SU+ @ Strathmore University Library Electronic Theses and Dissertations This work is availed for free and open access by Strathmore University Library. It has been accepted for digital distribution by an authorized administrator of SU+ @Strathmore University. For more information, please contact library@strathmore.edu 2021 The Effect of demonetization and COVID- 19 on mobile money transactions in Kenya. Omanga, Gabin Nyamweya Strathmore Business School Strathmore University Recommended Citation Omanga, G. N. (2021). The Effect of demonetization and COVID-19 on mobile money transactions in Kenya [Thesis, Strathmore University]. http://hdl.handle.net/11071/12897 Follow this and additional works at: http://hdl.handle.net/11071/12897 https://su-plus.strathmore.edu/ https://su-plus.strathmore.edu/ http://hdl.handle.net/11071/2474 mailto:library@strathmore.edu http://hdl.handle.net/11071/12897 http://hdl.handle.net/11071/12897 THE EFFECT OF DEMONETIZATION AND COVID-19 ON MOBILE MONEY TRANSACTIONS IN KENYA GABIN NYAMWEYA OMANGA 113530/2018 A Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Science in Development Finance of Strathmore University Strathmore Business School Strathmore University September, 2021 This dissertation is available for Library use on the understanding that it is copyright material and that no quotation from the thesis may be published without proper acknowledgement. ii DECLARATION I declare that this work has not been previously submitted and approved for the award of a degree by this or any other University. To the best of my knowledge and belief, the dissertation contains no material previously published or written by another person except where due reference is made in the project itself. © No part of this dissertation may be reproduced without the permission of the author and Strathmore University Gabin Nyamweya Omanga October, 2021 Approval The dissertation of Gabin Nyamweya Omanga was reviewed and approved by: Dr. Muli Maingi (Supervisor) Strathmore Business School Dr. George Njenga Dean, Strathmore Business School Dr. Bernard Shibwabo Director of Graduate Studies Strathmore University iii DEDICATION This dissertation is dedicated to my Dad James Makori Omanga and my family to whom I owe everything that I am. iv ACKNOWLEDGMENT I am greatly indebted to the Strathmore Business School, and specifically the Master of Science in Development Finance which has provided me with the excellent opportunity to write this dissertation. I wish to appreciate all the faculties who guided me through the various units during my course of study. Their time, dedication and well-researched tutorial material to ensure that we get the best in our course of learning cannot go without mention. I am obliged to register my deepest gratitude to my supervisor Dr. Muli Maingi for his dedication and commitment to see that I undertake this research on time. His near immediate and most times late night responses and constructive criticism pushed me into bringing out my best in the course of writing this dissertation. Special mention to my classmates for their words of encouragement. v TABLE OF CONTENTS DECLARATION........................................................................................................................... ii DEDICATION.............................................................................................................................. iii ACKNOWLEDGMENT ............................................................................................................. iv LIST OF FIGURES ...................................................................................................................... x DEFINITION OF TERMS......................................................................................................... xii CHAPTER ONE ........................................................................................................................... 1 INTRODUCTION......................................................................................................................... 1 1.1 Background of the Study ...................................................................................................... 1 1.1.1 Mobile money ................................................................................................................ 3 1.1.2 Demonetization .............................................................................................................. 7 1.1.2.1 History of demonetization........................................................................................... 7 1.1.2.2 Objectives of demonetization ..................................................................................... 8 1.1.3 Demonetization in Kenya ............................................................................................ 10 1.2 Problem Statement .............................................................................................................. 12 1.3 Research Objectives ............................................................................................................ 14 1.3.1 Main Objective of the Study ........................................................................................ 14 1.3.2 Specific Objectives of the Study .................................................................................. 14 1.4 Research Questions ............................................................................................................. 15 1.5 Scope of the Study .............................................................................................................. 15 1.6 Significance of the Study .................................................................................................... 15 1.6.1 Policy Makers .............................................................................................................. 15 1.6.2 Central Banks ............................................................................................................... 16 1.6.3 Mobile money service providers .................................................................................. 16 1.6.4 Academia/Researchers ................................................................................................. 16 CHAPTER TWO ........................................................................................................................ 