FINANCE E Q U I TA B L E G R O W T H , F I N A N C E & I N S T I T U T I O N S N OT E S Insolvency of Mobile Money Firms in Developing Countries Overview for Policy Makers Andres F. Martinez, Will Paterson, and Jonathan Greenacre © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202- 522-2625; e-mail: pubrights@worldbank.org. Cover photo: Shutterstock.com. Further permission required for reuse. >>> Acknowledgments This note was authored by Andres F . Martinez, Will Paterson (Finance, Competitiveness and Innovation Global Practice, World Bank Group), and Jonathan Greenacre (Boston University). The authors thank those who provided comments, in particular: Holti Banka, Harish Natarajan, Ahmed Tawfik Rostom, Matthew Saal and Gynedi Srinivas (World Bank Group); Stefan Staschen and Patrick Meagher (CGAP); Teresa Rodriguez de las Heras Ballell (Universidad Carlos III de Madrid); and the FCI Global Insolvency & Debt Resolution Team. The authors are also grateful to World Bank colleagues Jean Pesme (Global Director, Finance), Mahesh Uttamchandani (former Practice Manager, EFNFI) and Niraj Verma (acting Practice Manager, EFNFI) for their guidance. >>> Contents Acknowledgments 3 Overview 5 Address insolvency in the regulation of mobile money to protect 5 users and the economy The Treatment of Mobile Money Firms in Domestic 1.  7 Insolvency Frameworks 2. Major Risks to Funds as a Result of Insolvency 10 2.1 Loss of Value Risk 10 2.2 Illiquidity Risk 11 3. Mitigation Tools 12 3.1 Trust Model 12 3.2 Custodian 13 3.3 Specialized Regimes 14 4. Conclusion 15 Appendix 16 Endnotes 18 EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 4 >>> Overview Insolvency of Mobile Money Firms in Developing Countries This Note provides an overview of the challenges policy makers may encounter when a mobile money firm becomes insolvent. Such firms would likely be subject to corporate insolvency laws. Existing mitigation tools meant to safeguard customers’ funds may face legal and logistical problems unless they are coordinated with the country’s standard insolvency system. Customers may lose funds and/or not have quick access to them. The Note also highlights several areas requiring further research. Address insolvency in the regulation of mobile money to protect users and the economy E-money services1 have become increasingly popular, particularly in developing countries. These services, offered by providers other than traditional banks, enable customers to deposit, store, transfer value, and, in some cases, convert e-money back into cash. A key e-money service is mobile money.2 For the purposes of this Note, the term mobile money refers to an electronic pay- ment service, provided by nonbank entities, that enables people to deposit, store, transfer, and withdraw electronic funds back into cash.3 The term mobile money firm refers to firms provid- ing mobile money. Depending on the regulatory framework, these firms include mobile network operators (MNO), subsidiaries of MNOs, and firms unrelated to an MNO. First launched in 2004, mobile money accounts now number over one billion in 95 developing countries and process a combined US$2 billion in transactions daily. The COVID-19 pandemic accelerated the use of mobile money and other e-money services, as many countries lowered transaction costs and increased limits to incentivize contactless transactions. Mobile money has greatly benefitted millions of people in developing countries. The service has been especially impactful where customers have less access to traditional bank accounts and mobile phone penetration is high, providing users with an alternative way to store, transfer, and pay with mobile money. At the same time, the rapid growth of mobile money raises some regula- EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 5 tory concerns. The service is beneficial as long as customers tor said were in place were not properly constituted.5 Shortly can quickly and readily access their funds. But what if a mobile after this case, the UK established specific regulations ad- money firm becomes insolvent? Will customers still be able to dressing the insolvency of e-money firms. use funds during the firm’s insolvency process? Do they risk losing funds? In a developing country where mobile money plays a critical role in servicing low-income populations, the insolvency of an This Note provides an overview for policy makers of the risks e-money firm like Ipagoo could cause loss or delay in access of not having robust mechanisms in place to deal with mo- to funds for those who need them the most. In severe cases, bile money firm insolvency. A broad perception in the market such an insolvency could damage the credibility of the mobile is that most of the risks associated with such insolvencies are money system and the economy more broadly. While we are mitigated by regulatory measures, known as fund safeguard- not aware of a mobile money firm insolvency in a developing ing rules, imposed to protect funds provided by customers country, it is important for policy makers to put in place, review, (“funds”). The closer analysis provided here shows that a coun- and, where necessary, strengthen fund safeguarding frame- try’s policy makers may conclude that current risk mitigation works that ensure adequate coordination with applicable in- arrangements may be inadequate, especially when evaluated solvency rules. Ideally, policy makers should review fund safe- in the context of the national corporate insolvency systems un- guarding rules before a mobile money firm becomes insolvent. der which these arrangements would be activated. This Note Waiting until an insolvency occurs would likely compound loss focuses solely on corporate insolvency issues related to mobile and disruption for customers. This is because there may be an money firms; it does not analyze other relevant areas, such as extensive delay while courts and other actors clarify what pro- financial supervision, several of which are also important and tections are available and how effectively they operate. could be the subject of a separate study. Several tools commonly used to protect funds can serve as In most countries, no specific laws or regulations address the starting points for analyzing the effectiveness of a country’s insolvency of a mobile money firm. By default, then, if these fund safeguarding framework. See the Appendix for a list of companies become financially distressed, their insolvencies questions policy makers can use to begin the review process. (including possible reorganization of viable firms and liquida- This Note does not provide