, social and local information systems. While highly appropriate in many ways, these systems can also be constrained and insular. Greater access to shared telephone services can help break this insularity. Additionally, Duncombe (2007) finds the poor may benefit more from ICT if it is applied to strengthen a broader range of social and political assets and if it is use to build more effective structures and processes that favor the poor. Subsequently, Donner (2007) finds mobile phone use by micro-entrepreneurs in Kigali, Rwanda enables new business contacts and amplifies existing social relationships. Summarizing 14 research studies for micro and small enterprises (MSEs) Donner (2010) finds mobile phone use alone even without the payment services helps many MSEs become more productive through improvements in sales, marketing and procurement processes. Consequently, there is an opportunity to investigate the marginal impact of mobile money on low-income household enterprises in the least developed countries, which as the literature shows traditionally have not had access to such transformative technology. 2.3 Effects of Mobile MoneyAlthough mobile money literature is still limited, initial empirical evidence indicates that using a mobile money account brings positive returns to individuals. A market-level analysis conducted y Mbiti and Weil (2011) found the introduction of M-PESA in Kenya led to significant decreases in the prices of money transfer competitors. Additionally, they found an increase in the frequency of receiving remittances, which the authors conclude over-time has contributed toward financial inclusion in the country (Mbiti and Weil, 2011, Jack and Suri, 2011). In Mozambique, Batista and Vicente (2013) find evidence that the marginal willingness to remit was increased by the availability of mobile money. They also observed substitution effects of mobile money for traditional alternatives for both savings and remittances. In Niger, Aker et al (2011) look at the effects of using mobile money accounts for delivery of cash transfers versus traditional methods. Specifically, they find mobile money reduced the overall transaction costs of recipients, while offering an increase in freedom, flexibility, and privacy. A qualitative pilot study conducted in rural Cambodia by Vong et al (2012) identify benefits of time, security and convenience for micro-entrepreneurs who use mobile money services in rural areas. From this literature, the expectation is that micro-entrepreneurs would benefit positively from the use of mobile money.2.4 Savings OpportunityConflicting evidence available today has created an outstanding debate as to whether individuals save more or not through the use of mobile money. According to the study by Jack and Suri (2011) 71% of all households indicate saving money at home, under the mattress. Moreover, they find three quarters (75%) of households that are M-PESA users report also using their mobile money account to save. Among M-PESA users, 21% reported that it is the most important saving instrument and 90% say it is one of three most important vehicles for saving. Data collected in Tanzania from 3,000 households indicates 90% of mobile money users without a bank account report using their mobile account to save or store money in the last six months.From a small pilot study in Uganda, the results indicate that across users, regardless of their balances (low, medium, or high), the primary purpose to save in their mobile money accounts is for emergencies. Despite these user claims, Mbiti and Weil (2011) find in Kenya from analyzing aggregate data reported to the Central Bank that M-PESA customers dont appear to actually be using the mobile money account for storing value. They calculate a low value of average holdings at a point in time to be about US$3 (203 KSH). Additionally, they conduct an analysis of stored value and deduced that customers must have high time discount rates, since holding funds in the account to minimize usage fees would be advantageous. In either case the discrepancy may be a result of methods used or type of data available, or alternatively a reflection of heterogeneity in the broad range of users. Interestingly, Dupas and Robinson (2011) find in Kenya that if you simple provide people a safe and easy way to save money, they will save for health care needs. Dupas and Robinson (2009) also find strong evidence that a large fraction of female micro-entrepreneurs in rural Kenya face major savings constraints. In an experiment, women provided with savings accounts use the accounts to save to increase the size of their business and, in turn, increase their income and expenditures. In addition, they find women use the accounts to help cope with unexpected household health shocks, and thus better able to maintain inventory levels over shocks than are women without accounts. Hence there is a need for more empirical research in this regard. This question is particularly relevant to this study given the frequent assertion by respondents across the various mobile money studies of saving for future business investments.2.5 Empowerment & DiversificationThrough ethnographic research Morawczynski (2009) identifies that mobile money helps rural users to manage risk and diversify resources within their existing structures of power and dependency, which potentially affects intra-household power distance and bargaining. Aker et al (2011) also find initial evidence through an experiment that due to reduced cost of receiving transfers and greater privacy through mobile money there is a potential link to intra-household decision-making. For some women in Morawczynskis study mobile money is considered secret (private) savings that provides women with partial financial autonomy, which allows women to make financial decisions without asking their husbands. In addition, the women noted being able to save for the purchase of household items, unexpected illnesses, and school fees. The women also shared their desire to use the mobile money account to save specifically to start an income generating activity for greater reliability of income and freedom. Interestingly, initial evidence from Aker et al (2011) suggests that users of mobile money receiving the same amount of cash as non-users diversify their diets more and produce a more diverse basked of agricultural goods. These are important areas for further research, especially as it relates to individual and household decisions of income generation through farming or other business activities. 