18 vi LITERATURE REVIEW .......................................................................................................... 18 2.1 Introduction ......................................................................................................................... 18 2.2 Theoretical Literature .......................................................................................................... 18 2.2.1 Technology Acceptance Model ................................................................................... 18 2.3 Empirical Review................................................................................................................ 21 2.3.1 Demonetization and mobile money transactions ......................................................... 21 2.4 Summary of Reviewed Literature and Knowledge Gaps ................................................... 27 2.5 Conceptual Framework ....................................................................................................... 37 2.6 Operationalization of the Variables .................................................................................... 38 CHAPTER THREE .................................................................................................................... 39 RESEARCH METHODOLOGY .............................................................................................. 39 3.1 Introduction ......................................................................................................................... 39 3.2 Research philosophy ........................................................................................................... 39 3.3 Research Design.................................................................................................................. 40 3.4 Population and sampling ..................................................................................................... 40 3.5 Data ..................................................................................................................................... 40 3.6 Data Collection Methods .................................................................................................... 41 3.7 Data Analysis ...................................................................................................................... 41 3.7.1 Model Specification for objectives 1 and 2 ..................................................................... 42 3.7.2 The Moderating Effect of SARS Covid-19 on the association between demonetization and mobile money............................................................................................................................ 43 3.7.3 Procedure for Model Estimation .................................................................................. 44 3.7.4 Event of Interest Identification .................................................................................... 45 3.7.5 Identification of Estimation, Event and Post-event window ....................................... 45 3.8 Research Quality ................................................................................................................. 46 vii 3.8.1 Validity ............................................................................................................................ 46 3.8.2 Reliability ......................................................................................................................... 46 3.9 Ethical Issues in Research ................................................................................................... 46 3.9.1. Ethical approval .............................................................................................................. 46 3.9.2 Plagiarism ........................................................................................................................ 47 CHAPTER FOUR ....................................................................................................................... 48 PRESENTATION OF RESEARCH FINDINGS ..................................................................... 48 4.1 Introduction ......................................................................................................................... 48 4.2 Descriptive Analysis ........................................................................................................... 48 4.3 The Effect of Demonetization Announcement on Mobile Money Transactions ................ 50 4.3.1 Effect of Demonetization Announcement on the average monthly change in mobile money transactions (AMT) during the event window in Kenya .......................................................... 50 4.3.2 Effect of Demonetization Announcement on the cumulative change in mobile money transactions (CMT) during the 25- month event window in Kenya ......................................... 53 4.3.3 The Moderating Effect of Covid-19 on the association between Demonetization announcement and Mobile money transactions ........................................................................ 54 CHAPTER FIVE ........................................................................................................................ 56 CONCLUSIONS AND RECOMMENDATIONS .................................................................... 56 5.1 Introduction ......................................................................................................................... 56 5.2 Summary of the study ......................................................................................................... 57 5.2.1 Effect of demonetization announcement on the average monthly change in mobile money transactions (AMT) during the 25-month event window in Kenya .......................................... 57 5.2.2 The effect of demonetization announcement on the cumulative change in mobile money transactions (CMT) during the 25-month event window in Kenya .......................................... 58 5.2.2 The moderating effect of Covid-19 on the association between demonetization announcement and mobile money transactions in Kenya ......................................................... 59 viii 5.3 Conclusion .......................................................................................................................... 59 5.4 Contribution of the Study................................................................................................... 59 5.4.2 Contribution to theory ...................................................................................................... 