recommendations on which tools tion of firms that cannot be saved) would fall under the domes- to use, nor does it exhaustively cover all the issues that may tic corporate insolvency law of the country in which the mo- arise following the insolvency of a mobile money firm. Further- bile money firm is incorporated.4 Critically, therefore, for each more, a policy maker should consider the specific operational, country in which mobile money firms operate, the insolvency regulatory, and legal context of the country when examining rules may not fully recognize the asset segregation of fund the problems raised below. The key issues introduced by this safeguarding rules nor give priority to mobile money account Note are: holders relative to other liabilities. This could result in a loss of 1. The importance of reviewing the treatment of mobile money value and loss of liquidity to the account holders. firms under a country’s insolvency framework; The recent insolvency of the British e-money firm Ipagoo in 2. Major risks to funds; and which United Kingdom electronic money regulations were put 3. Key mitigation tools to safeguard funds and the possible to the test (explored further below) illustrates this. Domestic limitations of these tools vis-à-vis the corporate insolvency courts addressing the insolvency provided guidance on fund system. safeguarding rules, finding that certain protections the regula- EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 6 1. >>> The Treatment of Mobile Money Firms in Domestic Insolvency Frameworks A key regulatory difference between banking and mobile money is the insolvency regime to which each is subject. These usually break down as follows: • Banks are subject to special resolution tools that maintain access to services during times of financial distress and provide a special regime for customers. • Mobile money firms are subject to a country’s regular corporate insolvency regime. Given that the mobile money industry is relatively new, most corporate insolvency laws6 do not contain specific provisions regarding the insolvency of a mobile money firm. Mobile money firms are unique among non-bank businesses in that they receive considerable amounts of funds pro- vided by customers who then rely on the firms to provide functionality to complete day-to-day transactions through services similar in many ways to those provided by the banking industry. Like funds held in a bank, a person can deposit, store, transfer, and, in some cases, withdraw cash from their mobile money account; in some instances, mobile money accounts pay interest.7 How- ever, while banks have specialized insolvency resolution regimes to address the specific needs of depositors, most mobile money firms would come under general insolvency laws that do not give special status to account holders similar to that given to bank depositors. Mobile money account holders are likely to be classified as unsecured creditors (despite the issuer’s mobile money account nominally being backed by cash or securities), unless structures to safeguard funds exist and are enforceable under the general bankruptcy law. For these reasons, it is important that regulators properly understand the dynamic between their country’s corporate insolvency system and whatever mechanisms are in place to mitigate the negative impacts on customers caused by the insolvency of a mobile money firm. Despite the similarities noted, banks and mobile money firms are regulated differently,8 including with respect to the applicable insolvency regime. In most countries, default of a bank is treated considerably differently than default of a mobile money firm. Banks are usually subject to a range of emergency regulatory tools that exempt them from the corporate insolvency law.9 Such tools EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 7 usually include a combination of deposit guarantee schemes, tional legislation to safeguard funds, including provisions that emergency liquidity assistance facilities, and special resolu- the funds not be commingled with other funds provided by tion regimes. e-money users. Further, that the funds “shall be insulated . . . against the claims of other creditors of the payment institu- While to date no major mobile money firm has become insol- tion, in particular in the event of insolvency.”15 Ultimately in the vent, firms providing other e-money services have failed, dem- Ipagoo case, the EMRs were “construed as a means chosen onstrating the importance of clarifying fund safeguarding rules. to implement the insulation provisions.”16 The Court found that One such e-money firm is Ipagoo LLP (“Ipagoo”), the subject the EMRs and the EU Directives provide that e-money holders of the recent England and Wales Court of Appeal case10 Re are granted rights in priority to other creditors; e-money hold- Ipagoo LLP (In Administration) (2022) EWCA Civ 302, in which ers are “intended to stand apart from the normal insolvency the fund safeguarding rules applicable to e-money were put to regime and should only bear the costs associated with dis- the test. The case highlighted a key lesson: if an e-money firm tributing it.”17 Further, even though not necessary for the final fails, and it is not subject to bank regulation, it will likely be sub- decision, the Court found that the insolvency provisions in ject to a country’s regular corporate insolvency law, exposing the EMRs, given their status of transposing an EU Directive,18 customers’ funds to a range of risks. could have the potential to change the priorities in the corporate insolvency law.19 A key conclusion from the case is important to In August 2019, Ipagoo became insolvent and went into ad- highlight: the application of the EU rules had the ultimate effect ministration.11 The UK Electronic Money Regulations (2011) of protecting customers who provided the funds. Had the EU (“EMRs”), which implemented the European Union Electronic legislation not been applicable to the Ipagoo case, the solution Money Directive, required Ipagoo to safeguard the funds pro- would have been different. It is likely that the provisions con- vided by customers. It was not possible for the Administrators tained in the UK’s EMR would have been insufficient to ensure to determine whether the funds were properly safeguarded, that the funds were sufficiently protected in the case that Ipa- and Ipagoo was likely in serious non-compliance with the goo did not meet the requirement to segregate those funds— EMRs.12 Once Ipagoo became insolvent, it, like other e-money which is what happened in practice. providers, was subject to the