Tanzania’s new mobile money rule could derail financial inclusion

Mobile money — a technology that facilitates financial transactions through mobile phones without a bank account is driving financial inclusion in the country. It gives more people a chance to utilise financial products and services.

In Tanzania, there is a policy to encourage the use of mobile money and reduce the flow of cash. And mobile money has proved popular because of its advantages. People can transfer money or make payments wherever they are, in a simple, fast, convenient and affordable way.

Mobile money has improved the efficiency of transactions and initiated some changes in traditional banking in the country.

By end of 2018, Tanzania had over 19.5 million active mobile money accounts.

But recently after the Finance and Planning minister, Dr. Mwigulu Nchemba to announce an increase of tax rates on mobile money transactions, according to the public, these taxes disproportionately affect lower-income residents as those users are more sensitive to transaction costs.

Lower-income users may also react to the cost increase by reverting to cash transactions, which could lead to lower financial inclusion, an area in which Tanzania has made significant progress over the last decade.

Formal financial inclusion in Tanzania rose to 65 per cent in 2018 from 55 per cent in 2017. Though the proportion is still small, mobile phone transactions make up an increasingly large share of electronic transactions, rising by 78.9 per cent to Tsh3.3 trillion April 2018.

Around Tsh18 trillion ($163bn) is transacted every month on mobile money platforms in Tanzania, according to Dr. Faustine Ndugulile, Minister for Communication and Information Technology.

This trend highlights that the platform is largely used by low-income earners to manage small transactions.

Research by Business Times shows that, people without formal bank account or ID tend to be the poor, living in remote villages, where mobile money is their only access to financial services. They rely on mobile money agents for remittances.

It is difficult to obtain and replace IDs in Tanzania because of bureaucratic processes. So this policy could create inconvenience, which could discourage customers from using mobile money.

Business Times has done research on what influences behaviour related to financial technologies. One of my findings is that people are more open to utilising mobile money when they expect the effort of doing so to be small. On this basis, customers will not use mobile money if there are hindrances like an increase tax rates on mobile money transactions.

The current tax structure actually leads to double taxation, as airtime is required for mobile money transactions. The increasing tax rates and the challenge of double taxation raise concerns about a reversion to cash transactions and increasing financial exclusion for the poor.

Also taxation on mobile money transactions may not expand the tax base significantly but, rather, may reverse the gains on retail electronic payments and financial inclusion.

A higher tax rate on low-level retail electronic transactions mostly levied on low-income earners that are sensitive to transaction costs may discourage the use of mobile phone-based transactions, incentivizing them to revert to cash transactions to evade taxes and so less tax revenue. This trend will deal a big blow to the financial inclusion success witnessed so far.

Poorly designed tax policy will have poor outcomes on tax revenue and market distortions will drive consumption behaviour on an undesired path, so any future review of excise tax rates on airtime and financial services should be preceded with a thorough analysis of optimal taxation excise taxes, the likely change in behaviour around financial services, and, above all, the marginal contribution to the tax effort that policy aims to raise.