60 5.4.3 Contribution to practice ............................................................................................... 61 5.5 Policy Recommendations................................................................................................ 61 5.6 Limitations of the Study...................................................................................................... 62 5.7 Areas for further research ................................................................................................... 63 References ............................................................................................................................. 64 APPENDICES ............................................................................................................................. 82 Appendix I: Research Work Plan 2020/2021 ........................................................................... 82 ix LIST OF TABLES Table 1.1 Demonetization in other countries ……………………………………………………10 Table 1.1 Currency Circulation Kenya….……………………………………………………… 10 Table 2. 1 Research Gaps.............................................................................................................. 36 Table 2. 2 Operationalization of the Variables ............................................................................. 36 Table 3. 1 Operationalization of the Variables ............................................................................. 37 Table 3. 2 Moderating effect tests………………………………………………………………..43 x LIST OF FIGURES Figure 2. 1 Technology Acceptance Model …………………………………………………......20 Figure 2.2 Conceptual Framework……………………………………………………………....36 Figure 4. 1 Average Monthly Growth........................................................................................... 47 xi LIST OF ABBBREVIATIONS AMT Average monthly growth ATMs Automatic Teller Machines AT Actual growth CBK Central Bank of Kenya CMT Cumulative Average Growth EAC East African Community KAM Kenya Association of Manufacturers KEPSA Kenya Private Sector Alliance NACOSTI National Commission for Science, Technology and Innovation NFC Near Field Communication PEOU Perceived Ease of Use PIN Personal Identification Number PU Perceived Usefulness QR Quick Response RBI Royal Bank of India SMS Short Message Service TAM Technology Acceptance Model TPB Theory of Planned Behavior TRA Theory of Reasoned Action xii DEFINITION OF TERMS Demonetization: The withdrawal or removal of a currency's legal tender rights, the currency units will no longer be treated as legitimate currency (Kumar, 2017). Digitization: The increasing use of digital technologies for connecting people, systems, companies, products and services. (Coreynen et al, 2017). Event study: An event study is an analysis that examines the impact of a significant catalyst occurrence or contingent event on a variable such as the value of a security, growth trends in a phenomenon etc. (Khotari,2006). Fiat Money: A type paper or symbol with which one may buy or pay for most things by law. It bears no intrinsic value but immediately assumes a trading value when its shortage can prevent trades that would have been deemed profitable in a non-monetary competitive equilibrium system. (Shubik,1971) Financial Inclusion: Access and use of formal financial services by households and businesses, such as opening a bank account with a registered financial institution (Sahay et al. 2015). Electronic Money: Products with an information carrier, e.g., a microchip or a computer hard disk, containing prepaid value to be used as a multipurpose means of payment Van Hov (1999). Mobile Money: An easy and secure transaction where a sender sends money from their bank, credit/debit card, or own mobile money account to another mobile money account. (Aron, 2018). Mobile money agents: Mobile money service provider's retail arm, supporting cash-in/cash-out transactions. They are retail dealers networked across a geographical location to facilitate transactions (Obiero, 2016). Narrow Money (M0): The central bank of Kenya defines narrow money as the currency outside the banking system as well as currency accounts but excluding commemorative coins. (Addom et al, 2017). xiii SARS Covid-19: Infectious disease caused by novel, highly pathogenic human coronavirus, SARS-CoV-2, was discovered in a seafood market in Wuhan, Hubei, China. Subsequently, infection quickly spread to China and around the world. (Shi et al, 2020). Digitization of money: Digitization of money is the conversion of money from cash into non- cash yet usable electronic forms for payments and transfers such as digital wallets or mobile money transfers services. xiv ABSTRACT Mobile money has been identified as having several advantages over cash. It has the potential to boost economic growth and financial inclusion while closing the related gender- and rural-gaps in the process. It has further been found that demonetization, through a money supply shock can enhance use of other non-cash forms of money. This study sought to determine the effect of demonetization on mobile money in Kenya. The focus of the study was Kenya which demonetized its largest denomination, the one-thousand-shilling note, in May 2019. This dissertation is motivated by the need to determine the efficacy of demonetization as a tool for digitization and expansion of non-cash transactions in an economy, specifically mobile money. The study employed an event study methodology using the Mean Adjusted Model. The timeframe under review was split into two between April 2017 and May 2019 (25 observations) and May 2019 and June 2021 (25 observations). The study found that there was a significant increase in mobile money transactions attributed to demonetization. Further, the study concluded that measures on mobile money taken by the Kenyan government to cushion its citizens against economic effects of SARS COVID-19 pandemic in early 2020 did not have a significant moderating effect on the association between demonetization and mobile money transactions. This study has contributed to existing literature that demonetization through a cash supply shock, leads to use of alternative non-cash forms of payments. Additionally, the study deduced that demonetization is a good policy tool for expansion of currency digitization. Key words: demonetization, digitization, mobile money, event study CHAPTER ONE INTRODUCTION 1.1 Background of the