UK’s regular corporate insol- vency regime. The Administrators of Ipagoo asked the Court Since Ipagoo went insolvent, the UK has tried to fix this problem for guidance on how to distribute the funds and whether the by introducing new regulations for this industry: an insolvency EMRs created a statutory trust that would segregate the funds procedure (called “special administration”) for payment institu- provided by customers from other assets of the company. tions and for electronic money institutions, which is discussed One of the key issues for the Court to decide was whether below.20 Many other countries, particularly in the developing the EMRs’ insolvency provision13 would be applicable, rather world, have not introduced specialized insolvency regimes for than the regular creditor payment priorities established by the mobile money firms or updated their basic fund safeguarding corporate insolvency law. Ultimately, reviews at the trial- and rules. This could put funds at risk. For example, Kenya and Tan- appeals-court levels were required to clarify the precise op- zania, two countries with major mobile money sectors, have not eration of fund safeguarding rules, causing a two-year delay amended their fund safeguarding rules since 2014 and 2015 between Ipagoo’s insolvency and the final decision regarding respectively, despite significant growth of this service and its distribution of funds to customers.14 importance to the countries’ economies.21 Although both Kenya and Tanzania have a range of protections against loss of value The Ipagoo case also involved two European Union (EU) di- and illiquidity, as explained below, it is unclear how some tools rectives related to e-money: Electronic Money Directive (EMD) will operate in practice, such as accelerated funds dispersal. (2009/110/EC) and the Second Payment Services Directive (PSD2) (2015/2366/EU). As with all EU Directives, these pro- For several reasons, inadequate fund safeguarding rules visions had not immediately been made part of the domestic would likely create more serious problems in developing coun- legislation of the member countries: each member country tries than the Ipagoo insolvency created in the UK. First, mo- is required to transpose them to national legislation. The e- bile money, by enabling people to use it as a form of savings, money Directives required EU Member States to establish na- has a wider functionality than Ipagoo’s service. Further, mobile EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 8 money services normally have a network of agents, which en- the specific trust (or fund-separating mechanism) has been able users to convert mobile money into cash without having a established.25 traditional bank account. In Sub-Saharan Africa, 15 percent of adults have used a mobile money account to save.22 This is be- Third, mobile money plays a more significant role in the econo- cause some mobile money services enable customers to store mies of many developing countries than in those of developed funds in their accounts and even to obtain interest.23 This could countries, to the point that the service may represent a form of mean that the insolvency of a mobile money firm can cause “systemic risk.” This means that failure of one or more mobile people in these countries to lose a portion of their longer-term money firms may significantly damage the financial and wider savings in addition to their transaction funds. economic system of a developing country. For example, by 2014, M-Pesa processed 66.56 percent of the volume of na- Second, in many developing countries, regulatory and legal tional payments in Kenya. Collapse of this service would there- frameworks for insolvency, and their implementation, often fail fore have a comparatively bigger impact in Kenya than it would to comply with existing good international practices, such as in jurisdictions where mobile money is less widely used. While those set out in the World Bank Principles for Effective Insol- no mobile money firm in a developing country has become vency and Creditor/Debtor Regimes.24 This means it is even insolvent, occasional short-term outages of e-money services more difficult for policy makers to predict how a court and re- (ranging in duration from one to two hours to three to four days) lated bodies will resolve a failing mobile money firm. In turn, have occurred in several countries, and each of these outages this means it is difficult to predict how fund safeguarding rules imposed significant costs on the affected communities. The will operate, particularly regarding the extent to which the rules extent of such costs suggests that the insolvency of a major protect funds. Even in countries where the insolvency system mobile money firm, which might cause a disruption of sever- works well, issues may arise related to trust law or the way that al years, could be seriously damaging to local economies.26 EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 9 2. >>> Major Risks to Funds as a Result of Insolvency A country’s corporate insolvency regime can expose funds provided by customers to two types of risk: loss of value and illiquidity.27 These risks depend on how the domestic legal framework clas- sifies the customers who provided those funds, particularly whether they are treated as creditors of the insolvent debtor or remain “outside” the corporate insolvency proceeding. This classifica- tion will depend on a range of domestic factors.28 However, without any regulatory mechanisms in place that deal with these creditors specifically, it is likely that mobile money customers will be classified as unsecured creditors.29 The extent to which the insolvency regime complies with good international practices also impacts the scale of these risks.30 Many countries have implemented mitigation tools (analyzed in Section 3 below) designed to ad- dress some of the risks. The discussion in this section focuses on the possible difficulties that the application of the corporate insolvency law could generate in the absence of any mechanism to safeguard the funds provided by customers. 