How Afghanistan Is on the Leading Edge of a Tech Revolution

Mobile banking has made a bigger advance in the country than in the rest of the world, including the U.S. — with potentially huge repercussions

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In the eyes of the rest of the world, war-torn Afghanistan is a place with beaten-down infrastructure, the minimum of modern amenities and certainly none of the services made possible by the latest technological advances powering the Internet, financial services and telecommunications.

Surprisingly, however, Afghanistan is on the leading edge of the mobile-money and banking revolution sweeping through developing countries from Kenya to Indonesia. For example, these days it’s not at all unusual to see an Afghan policeman on Kabul’s security cordon, known as the Ring of Steel, checking his Nokia 1101 to verify that his monthly salary has been transferred to his mobile wallet. Then, just as quickly, texting a sum of money to his wife’s mobile phone in rural Afghanistan so she can buy groceries for the family or a new propane tank for the kitchen.

Nothing this slick exists in the U.S. or most other G-7 countries, but in Afghanistan — a country of 30 million where nearly 70% of the population is illiterate and fewer than 5% of people have a bank account — this scenario is part of reality. “I’m not aware of any such deployment in the U.S.,” says Tomasz Smilowicz, managing director at Citi’s Global Transaction Services in New York, referring to Afghanistan’s mobile-money service, known locally as M-Paisa. “It’s a success, no questions about it.”

M-Paisa was first introduced in the country in 2009 as a trial to pay the Afghan national police with mobile money instead of cash. The results were immediate and dramatic: costs dropped by 10% because it eliminated phantom payments to nonexistent officers pocketed by middlemen. And the rest of the force thought they had received a 30% salary increase because these same middlemen were no longer able to skim cash from legitimate salaries.

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Fast-forward to the present and M-Paisa — a joint venture between Afghanistan’s biggest telecom provider Roshan and British multinational Vodafone — has more than 1.2 million subscribers, according to the Afghan Mobile Money Operators Association. And it’s growing at double-digit rates on the strength that 40% of Afghans own mobile phones, according to Citi. The service’s functionality has also grown beyond direct-payroll deposits in the public sector to include mobile person-to-person transfers, point-of-sale merchant payments and microfinance loan disbursements and repayments. Western Union signed an agreement with Roshan last year to enable international money transfers to be sent directly to M-Paisa mobile subscribers in Afghanistan.

“M-Paisa has made a big contribution toward eliminating corruption and theft in Afghanistan’s public sector,” says Laurence Chandy, an analyst who specializes in development issues at the Brookings Institution in Washington. That’s saying a lot given that Afghanistan is one of the most corrupt countries in the world, surpassed only by Somalia and North Korea. But perhaps M-Paisa’s most important role is as a catalyst for economic development. “It fundamentally changes what it means to be poor,” says Chandy.

Chandy points out that 2.5 billion people on the planet have no access to financial services of any kind. But thanks to the intersection between mobile phones with financial services in recent years, the world’s poor have a new ladder up to increased prosperity and financial stability.

Afghanistan’s banking system is a corrupt mess, and the country’s financial institutions are not trusted. M-Paisa has gotten around this barrier to acceptance by taking the country’s banks out of the equation, at least in the early stages. To use the service you don’t need a bank account, and in place of ATMs, mobile provider Roshan uses a network of agents, mostly mom-and-pop shops, that not only accept M-Paisa payments for groceries and supplies, but also dispense money to M-Paisa subscribers. “Mobile money brings people outside the formal economy into a much bigger market,” says Chandy. “They suddenly become able to borrow money to buy fertilizer, pay for health care or save money for education.”

(MORE: Panic in Afghanistan: The Angry Run on Kabul Bank)

M-Paisa also creates the opportunity for government donors and charities to distribute aid directly to Afghans who can use it to buy exactly what they need, once again bypassing corrupt middlemen and local banks that illegally pocket money.

Despite problems with Afghan banks, Roshan is at present working to integrate them into M-Paisa in order to roll out new services, including e-payment of monthly utility bills. Whether that’s successful remains to be seen because people will first need to regain trust in the financial system. “Over 80,000 utility customers received SMS messages in February informing them that their next bill will arrive via text message,” says Kevin O’Loughlin, a senior development outreach officer on the ground with USAID in Kabul. “They will then be instructed on how to pay future bills with mobile money.” It remains to be seen if this pilot project works, but many in the test group already use banks to pay their bills and have built up some degree of trust in the financial system.

M-Paisa has proved itself to be a success, but like other mobile-money deployments — including Kenya’s M-Pesa, also launched by Vodafone and considered to be the benchmark of M-banking solutions — it faces challenges. In addition to a corrupt banking system, it needs to expand its network of retail agents outside the capital Kabul. That’s because if an agent in rural Afghanistan runs out of cash another may be very far away, and Afghan banks cannot pick up the slack because they operate few branches outside city centers.

Roshan’s three main competitors, Afghan Wireless, Etisalat and MTN, launched their own mobile-money offerings in 2012. As they roll out services interoperability will become an issue that could stall growth unless a roaming agreement is put in place that allows subscribers to use their mobile wallets on any wireless network. Says Smilowicz of Citi: “The challenge will be to convert mobile money in Afghanistan into an open system.”