Study Demonetization refers to an effort to stop the circulation of a specific currency and replace it with a new one (Jaiswal & Jagtap, 2017). Demonetization may also be defined as the withdrawal or removal of a currency's legal tender rights, the currency units will no longer be treated as legitimate currency (Kumar, 2017). Mobile money transactions are transfers of money issued by a bank or other financial institution to enable its clients to use a mobile device, such as a tablet or mobile phone, to carry out various forms of financial transactions. It utilizes applications provided by banks or financial institutions, typically called an app (Lule, Omwansa & Waema, 2012). Global System for Mobile Communications (GSMA) has defined mobile money as an easy and secure transaction where a sender sends money from their bank, credit/debit card, or own mobile money account to another mobile money account. GSMA further defines mobile money as a sustainable, scalable approach to providing convenient and affordable financial services to the underserved. Central banks and governments across the globe have been attempting to replace paper currency with plastic and encourage the use of digital payment instruments including mobile money for several reasons (Neeraj, 2018). It has been argued by several scholars that mobile money can contribute to the economy through its impact on financial inclusion, food security, employment, and capital accumulation both financial, human as well as social. See, for example, Yang and Choi (2007); Andrianaivo and Kpodar (2012); Aker and Wilson (2013); Beck et al. (2015); Carlson et al. (2015); and Ky et al. (2018). According to a 2019 report by GSMA, mobile money has been one of fastest growing digital payment platforms due to its low cost and relative ease of use. Mobile payments have also opened up transparency in payments. According to a 2014 USAID report, back in 2009, Afghan police officers were surprised that, when the government started paying their salaries through mobile money rather than in cash, the amounts were significantly larger than before. It turned out that the new mobile payment systems exposed superior officers who had been skimming off some of the payroll cash passing through their offices. Through digitizing payments, The Afghan government discovered as much as 10 percent of the country’s police force consisted of “ghost workers”.(World Economic Forum 2014). Mawejje and Lakuma (2019) in their study of https://www.elibrary.imf.org/view/IMF071/24304-9781484315224/24304-9781484315224/ch13.xml#ch13ref43 2 macroeconomic effects of mobile money in Uganda showed that mobile money had positive effects on consumer price index, monetary aggregates, aggregate economic activity, and private- sector credit. Mobile money can facilitate financial inclusion. Lwanga and Adong (2016) established that having a registered mobile money account increased both the amount of aggregate household savings in Uganda. This implies that in the presence of imperfections in financial markets, the increased adoption and use of mobile money could lead to increased formal savings. Chummun, (2014) used a survey to collect data in rural Zimbabwe and concluded that the usage of mobile money by the unbanked rural people was very high, especially for sending and receiving remittances. However, he further noted the saving and loan aspect of mobile money were not very popular. Users were still relying on their traditional methods of savings and borrowing. The study shows that an increase in mobile money will further enhance financial inclusion more so on remittances. According to a 2017 report by Financial Sector Deepening (FSD), mobile money in Kenya has led to an expansion of both investments and borrowing. The Kenyan government pioneered the first bond issue via mobile money in 2017. According to the report, the aim of this bond dubbed M- Akiba was to enable the government access low-cost capital while at the same time giving low- income Kenyans an additional investment platform. Investing in M-Akiba involved a two-step process: first, the individual was required to register their mobile money account, and then they had to purchase the bond. The minimum purchase was pegged at US$30 while the bond earned 10% annual interest. Interest disbursements were made every six months directly into the individual’s mobile money account. According to a 2019 paper by audit firm Ernst & Young, mobile money schemes around the world have been growing fast, with developing countries at the epicenter of the growth. Sub-Saharan Africa is growing the fastest with mobile money deployments increasing by an average of 39% annually over the last decade. While this holds true, the report further states that the value of mobile money transactions was 6.4% of SSA’s GDP in 2018, this is as compared to the 20.4% share of GDP currently held by credit cards in the European Union (EU) in 2018. In other words, there is a lot of room for growth of mobile money in Sub-Saharan Africa. 3 It has been argued that governments and regulators can increase digitalization and move towards a cashless economy through demonetization. Patnam and Yao (2020) while studying the real effects of mobile money found that in India, demonetization caused a spike in the short term in use of Paytm, one of the largest mobile money providers in India. The analysis showed a large spike in the level of transaction volumes immediately following the demonetization policy announcement, which contrasts with the relatively lower level of transaction activity in the days just before the announcement of demonetization. Further, a study by Chodorow-Reich et al. (2020) opines that there was a large increase in mobile money use following the demonetization policy announcement in India. Crouzet, Gupta, and Mezzanotti (2019) further show an increase both in the mobile money transactions as well the growth rate of the user base. Kaur (2016) analyzed the impact of demonetization on the cashless payment system in India and found that increased use of credit cards, debit cards, online banking, and mobile payment transactions was due to demonetization. The relationship between demonetization and mobile money is further explained by the Adaptive Market theory. It theorizes that people are often rational, but can sometimes overreact especially during periods of increased market volatility (Lo, 2004). The Technology Acceptance Model also supports the relationship between demonetization and mobile money. It suggests that the acceptability of a good information system is mainly dependent on perceived usefulness as well as anticipated ease of use (Swanson, 1987). Studies on mobile money have taken a leading role in monetary economics research in the last decade, more so in the context of developing countries. Many researchers agree that demonetization has an impact on the digitization of the economy through electronic payments, mobile money, and card transactions. Based on existing theories, this study will build a model that will investigate the relationship between demonetization and mobile money growth in Kenya. 