2.1  Loss of Value Risk The most likely scenario, in the absence of specific rules to prevent it, is that customers that pro- vided funds to the debtor will be treated as unsecured creditors. In most countries, insolvency law contains provisions giving unsecured creditors a share in any distribution of the debtor’s assets on a pro rata basis, after distribution to secured creditors and other priority creditors. This creates loss of value risk because such unsecured creditors face a potential write-down in the value of their funds during insolvency proceedings.31 Customers holding mobile money have ‘purchased’ those balances by providing funds, usually via some cash-in mechanism (agent network, bank transfer, etc.). The mobile money issuer is supposed (in certain legal systems) to hold those funds in a dedicated bank or trust account, matching sound assets in the company’s trust account against the customer liability represented by the mobile money balance in customer accounts. However, even where the mobile money ac- count is backed by assets held in a bank or investment account, unless that asset and the paired mobile money liability to customers is segregated or set aside from the overall bankruptcy estate, in a liquidation scenario, some or all the funds provided by customers, may become part of the in- EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 10 solvency estate. If the mobile money balances and the assets tain a rule suspending enforcement action against assets held backing them are commingled with other liabilities and assets by the debtor while insolvency proceedings take place. The of the company, the available assets may be used to repay suspension provides parties with time to thoroughly examine debts owed by the mobile money firm to third parties, including the debtor’s financial and management situation. In this case, secured creditors. Since in many insolvency proceedings the mobile money customers, as unsecured creditors, would be total liabilities exceed total available assets, there would not be subject to such a rule and thus unable to obtain their funds until enough assets to repay mobile money holders in full. insolvency proceedings conclude. Such a delay before final distribution of assets can be considerable, spanning the typi- Professional and other fees that customers incur in making cal timeframe for a civil or commercial judge to be appointed,35 their claims, as well as the usually substantial expenses of and any hearings held, motions considered, claims reviewed, insolvency proceedings, may also reduce the value of funds before a decision is made regarding a restructuring plan or the ultimately available to customers in a liquidation. liquidation to be performed and finalized. In East Asia and Pacific countries, for example, the average Illiquidity risk can be particularly problematic in developing cost of an insolvency is 20.6 percent of the debtor’s estate.32 countries; judges and other legal professionals are not usually Delays in distribution may also mean that assets depreciate, specialists in handling complex insolvencies and are unlikely to leaving less available for collective distribution. The average re- be able to provide the kind of support required for the effective covery rate for secured creditors in sub-Saharan Africa is 20.5 and efficient insolvency of a mobile money firm. cents on every dollar recovered during insolvency proceed- ings.33 This means customers, when classified as unsecured Infrastructure problems and customers’ lack of financial ex- creditors, would be likely to recover little, if any, of their funds.34 perience could make this delay even longer. A significant por- tion of mobile money customers in the developing world do not have bank accounts and have had little experience with 2.2  Illiquidity Risk financial documentation and procedures. Many live in rural Customers also face delays in receiving their funds because of areas, far from the physical location of commercial courts.36 the time it takes to conclude insolvency proceedings. In most This means customers may expend significant time performing developing countries, corporate insolvency procedures, unlike procedural steps, such as filing a claim. Also, once insolvency bank resolution frameworks, take years to complete. Illiquidity proceedings are complete, a significant delay may follow while risk arises because most corporate insolvency regimes con- customers are identified, and cash is physically retrieved.37 EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 11 3. >>> Mitigation Tools This section provides a starting point for policy makers to review the potential challenges that may arise when applying mitigation tools to address the risks of loss of value and of illiquidity. The pre- dominant mechanisms, most of which can be used in combination to strengthen the safeguarding of customer-provided funds, are discussed below. Application of these tools depends on the type of corporate entity providing mobile money. In some cases, MNOs provide mobile money, alongside other products, such as communication and mobile phone services. In other cases, as in Uganda and Tanzania, MNOs applying to launch mobile money must provide this service through a subsidiary company.38 This separation is aimed at, among other goals, insulating mobile money customers from the insolvency of the MNO.39 Regulation often requires such subsidiary companies to store funds in a trust and to comply with other fund safeguarding rules. 3.1  Trust Model Many countries use legal instruments to separate funds from the estate of the insolvent mobile money firm. Common law jurisdictions, particularly, tend to require mobile money firms to store funds in a trust. Kenya, Malawi, Rwanda, Tanzania, and Uganda require mobile money firms to store funds in a trust.40 In theory, funds, as trust assets, are segregated from assets of the mobile money firm. This approach should address loss of value risk because it means such funds are unavailable for distribution to firm creditors during insolvency proceedings. However, trusts have certain limitations that may make them insufficient to fully address the risks mentioned above. a. Legal compatibility In many countries, a potential conflict may exist between the mobile money trust requirements and other legislation, particularly insolvency and trusts. This can mean that mobile money trust require- ments are insufficient to legally protect funds against loss of value risk. The uncertainty around the creditor classification and rights of customers in an insolvency scenario may leave funds exposed to loss of value and illiquidity risks. For example, this can be the case if the way the trust was established or the trust structure the regulator has set is found to be improperly constituted.41 EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 12 b. Inadequate governance rules countries. Research suggests that a combination of fiduciary Many trust documents do not contain such important rules as contracts, mandate contracts, and direct regulation can achieve standards of competence for trustees and