Financial inclusion in rural areas: the role of mobile financial services

Mobile Financial Services (MFS) have been shown to increase the consumption smoothing abilities of
households who use these services when they experienced supply shocks (e.g. droughts). However,
there is some empirical indication that MFS-usage might negatively affect the consumption
smoothing abilities of non-users. In the present proposal I formulate a theoretical framework which
shows that such negative spillovers might indeed exist; particularly in extremely isolated areas,
where food price increases cannot easily be counterbalanced with food imports from other markets.
More precisely, based on previous MFS literature and pricing theory, it can be hypothesized that an
increase in MFS user rates ceteris paribus increases price spikes after supply shocks occurred. For
non-users this implies that after supply shocks they face higher food prices without having the
additional consumption smoothing instrument, MFS, to deal with the increased prices. It follows that
increase in MFS-user rates could negatively affect real food consumption of non-users in isolated
areas. This proposal therefore aims to investigate whether MFS can reinforce local food price
increases after supply-shocks and whether such local food price increases translate in consumption
downfalls for non-users in East-Africa.
Given the scarcity of consumption smoothing instruments and particularly access to financial
institutions in rural areas, many researchers have investigated the rural-urban gap in financial
inclusion. Within this field of research, there is a substantial consensus that MFS decrease the rural
urban gap in financial inclusion. However, rural areas are far from being homogenous and the
increase in financial inclusion in rural areas caused by MFS could be largely attributed to such rural
areas which are in close proximity to urban areas, whereas extremely rural areas might remain
excluded. There are several arguments supporting the aforementioned hypothesis, such as a lack of
MFS-infrastructure (mostly agents and network) in extremely rural areas, a lack of spatial spillover,
and the obstacle of a double-sided platform structure of MFS (explained below), could cause
extremely rural areas to be systematically excluded from this service; however empirical studies
supporting these arguments do not exist hitherto. Overall it can be stated that up until now little is
known about the diffusion of MFS in space. This proposal therefore aims to investigate the diffusion
process of MFS in East-Africa, with a specific focus on the role of spatial spillover, externalities, and
access to the MFS-infrastructure.