1.1.1 Mobile money According to a report by FSD in 2019, electronic money, otherwise known as e-money, is an emerging monetary form that is rapidly becoming popular and adopted in modern economic systems. The initial adoption of e-money in developed countries happened in the 1980s through the introduction of debit cards that allowed the electronic transfer of money from one bank account to another. This allowed payment by a customer to a merchant electronically. These were the first 4 instances of electronic cashless transactions but the case was not the same in developing countries. Adoption of electronic cards was not heavy mainly due to relatively low levels of financial inclusion as well as low access to formal banking services by a majority of the population. However, since the mid-2000s, there have been rapid developments in the mobile telecommunication sector, which gave birth to mobile money financial services (Hughes and Lonie, 2007). Since mobile money account ownership did not require ownership of a bank account, mobile money was rapidly adopted by the unbanked. This served as an ideal platform for money transfer services for many low and middle-income households in developing countries, Kenya being one of the countries that experienced transformative growth in mobile money services (Mas and Morawczynski, 2009). 1.1.1.1 Mobile Money in Kenya The first mobile money platform in Kenya was MPESA which was developed in 2007. The M in MPESA stands for mobile while PESA is the Swahili word for cash (Hughes and Lonie, 2007). Just a month after launching MPESA, Safaricom, the entity running the mobile payment system, enrolled more than 20,000 users on the platform. This customer base grew exponentially to over six million between the launch in March 2007 and 2009 (Mas and Morawczynski, 2009). Mobile money services have since grown to be used by over 95 percent of the adult population in Kenya, making Kenya a world leader in mobile money (Financial Sector Deepening Kenya, 2019). Today, MPESA has been recognized as the most noticeable success story (Omwansa & Sullivan 2012). According to the Communications Authority of Kenya (CAK), MPESA is used by about 20 million Kenyans, accounting for 96 percent of all households, and in Kenya, there are more mobile money accounts than there are bank accounts. Other mobile money players are Airtel money offered by Bharti Airtel, T-cash by Telkom Kenya, and Equitel offered by Equity bank (CAK, 2020). In Kenya, mobile money is a service offered by mobile telecommunication companies such as Safaricom to their customers (Omwansa & Sullivan 2012). The user’s registered SIM card acts as the wallet where the electronic funds are held. The telecommunication company providing the service will then partner with a financial institution almost always a commercial bank(s) to store the physical cash which will represent the electronic float in the SIM. The bank will store the money in a special demand deposit account managed by a trustee. It, therefore, follows that, the value stored in a user’s SIM card wallet takes the form of claims on money held in a trust account 5 at the commercial bank(s) that the mobile telecommunication company chooses. (Omwansa & Sullivan 2012). The mobile money service enables the user to store electronic funds on their SIM cards, and they can use their mobile phone messaging service to send the electronic funds to other users or make payments. The transfer takes the form of a text message directed to the recipient’s phone number, therefore not requiring an internet connection to facilitate the money transfer. The M-Pesa platform is also used for storing, withdrawing money electronically, topping up airtime, paying for goods, services, school fees, utility bills while at the same time offering savings and loan products. Companies can also use the scheme for disbursing employee salaries and collect bill payments (Safaricom, 2015). Further, Kenya was the first developing nation to launch a mobile-banking service based on text messaging (Shaikh, & Karjaluoto, 2014) The service is not restricted to local transfers or payments only. Safaricom’s partnership with Western Union for example permits its mobile money service MPesa customers to receive money from 45 nations, including the United Kingdom, United States, Italy and Canada (CISCO, 2013). In summary, mobile money allows the users to use their SIM cards as a digital wallet to hold and use digital funds. (Omwansa & Sullivan 2012). It is important to emphasize that mobile money is a substitute but not a replacement for physical cash. The distribution and exchange of mobile electronic float for physical cash is facilitated by a vast network of “mobile money agents”. When a mobile money user needs to load electronic funds on their mobile phones, they simply need to hand in physical cash (coins and notes) to a mobile money agent, and the agent will transfer an equal exact amount of mobile electronic float to the user’s mobile phone (Hughes and Lonie, 2007). The mobile money agents therefore “sell” mobile electronic float to users who wish to load money into their SIM cards. The agents also “sell” cash to users who wish to re-convert their holdings of mobile electronic float back to physical coins and notes (Hughes and Lonie, 2007). In summary, mobile money agents act as the exchange points for physical cash and mobile e-money. Agents receive a commission for the transactions that they facilitate. Kenya has a vast network of mobile money agents spread across the country, which has been one of the reasons for the rapid success of mobile money services (Hughes and Lonie, 2007). Due to the fact that mobile financial services in Kenya are offered by mobile telecommunication companies which are not financial companies, there was a need to partner with formal financial institutions