reporting require- protection comparable to that provided by trust instruments, ments. Inadequate governance rules mean trusts are less but very careful legal and regulatory drafting is required.46 likely to operate effectively in practice. In addition, monitoring Furthermore, like the custodian model and trusts, these legal of safeguarding requirements, such as segregating of funds instruments can only potentially address loss of value risk; cus- provided by customers from other funds, may be inadequate. tomers may still face significant illiquidity risk. This is because, If mobile money firms required to segregate funds disregard like a trustee, the actor administering the fiduciary or mandate those provisions, the funds will likely be commingled with other contract may not have adequate administrative mechanisms to assets and liabilities, leaving customers who provided funds promptly return funds to customers or reliable information on unsecured or unprotected. the mobile money customer’s account. c. Illiquidity risk Trusts, in themselves, do not address illiquidity risk. This is 3.2 Custodian because the trustee of the mobile money trust may have inade- A custodian model means a firm performs all operational quate administrative mechanisms for returning funds. Custom- mobile money functions but delegates one function—safe- ers may then face a lengthy delay while trust funds are either guarding of funds—to another actor who has “custody” of the transferred to a solvent mobile money firm or the trust assets funds. This custodian is often also mandated to store customer are liquidated and returned to them. Further, litigation during funds in a trust. Under the custodian model, a mobile money the insolvency proceedings may delay the return of funds. For customer has no direct legal claim against the provider of the example, in many countries, the court may be asked to exam- mobile money service. Instead, at least in theory, that customer ine whether a preferential transfer of property or a transfer at has a claim against assets of the custodian. This mechanism under value were effected through a trust.42 intends to address loss of value risk because the separate firm holds the funds, which are then assumed to be unaffected by To remedy aspects of this risk, a small number of coun- the mobile money firm’s failure. tries have implemented what appears to be an accelerated funds dispersal mechanism for mobile money in the event Safaricom’s M-Pesa service in Kenya uses the custodian of operator insolvency. Kenya introduced such a scheme in model. Safaricom (an MNO) never receives funds from cus- 2014 through its National Payment Systems Regulations.43 tomers and agents. Instead, funds are paid directly to another Upon the insolvency of a mobile money firm, the Central Bank firm called the M-Pesa Holding Company (MPHC), a nonbank of Kenya can distribute trust assets to customers. A few other entity that has custody of the funds and stores them in a trust countries have since introduced the tool as well, with the aim account.47 This approach creates the following distinction: of enabling a policy maker (usually the central bank) or other Safaricom performs mobile money services and facilitates mo- actor to return funds more quickly than if a collapsing mobile bile money transactions, but legally, MPHC performs the actual money firm enters the country’s regular corporate insolvency payment functions, because MPHC, not Safaricom, accepts, proceedings.44 For example, in the event of revocation of a stores, transfers, and pays out funds. mobile money firm’s license, the Bank of Tanzania (Tanzania’s Central Bank) can require the firm to (a) distribute to customers The United Kingdom’s EMRs, which were the subject of the the funds held in the special account in which funds are stored, Ipagoo case, also provide an option for a custodian arrange- and (b) pay any shortfall in the special account.45 The precise ment. Such regulations require an e-money issuer to store legal operation of accelerated funds’ dispersal mechanisms funds in a separate account with an authorized credit institution have yet to be tested, particularly the extent to which they fit or an authorized custodian.48 with a country’s wider insolvency regime. Some unexplored challenges accompany use of a custodian d.  Challenges for civil law countries to address loss of value risk. Traditionally, trust instruments with identical effects to those typi- cal in common law countries have not been available in civil law EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 13 > > > Several alternative arrangements are possible, but each may FIGURE 3.1:   Safaricom Structure take time to initiate, imposing a delay in mobile money per- formance. One arrangement involves transferring the cus- todian—which by extension means transferring funds—to a MPHC solvent mobile money firm. This firm can then take the place of the original (now insolvent) mobile money firm and provide Safaricom E-money Cash E-money Cash the administrative structures required for the custodian to per- form mobile money transactions. Alternatively, the custodian Facilitates could directly distribute funds to customers in cash, although transactions this firm may not have the mechanisms required to do so or reliable information on the individual positions of the mobile Customer Agent money customers. 3.3  Specialized Regimes a.  Unclear effectiveness The UK recently released the Payment and Electronic Money Unlike what regulators may assume, under certain excep- Institution Insolvency Regulations 2021(“Regulations”),51 which tional conditions, insolvency of the mobile money firm can be established a new insolvency procedure (termed special extended to other companies within the same group, including administration) for payment or electronic money institutions. a holding company. These circumstances can include “pierc- The Regulations take a direct and holistic approach to dealing ing the corporate veil,” a phrase that describes a court holding with the insolvency of an institution. Among other grounds, if a shareholder responsible for the actions of the corporation the institution “is, or is likely to become, unable to pay its debt” as if the corporation’s actions were the shareholders’. Other an application for special administration can be made.52 circumstances include commingling trust assets with assets of the mobile money firm49 and, potentially, fraud. In France, The Regulations allow the special administrator to keep an in- for example, courts have allowed creditors of a group’s sub- solvent institution operational, with the aim of ensuring continu- sidiaries to request payment of their debts from the holding ity for consumers and prioritizing the return of funds.53 The ad- company where the creditors may have validly assumed that ministrator’s objectives are to ensure (i) return of relevant funds both companies formed only one single entity or that they were as soon as reasonably practical; (ii) timely engagement with united by a community of interest.50 payment systems operators and regulators/authorities; and (iii) either rescue of the institution as a going concern or wind it up b.  