2.6 Social Networks & Risk SharingAs found by Marcel Fafchamps (1992) and many other researchers, informal solidarity networks provide an important means by which individuals and households share risk. Access to affordable money transfer services has been shown to have an effect on these social networks. Morawczynski (2009) documents initial evidence of social capital deepening and broadening through the use of mobile money (M-PESA). This increase in social capital suggests a reduction in vulnerability achieved through the solicitation and accumulation of financial resources and the maintenance of social networks. Jack and Suri (2011a) also find M-PESA users have correspondingly larger shares of their remittance portfolios linked to other relatives and friends, suggesting broader social networks. In a subsequent paper, Jack and Suri (2014) explore more concretely the means by which mobile money effects social networks through individuals and household sharing of risk. The authors introduce a complementary source of incompleteness in social networks, transaction coststhe actual costs of transferring resources between individuals in the network. This challenges a dominant assumption in economic theory that transactions between social networks are frictionless. Mobile money has dramatically reduced the cost of sending money across large distances in Kenya, which enables the authors to test effects of transaction costs on risk sharing. They find that when households experience a negative income shock, per capita consumption falls on average 7-10 percent for a non-user of mobile money. While households that use MPESA with good access to the agent network, experience no such fall in per capita consumption. Not surprising, these effects are even more evident for the bottom three quintiles of the income distribution. Hence, mobile money appears to increase the effective size of, and number of active participants in risk sharing networks, seemingly without exacerbating information, monitoring and commitment costs. The benefits of lower transaction costs of mobile money appear to be sufficiently large enough to offset any incompleteness of insurance that would otherwise arise from information or commitment problems within solidarity networks. Given the strong benefits in social networks from the use of mobile money, especially the bottom quintiles, similar advantages are also expected among microenterprise networks. 2.7 Technology Adoption Profiles of Mobile Money UsersWhile there were earlier deployments of mobile money in other countries, the launch of MPESA by Safaricom in Kenya in 2007 experienced the fastest uptake with nearly 15 million users in five years (as of January 2012). Using data from the Kenya FinAccess survey data in 2006 and 2009, which included 4,000 households, Mbiti and Weil (2011) find that active early adopters of M-PESA are likely to be urban, educated, banked and affluent confirming this profile of early adopters. Jack and Suri (2011a) conducted a panel study on M-PESA mobile money surveying 2,000 households across the country in 2008 and 2010. They also found the user profile of early adopters to be more literate, with higher levels of education and wealth, bank accounts, urban dwellers, and a slight male bias. In the follow-up survey by Jack and Suri (2011a) find with time the demographics of Kenyan users begins to shift. According to Moores innovation adoption model, which stratifies users as innovators, early adopters, early majority, late majority and laggards (Moore 1991) this is naturally expected. Jack and Suri (2011a) find in Kenya the early majority is proving to be more balanced between men and women, with increased uptake from the rural areas and those with less education and less well off. In both rounds they find lack of mobile phone cited as the primary reason for not using the service, which suggests that many of the individuals who adopted M-PESA between the two rounds were those who already owned mobile phones. Collectively, these results indicate that with time this technology innovation will be adopted more broadly by the population encompassing the late majority users and eventually the laggard users. As seen, the mobile money literature thus far has focused on the initial effects of usage regarding adoption, financial inclusion, savings, risk sharing, and consumption smoothing. The next frontier for effects assessment of mobile money is with intra household decision-making and financial Institutitions development activities, providing the motivation for this research.CHAPTER THREE METHODOLOGY3.0 Introduction This study is designed to find out the effects of MTN Mobile money to financial Institution development case study of Centenary Bank, Uganda (Kampala). This goal cannot be achieved unless the research work is orderly, imaginative, logical and accurate.Hence, this chapter is associated with the research method used in carrying out the work. The pertinent pointed here is that it helps to know which method is appropriate for the project. 3.1 Research DesignTherefore, on the basis of this study, the research design to be used for collecting the required information is the survey analysis on the basis of self-administered questionnaire, interview and personal observation. The primary and secondary data are source of information on the effects of MTN Mobile Money to the development of financial Institutions, specifically Centenary Bank, Uganda (Kampala)3.2 Area of the StudyThe geographical location of this research work will be within Uganda specifically Centenary Bank Main branch in KampalaThe research will examine the effects of MTN Mobile Money to the development of financial Institution.3.3 Population of the StudyThe population for the study is made up of 40. This number comprises employees, and customers of the MTN mobile Company plus centenary bank. Employee, For the purpose of this study, the actual population or aggregate is thirty four (40) holders.3.4 Sampling DesignI will use random sampling in the interest of the time and reliable information desired3.5 Sample SizeThe sample considered thirty four, (40) respondents from different departments and faculties.3.6 Instrument Used For Data CollectionQuestionnaire, interview and personal observations will be used for the collection of the data. The instruments used for the collection of data are meant for selected individuals in the town which were used as a case study of the research work. The questionnaire will be rightly used to measure the independent and dependent variables identified in the research question and hypothesis.3.7 Method of Collecting DataThe data of this research work will be collected through the administration of questionnaire, interview and personal observation on respondents in the selected Town. The instrument will be used to elicit demographic data and data for specific questions for the study.To ensure accurate data collection, the questionnaires will be distributed directly by the researcher to the respondents. The interview and personal observation will also be conducted by the researcher. The above instruments used, will help in collecting an aggregate amount of the data to be used for the study.

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