for the purpose of cash storage and management (Omwansa & Sullivan 2012). The 6 mobile telecommunication companies that offer mobile money services usually contract a commercial bank(s) to handle the cash backing up the mobile electronic float. The mobile money agents, therefore, purchase digital funds by depositing physical cash in the contracted banks. The physical cash that is received by the commercial banks is stored in demand deposit accounts that are called trust accounts. The exchange is directly shilling-for-shilling, that is, for every shilling in physical cash received, the bank transfers one shilling of mobile electronic float to the agent’s mobile phone. The agents then use their purchased electronic float to transact with final mobile money customers. (Omwansa & Sullivan 2012). Once the agents have purchased electronic float, they are ready to trade it with final customers. The transactions between agents and customers are either cash deposits or cash withdrawals. A cash deposit transaction is carried out when a customer wants to buy mobile electronic float to use on their mobile phones. The customer pays (deposits) some physical cash to the agent in exchange for the digital cash. Upon receiving the physical funds, the agent transfers an equivalent amount of mobile electronic cash from their own mobile phone to the customer’s mobile phone. The transfer is made via SMS text messaging services and takes about 10 seconds processing time. The customer is not charged for deposit transactions - the amount that the agent transfers to the customer’s phone is exactly equal to the amount of physical cash that the customer deposited. Consequently, the agent does not earn any money to facilitate deposit transactions. A cash withdrawal is the opposite of a deposit transaction. A withdrawal transaction takes place when a customer wishes to convert their holdings of mobile electronic funds back to physical cash. The customer simply transfers the mobile electronic funds from their mobile phone to the agent’s mobile phone via SMS text. The agent receives the electronic funds and then hands the customer the physical cash. Unlike deposit transactions, the customer is charged for withdrawal transactions. Part of the amount charged is earned by the facilitating agent while the other part is earned by the mobile telecommunications company. This is how agents make an operating profit. All the same, there are 3 main classes of transactions that can be carried out through mobile money platforms: Money transfers, payments and loans and savings. (Kusimba 2018), (Kusimba et al. 2016). https://www.cambridge.org/core/journals/africa/article/human-atms-mpesa-and-the-expropriation-of-affective-work-in-safaricoms-kenya/296F3981007684F265530C7FEECC6813#ref20 7 1.1.2 Demonetization Demonetization has been defined as the process of eliminating or removing a specific currency unit from its status as a legal tender (Jaiswal & Jagtap, 2017). It is the mechanism by which specific currency forms cease to be produced and circulated. If a national currency change occurs, this is critical. It will remove the old currency unit and replace it with a new currency unit (Kumar, 2017). Ghosh (2017) noted that a legal tender is a form of payment considered to be valid for performing a financial obligation by a legal system. It can be something that extinguishes debt when provided in payments. Coins and banknotes are generally defined as legal bids, although personal checks, credit cards, and similar non-cash payment methods are not regarded as legal bids, as debt obligations are not relieved until a tender is received (Rajani, 2019). Removing the legal tender status of a unit of currency is a drastic intervention into an economy. This is because it directly affects the medium of exchange used in all economic transactions. It can help stabilize existing problems, or it can cause chaos in an economy, especially if undertaken suddenly or without warning (Bernier, 2021). That said, demonetization has been undertaken by nations for a number of reasons. Rajani (2019) lists inflation reduction, corruption, and cash discouragement as reasons for demonetizing a currency. Demonetization has been used as a remedy whenever there is hyperinflation or instability in a currency (Rajakumar & Shetty, 2016). 1.1.2.1 History of demonetization The United States demonetized its currency twice in 1873 and again in1969. The Coinage Act of 1873 demanded that silver be withdrawn from use as currency, and that the gold standard as a legal tender be replaced. This led to a contraction in cash supply, followed by a five-year economic depression in the region (Friedman, 1990). The US declared all bills over $100 null and void under President Nixon in 1969. That was in an attempt to curb the county's black money and regain its look. This transition was successfully completed. Many scholars have termed it as the start of the prestigious growth of the bank system in the USA. To date, the $100 bill is the most widely traded currency in the world. (Friedman, 1990). According to a 2001 report from the International Crisis Group, in Myanmar in 1987, the military invalidated 80% of the value of currency in circulation in an attempt to curb the rising black economy. It led to student demonstrations followed by a government crackdown the very next year. Within a space of two decades, Burmese people in 8 Myanmar were subjected to three rounds of demonetization in 1964, 1985 and 1987. Each of which only helped to punish an already struggling economy (Karthikeyan, 2017). In 1988, the Reserve Bank of Australia introduced polymer bank notes to replace the existing paper currency, aimed at curbing counterfeit currency, due to the former’s high security features that made it difficult to counterfeit. In 1999, the Lira, Franc and German Mark was demonetized by Italy, France and Germany respectively to enhance trade with each other as well as facilitate their access to the European Union (Phillips, 2004). In 1982 and 1984, respectively, Ghana and Nigeria had demonetization exercises. Studies have found that these attempts to demonetize the economy have either had more negative economic consequences than have positive effects or have failed to achieve desired objectives. (Palanisamy 2017). In Ghana, the state banned the 50 Cedi note to reduce tax evasion and counter corruption. This resulted, however, in a loss of trust in the financial markets and the currency, where the black market functioned, money was converted into physical assets and foreign currency was used. General Muhammadu Buhari's Government released new currency notes in Nigeria that were quickly obsolete with new colors. The movement to reform an inflated and debt-ridden economy was terribly unsuccessful. The following year, Buhari was eventually expelled from his seat in a coup. (Palanisamy 2017). In 2015, Zimbabwe experienced demonetization in an effort to deal with hyperinflation. The Zimbabwe dollar, also known as ZWD, was the main currency in the country since it attained independence in 1980 to 2008. During the hyperinflation period of 2007 to 2008, daily prices doubled (Makochekanwa 2009). The ZWD was replaced by a variety of regional currencies through demonetization in an effort to deal with this crisis. On 8 November 2016, the Government of India announced the demonetization of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. (Lahiri, 2020). 