Administrative limitations leading to “liquidity risk” in the best interests of the creditors.54 Under the Regulations, A custodian model cannot, in itself, address potential liquidity claims by holders for electronic money held by the institution risks to funds in the event of the collapse of a mobile money are paid from an asset pool in priority to all other claims, except firm: additional funds transfer mechanisms are likely required. for the costs of distribution and third party fees and expenses Liquidity risk means customers face a delay in accessing their for operating the funds account, subject to certain conditions.55 funds for the purposes of performing mobile money functions, In the event of a shortfall, it should be “borne pro rata by all even if the actor with legal title to such funds has not entered users or holders for whom the institution holds” the electronic insolvency proceedings. In this context, the delay arises money within the specific asset pool.56 The administrator also because the custodian may not have the administrative capa- may set bar dates for the submission of such claims.57 Finally, bilities to provide mobile money services without the support the Regulations also allow the UK Financial Conduct Authority of the parent company, that is, of the mobile money firm. This (FCA) to direct the administrator under certain conditions to means collapse of the mobile money firm may lock up funds prioritize one or more of the objectives58 in the public interest.59 with the custodian until an alternative arrangement is designed Further research is required into this mechanism and others and implemented. implemented in other countries. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 14 4. >>> Conclusion Addressing issues related to the insolvency of mobile money firms is particularly important for developing countries because of the size of their ever-increasing mobile money sectors and because many lower-income communities (where few have bank accounts) use the service exten- sively and may be particularly vulnerable to its failure. Additional work is required to better understand what could happen in the event of a mobile money firm’s financial distress and possible formal insolvency proceedings. The conclusion that emerges at this early stage of the analysis, however, is that policy makers should carefully review the regulatory mechanisms in place to protect funds stored in mobile money firms and to mitigate the risks highlighted in this note. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 15 >>> Appendix Starting Point: Questions for Policy Makers A range of issues arise in the context of the laws and regulations applicable to mobile money. Policy makers wishing to strengthen regulatory frameworks for their mobile money sectors can begin, however, by seeking answers to the following questions: Legal status of mobile money customers • What is the legal status of a mobile money customer in relation to the mobile money firm that she uses? • In particular, is she a secured, priority, or general unsecured creditor, or does she have some other legal classification? Structural separation • Do you require firms wanting to provide mobile money to establish a subsidiary firm? Does that subsidiary firm provide the service? Custodian • Do you require mobile money firms to store funds with a regulated financial institution? • Can mobile money firms store funds with a separate firm that is not a regulated financial institu- tion? • If yes, what are the qualification criteria for such a firm to be able to store funds, and how do you supervise that governance arrangement? • What is the interaction of the separate firm with an insolvency process? Trust and trust-like arrangements • Common law countries: Is the mobile money firm required to segregate funds from the firm’s other assets, such as by using a trust, escrow, and/or another type of legal instrument? EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 16 • Civil law countries: Is the mobile money firm required to • If so, how does it work? Are system interoperability and segregate funds from the firm’s other assets, such as by information-sharing protocols in place? using a fiducia? Operation of insolvency framework • How are these instruments treated in an insolvency process? • Do you have an insolvency law that conforms to most inter- Facilitating funds dispersal national good practices, such as those in the World Bank • Do you have an efficient and transparent mechanism to Principles for Effective Insolvency and Creditor/Debtor accelerate the process of dispersing funds during insol- Regimes?60 vency? • If so, do stakeholders understand the framework and use it effectively? EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 17 >>> Endnotes 1. Electronic money (e-money)-based instruments: In general terms, lizing runs and negative externalities associated with bank failure — these instruments involve the payer maintaining a prefunded transac- including potential collapse of the payment system and transmission tion account with a payment service provider, often a nonbank. (Non- or magnification of financial shocks under conventional bankruptcy banks are the exclusive focus of this Note.) Specific products include proceedings. See https://scholarship.law.cornell.edu/facpub/1715/. online money when the payment instruction is initiated via the internet, 10. Ipagoo was authorized “to issue [e-money] and to provide multi-coun- mobile money when initiated via mobile phones, and prepaid cards. try and cross-currency payment account services and was regu- See CPMI-World Bank Payment Aspects of Financial Inclusion (2016). lated by the FCA accordingly. It offered a payment card and mobile 2. Mobile money differs from privately issued digital currencies such telephone ‘app’ which enabled customers to manage accounts in as cryptocurrencies. Unlike cryptocurrency, which is typically not multiple currencies and carry out international transfers of funds in operated/issued by a