Billion-Dollar Lawsuit Claims Safaricom Should Be Regulated as a Bank

Three customers of Kenyan operator and mobile money provider Safaricom are demanding USD2.38bn in damages because the telco lends money but is not subject to the same regulatory oversight as banks, reports Quartz. Their class action lawsuit argues that positive balances in some mobile money wallets are used to finance overdrafts provided to other customers, making Safaricom a borrower and lender that undertakes the same risks as retail banks. This means customer balances are also at risk if lending goes too far relative to the amount held on deposit, despite customers never having consented to allowing their funds to be lent to others. As a consequence, the plaintiffs argue that customers deserve to be compensated by receiving interest on their deposits, as they would with a normal bank account.

Safaricom’s M-PESA mobile money service set a precedent that has resulted in millions of previously unbanked Africans engaging in a far wider variety of economic activities. This has fed into the financing of small businesses too. The Fuliza overdraft facility has proven to be a natural extension of these services; Fuliza permits a phone user to make M-PESA transactions even though their wallet does not contain adequate funds. However, Fuliza has come under attack from organized criminals. Eight suspects were arrested in early February for having allegedly stolen almost KES500mn (USD3.9mn) by fraudulently registering SIM cards for 123,000 new mobile phone numbers, then using those SIM cards to borrow money through Fuliza.

It requires a stretch of the imagination to believe Safaricom’s fraud losses could be so high that they might represent a risk to the deposits of honest customers. M-PESA is such a profitable service that Safaricom is under political pressure to split their mobile money business into a separate entity from the rest of their telecoms operations. Nevertheless, the reputation of Safaricom has not been helped by repeated stories about fraudulent abuse of M-PESA. One recent story featured ‘loans from the grave’ after a widow said her dead husband’s phone had been used to borrow money. The widow and several others have instigated a separate class action lawsuit against Safaricom and the Communications Authority of Kenya over the frequency with which SIM swap fraudsters hijack phone accounts as a gateway to taking out loans in the names of their victims.

I would not be surprised if both lawsuits are ultimately dismissed. When the Risk & Assurance Group held its Nairobi conference at Safaricom’s offices in 2018, the agenda was disrupted on the second morning because of an unscheduled visit from a government minister. The Kenyan government has long been conscious of the scale of M-PESA’s success, and what it means for economic growth and tax revenues. There are always arguments to be had over how far to regulate private sector businesses in order to protect ordinary people, but African politicians who have been tempted to strangle new telco services soon decide to loosen their grip when the realize they are also strangling the flow of new money into the government’s coffers. However, these two legal cases do illustrate how much now depends on phones only being used by the people they belong to. Whether the phones are a tool used to access a service provided by another business, or whether the telco morphs into a multi-service business that provides financial services alongside telecommunications, criminals have realized that the easiest way to steal or invent a new identity is via a phone.

When does regulation go too far, and when does it fall short? That question will be addressed during today’s episode of The Communications Risk Show, which features an interview with Sossina Tafari, a US-based consultant who specializes on advising governments how to regulate the communications sector. Join us at 4pm GMT at to watch the live broadcast or catch the recording soon after.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.