1.1.2.2 Objectives of demonetization The objectives of demonetization have been achieved in many countries with varying success levels in the past. Trinidad and Tobago demonetized its largest currency note in December 2019 in an effort to address corruption, curb counterfeit currency and other financial crimes. The exercise was relatively well managed and appears to have had an impact on “black money”. This appears so since over 5% of the demonetized notes were not presented for exchange (Mahabir & Hilaire, 2020). India demonetized in 2016 for more or less the same reason; to tackle crime and corruption (Abhani, 2017). Many researchers studying India's demonetization have said that it was 9 a mistake. The process was marred by confusion, according to Waknis (2017), where access to both the new and existing currencies were restricted in some areas. Singh, (2017) claims demonization in India did not fulfill the goal of curbing illegal money because a total of 98.9% of prohibited money was able to be reintegrated into the economy. A major objective for demonetization has been digitization of the currency. The creation of a cash- less economy is an important milestone in reducing currency printing and circulation costs, enhancing transmission of monetary policy tools as well as financial inclusion and curbing black money and tax evasion (Rogoff, 2015). Many central banks and governments, in both developed and emerging economies, continue attempting to replace paper currency with plastic and propagate the usage of digital payment instruments. One of the objectives of the India demonetization was an attempt at establishing a cashless economy. (Prabhu et al, 2017). AmbalikaSinha and DivyaRai (2016) reported in their article that there was severe disruption in rural India more so in the informal sectors as there were very few cashless transactions in this market. The sudden lack of cash was brutal to the small businesses in rural India. This however led to a surge in enrolment in mobile money and mobile wallet platforms. but also listed among the objectives was to modernize its cash-dependent monetary system. Agarwal et al, (2018) concluded that the usage of mobile- wallets did experience a surge due to demonetization in both transaction volume and value. 10 Table 1.1 Demonetization in other countries Country Ghana Myanmar North Korea Zimbabwe Australia Zaire Pakistan Germany USA Philippines Year 1982 1987 2010 2010 1996 1990 2015 1923 1969 2016 Objective To control black money To curb black money To curb black money Sliding out from Hyperinflation To the curb Withdraw obsolescent currency To get rid of black Money Due to high domestic prices Due to black money Preserve currency integrity Results Failed Failed Failed Failed Successful Failed Failed Successful Failed Failed Source: Corporate Finance Institute 1.1.3 Demonetization in Kenya On June 1st 2019, the central bank of Kenya, through its governor, announced that it would phase out the 1000 Kenya shilling notes and replace it with new notes. The old currency would be expected to remain in use alongside the new currency notes up to 30th September 2019. The old notes would not be accepted as legal tender from October 1st 2019. They would be rendered useless. According to the Central Bank, the goal of this exercise was to eliminate or at worst reduce the flow of counterfeit currency as well as to curb corruption and black money. The demonetization in Kenya was also supposed to achieve compliance with the 2010 Kenya Constitution. (Ratemo and Arbiol, 2018). The Kenyan Constitution in Section 231 (4) states in part… ‘’… (4) Notes and coins issued by the Central Bank of Kenya may bear images that depict or symbolize Kenya or an aspect of Kenya but shall not bear the portrait of any individual.’’ 11 The Kenyan currency in both notes and coins bore images of individuals including the currency in circulation before the year of demonetization. The central bank in Kenya was supposed to ensure that individual photos were not taken by the new currency in an attempt to use demonetization to comply with the constitution. The Kenyan central bank announced in June 2019 via its governor that it is gradually withdrawing the old Ksh 1000 notes. The old currency would continue to be in use alongside the new currency notes. The 1,000 note accounts for over 83% of the value of currency in circulation hence this study saw no need to control for the other denominations. On October 1, 2019, the CBK issued a demonetization report stating that the CBK was able to collect a total of 209,661,000 from an initial total of 217,047,000 notes of Ksh 1000 at the end of the demonetization period ending on September 30, 2019. A total of 7,386,000 notes worth Ksh 7.386 billion were hence considered worthless. According to the CBK governor, 7.386 billion shillings is a significant amount. This was held by individuals or entities who did not want to be subjected to rigorous controls. Table 1.2 Currency in Circulation in the Kenyan Economy Denomination Notes in Circulation (millions) Value (millions) 1000 217.6 217,600.00 500 30.8 15,400.00 200 54.8 10,960.00 100 126.4 12,640.00 50 100.5 5,025.00 20 9.9 198.00 Total 540 261,823.00 Source. CBK (2019) The success or failure of demonetization should be analyzed based on the various objectives set out by the CBK as its reasons for demonetization. First, demonetization in Kenya was successful in fulfilling Article 231 sections (2) and (4) of the Constitution of Kenya 2010. Additionally, the new notes came