single issuer, mobile money is one form of real time in multiple EU countries.” Ipagoo Court of Appeal, para. 2. e-money issued/operated by a particular mobile money issuer/oper- This is a slightly narrower functionality than mobile money, which also ator. Both can be exchanged for fiat currency, but while the value of provides a mechanism for storage and savings, as discussed in the cryptocurrency fluctuates, mobile money value is stable and can be introductory section of this note. converted into fiat on a one-to-one basis. Moreover, cryptocurrency 11. A restructuring procedure under the UK insolvency system. is a speculative asset; it is not insured, not backed by fiat currency, 12. Ipagoo, Appeals Court Judgement, para. 10. and in some countries not regulated in any way. Mobile money, on the 13. This provision, triggered by the insolvency of the e-money institution, other hand, is usually regulated and safeguarded, as it is often held in grants e-money holders rights in priority over other creditors (even dedicated escrow commercial bank accounts (in some rare cases in most insolvency expenses). See EMR, Art. 24. central bank accounts) and is also sometimes insured. Attempts have also been made to compare mobile money to central bank digital cur- 14. Ultimately, the UK Court of Appeal found that the safeguarding rules rencies (CBDC). One of the main differences between them, however, set out in the EMRs did not create a “statutory trust” over the e-money is that CBDC is a central bank liability, while mobile money is a liability holders or funds managed by an e-money issuer. A statutory trust of the private entity that issues it, even in the rare cases where the fiat is a trust imposed by statute (e.g., trusts declared of certain sums value of mobile money is held in central bank accounts on behalf of improperly received by directors as compensation for loss of office; the mobile money issuer. see ss. 217, 218, 219, and 222 of the UK Companies Act, 2006). Giv- en that the EMRs implemented an EU Directive, it was decided that 3. See, for example, Jonathan Greenacre (2018), “Regulating Mobile such rules apply rather than the standard insolvency rules on priority. Money: A Functional Approach,” Background Paper 4, Blavatnik This meant that customers of an insolvent e-money firm had a right to School of Government, Oxford University; https://pathwayscommis- be paid ahead of other creditors. This contrasts with an earlier High sion.bsg.ox.ac.uk/sites/default/files/2019-09/regulating_mobile_ Court decision (in Re Supercapital Ltd (2020), EWHC 1685 (Ch)), money.pdf. which held that customer funds of insolvent UK-authorized payment 4. Or, in some cases, where the company has the “main center of services firm were held on trust, and UK FCA guidance (pursuant to interests”, depending on the jurisdiction determined by the applicable the UK’s Electronic Money Regulations 2011), stating that both e-mon- corporate insolvency law. ey and payment services firms hold their customer funds on trust. 5. In particular, a statutory trust. See Ipagoo, CoA, para. 90. 15. See PSD2, Article 10. 6. Also called “bankruptcy laws”; in this note, if applied to companies, 16. Ipagoo, Court of Appeal, para. 102. the terms are considered synonyms. 17. Ipagoo, Court of Appeal, para. 94–96. 7. See, for example, J. Greenacre, “What Is Mobile Money?” Blavatnik 18. The reconciliation of the different order of priorities contemplated in School of Government, The Regulation of Mobile Money, Oxford Blav- the UK EMRs and the one contemplated in the corporate insolvency atnik School of Government: Pathways for Prosperity Commission on law was interpreted, in Ipagoo’s case, in an EU-specific context. Technology and Inclusive Development (2018). When the electronic money regulations and the insolvency law contain 8. Other important regulatory differences include that mobile money contradictory orders of priorities in developing countries, the court will firms are usually subject to lighter capital requirements and are pro- consider the country’s relevant domestic elements and, in absence of hibited from credit creation. clear rules, may legitimately conclude that the insolvency law prevails, 9. Policy makers tend to justify using such tools based on a range of depending on the country’s legislative and regulatory system. factors, including the vulnerability of bank balance sheets to destabi- EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 18 19. Ipagoo, Court of Appeal, para. 96. Afghanistan, Kenya, Malawi, Sri Lanka, and several Pacific islands. 20. See Payment and Electronic Money Institution Insolvency Regulations Trusts law seeks to isolate funds from the rest of the debtor’s assets, 2021, https://www.legislation.gov.uk/uksi/2021/716/contents/made. allowing the customer to retain beneficial ownership in the trust assets. For a detailed discussion on how trusts achieve fund isolation, 21. Kenya, National Payment System Regulations; Tanzania: Electronic see Jonathan Greenacre and Ross Buckley (2014), “Using Trusts Money Regulations 2015 (E-Money Regulations). to Protect Mobile Money Customers,” Singapore Journal of Legal 22. Global Findex Database 2021, Executive Summary, p. 3. Studies, pp. 59–78. 23. See, for example, MTN Rwanda, https://www.mtn.co.rw/mtn-rwanda- 35. This does not apply in those countries where the insolvency process pays-out-interest-to-mobile-money-subscribers/. is run by an administrative entity. 24. The World Bank Principles for Effective Insolvency and Creditor/ 36. For example, the World Bank’s 2017 Findex Report states that almost Debtor Regimes, together with the UNCITRAL Legislative Guide on half of mobile money users in Sub-Saharan Africa do not have an Insolvency, are the internationally recognized benchmarks for ICR. account with a financial institution. See globalfindex.worldbank.org. See https://openknowledge.worldbank.org/handle/10986/35506. 37. While it is likely that customers receive access to their funds faster 25. See the example of Ipagoo above, which deals with the issue of a in a successful restructuring than in a liquidation, the process of statutory trust. approving and implementing a restructuring plan can also take many 26. For example, on December 7, 2018, the M-Pesa mobile money service months, if not years. in Kenya experienced a six-hour network outage that immediately 38. Tanzania: Under the Payment Systems Licensing and Approval halted service, which in turn disrupted transaction processing of Regulations, 2015, firms need a license as a PSP and e-money issuer an estimated 679.3 million Kenyan shillings every hour (https://www. before they can start operations (see E-Money Regulations 2015, Part nation.co.ke/kenya/business/safaricom-probed-over-costly-m-pesa-out- II). See NPS Act 6.-(1), Uganda, National Payment Systems Act, cl 48. age-117140). Millions of Kenyan M-Pesa customers could not make 39. In some circumstances, however, MNO insolvency could potentially payments to utility firms, hospitals, banks, government agencies, and affect the separate firm as well. other actors. More recently, disruptions of M-Pesa occurred on June 23, 2021 (see https://allafrica.com/stories/202106240072.html) and 40. The following laws require the countries’ mobile money firms to October 7, 2021 (see https://businesstoday.co.ke/m-pesa-outage- protect customer funds by storing them in a trust: Kenya National hits-bank-services/). Previously, on February 18, 2016, the Ugandan Payment System Regulations 2014, Sections 25 (3) (a) & (b); Malawi government ordered mobile money firms to disable mobile money Payment Systems (e-money) Regulations 2019, Part IV; Rwanda systems for four days. At the time 35% of Uganda’s adult population, Regulation N° 05/2018 of 27/03/2018 Governing Payment Services or 6.7 million people, had mobile money accounts. Anecdotal evidence Providers, Article 6; Tanzania 2015: Electronic Money Regulations, revealed that large numbers of people were unable to pay bills, transfer Part V; and Uganda, National Payment Systems Act, cl 49. money to relatives, and generally manage their financial and economic 41. See Ipagoo, Court of Appeal. Even though the regulator asserted that affairs. (See https://www.cgap.org/blog/impact-shutting-down-mobile- a statutory trust protected the funds of e-money holders, the Court money-uganda.) found no such trust. 27. Awrey, Dan and van Zwieten, Kristin, The Shadow Payment System 42. For example, see s. 95-96 of the Canadian Bankruptcy and Insolven- (April 21, 2017). 43 Journal of Corporation Law, Oxford Legal Studies cy Act, 1985. Research Paper No. 55/2016. 43. See https://www.centralbank.go.ke/images/docs/legislation/NPSRegu- 28. The classification and resulting operation and scale of risks will also lations2014.pdf. depend on the nature of the funds being deposited, the terms of 44. These include, for example, Tanzania’s Electronic Money Regulations the relationship between customers and the mobile money firm (the (2015) and Ethiopia’s Licensing and Authorization of Payment Instru- debtor), other contractual arrangements, and the order of priorities in ment Issuer’s Directive (2020). the domestic law that governs these terms. 45. The trigger for using the accelerated bankruptcy regime is revocation 29. This was the case in the Mt. Gox insolvency in 2014. Note customers of mobile money firm’s license, which may involve bankruptcy. This is may be placed in many other legal classifications, even potentially because one of the grounds for revocation is breach of the E-Money being considered “equivalent” to depositors, unsecured creditors, or Regulations and or any other written law, which may give the Bank creditors with a right of separation in countries where those mecha- of Tanzania the power to revoke an e-money issuer’s license in the nisms are contemplated. event of institutional distress and bankruptcy (E-Money Regulations, 30. See https://openknowledge.worldbank.org/handle/10986/35506. The s 11(2)). World Bank Principles for Effective Insolvency and Creditor/Debtor 46. https://www.academia.edu/36191665/International_and_Comparative_ Regimes provide a benchmark good practice approach. Law_Quarterly_Protecting_Mobile_Money_Customer_Funds_In_Civ- 31. See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2843772. il_Law_Jurisdictions_Protecting_Mobile_Money_Customer_Funds_In_ 32. This is measured in a hypothetical case by the archived 2020 World Civil_Law_Jurisdictions. Bank Doing Business report, Resolving Insolvency indicator; the 47. The M-Pesa Holding Company stores funds in one or more commer- methodology is available at https://archive.doingbusiness.org/en/data/ cial banks and/or in government bonds. exploretopics/resolving-insolvency. 48. Electronic Money Regulations 2011 (EMRs), section 21(2)(b). In this 33. This is measured in a hypothetical case by the archived 2020 World sense, the EMRs differ from most regulation of mobile money that rely Bank Doing Business report, Resolving Insolvency indicator, the meth- on storing funds in a trust (discussed below). odology of which is available in https://archive.doingbusiness.org/en/ 49. See https://pathwayscommission.bsg.ox.ac.uk/sites/default/ data/exploretopics/resolving-insolvency. files/2019-09/regulating_mobile_money.pdf. 34. Alternatively, some laws might grant customers recognition as the 50. See https://cms.law/en/media/international/files/publications/guides/ “owners/depositors” of the assets with the debtor, thus giving them cms-guide-liability-holding-companies?v=1. a right of separation that would grant them a de facto priority status, 51. See https://www.legislation.gov.uk/uksi/2021/716/contents/made. possibly excluding their assets from the debtor’s estate. Several 52. Reg. 9 (1)(a), UK Payment and Electronic Money Institution Insolvency countries apply the law of trusts to the protection of funds, including Regulation 2021. EQUITABLE GROWTH, FINANCE & INSTITUTIONS NOTE   |  INSOLVENCY OF MOBILE MONEY FIRMS IN DEVELOPING COUNTRIES <<< 19 53. See Explanatory Memorandum, https://www.legislation.gov.uk/ 58. Reg. 38, UK Payment and Electronic Money Institution Insolvency uksi/2021/716/pdfs/uksiem_20210716_en.pdf. Regulation 2021. 54. Reg. 12 (1)-(4), UK Payment and Electronic Money Institution Insol- 59. The public interest in “(a) the stability of the financial systems of the vency Regulation 2021. United Kingdom; (b) the maintenance of public confidence in the sta- 55. Reg. 18, UK Payment and Electronic Money Institution Insolvency bility of the financial markets, payment systems and payment services Regulation 2021. and electronic money sectors of the United Kingdom; (c) securing an appropriate degree of protection for users or holders.” See Reg. 38, 56. Reg. 19, UK Payment and Electronic Money Institution Insolvency UK Payment and Electronic Money Institution Insolvency Regulation Regulation 2021. 2021. 57. Regs. 20 & 21, UK Payment and Electronic Money Institution Insolven- 60. Available at https://documents.worldbank.org/en/publication/ cy Regulation 2021. documents-reports/documentdetail/391341619072648570/princi- ples-for-effective-insolvency-and-creditor-and-debtor-regimes. 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