with features that enhanced inclusivity as the visually impaired can knowingly transact using them (Abrol, 2020). Secondly, according to the CBK, the new notes came with 12 enhanced security features which can effectively deter if not minimize illicit financial transactions in counterfeits and money laundering. Thirdly, and equally important was the move to purge “black money” from mainstream economy or demonetization of the Kenya shilling. According to the Central Bank of Kenya, the Sh1, 000 notes, which is the largest currency bill, are widely being used for illicit financial transactions and forgery. The other short term effect is on illegal financial activities: Demonetization policies, if carried out within short timelines, are likely to greatly aid in curbing financial flows in the black market. However, a demonetization policy that gives a long transition period, as in Kenya’s case, is likely to have little or no effect on the black market since the market has time to conform to the new currency (Neeraj, 2017). Despite this, according to the CBK post demonetization report, during the 4-month demonetization period, 3,172 suspicious transactions were flagged and were being investigated at the time. 1.2 Problem Statement While Kenya has been a global leader in mobile money for the last two decades (Mbiti, 2011), a report by Financial Sector Deepening in 2019 noted that cash is still the most preferred mode of payment in the settlement of everyday transactions in Kenya. The report also showed cash being employed in the settlement of up to 92 percent of daily expenses ahead of mobile money accounts, bank transfers and pay bill solutions. About 89% of dependents got their money in cash, 33 per cent via mobile money while 10 per cent got thorough other modes of payment. The report further shows that 96 per cent of traders in the country received their payments in paper form while 19 per cent of other payments were done using mobile money and other forms of payment. Further, the report argued that while the uptake of mobile money accounts has increased between 2016 and 2019, the number of daily mobile money transactions has not. It can therefore be assumed that there is still room for improvement. Mobile money has been identified as having the potential to boost financial inclusion while closing the related gender- and rural-gaps in the process Bukari et al (2021). According to a 2019 report by McKinsey, increased use of mobile money could increase the GDPs of all developing economies by 6% by 2025. It is therefore paramount and in the interest of all to move away from cash to non-cash transactions. 13 Demonetization can be used as an economic policy to enhance cashless transactions (Dinesh & Reddy, 2019). According to the CBK, demonetization in Kenya was done to curb illicit inflows of cash, deal with corruption and reduce circulation of counterfeit currency. While the objectives did not include digitization of the currency through mobile and electronic money, empirical and evidence and theory suggest that with the demonetization and subsequent absence of cash, alternative channels of payment check in. Agarwal et al (2018) argue that demonetization in the less structured sector leads to a rise in mobile money transactions. Kushwaha et al (2018) posits that the absence or decrease of cash in the economy results in a rise in the use of other sources of money or modes of payment during the demonetization of a currency. Bhatnaga (2017) argues that one of the main goals of demonetization is to foster the digital economy. Money supply, M1 or the ‘narrow’ money, is made up largely of currency with the public and demand deposits with commercial banks net of inter-bank deposits. The currency with the public is not only in cash but also in digital form. It therefore follows that a voluntary reduction in the demand for and supply of ‘currency’ – in equilibrium – for example, through demonetization will not have a change in quantity of M1 but will only shift the balance from cash held with the public to demand deposits through banking or a shift from one form of cash to a digital one for instance, mobile money. Overall money stock remains the same, only that, other forms and denominations of money are used instead (Chattopadhyay 2019). Existing theoretical and empirical literature holds that demonetization leads to cash shortages in the country. This shortage leads to use of other forms of currency. In India, a reduction in cash compelled many people to use other modes of payment such as electronic and mobile payment platforms, (Bhatnagar, 2017). The other forms of currency come with various advantages. (Maiti 2017; Agarwal et al. 2018) showed that positive trends in the use of mobile payments, both in value and volume, have been observed following demonetization in India. According to Thirupathi (2019), the main advantage of mobile transactions is that these are digital transactions therefore they ensure recording of all transactions making it almost possible to control black money and tax evasion. This dissertation therefore seeks to understand if during the 2019 demonetization in Kenya, where a significant amount of currency (83%) was gradually rendered illegal, there was a significant shift to other forms of money, specifically a shift to mobile money. The study seeks to confirm if there was a shift from cash to other forms of money during the period after demonetization or whether 14 there has been an increase in non-cash transactions after demonetization in Kenya. Further, while several studies have been done on demonetization, none of the reviewed studies focused on the effect of demonetization on digitization or mobile money transactions in Kenya. Therefore, this study seeks to bridge this gap by establishing the effect of demonetization on mobile money transactions in Kenya. Additionally, while Abrol (2020) picked a methodology based on secondary data from research papers, journals, and publications with observation and documentary analysis as the base of their study, this dissertation used actual numerical data from the regulators in analysis of trends. Further, at the tail end of the demonetization, the CBK director announced that demonetization ended well with the exercise having little impact on the economy—inflation and exchange. There was also little evidence of a rush to purchase high-value assets in cash. The CBK however did not disclose the effects of demonetization on other non-cash forms of payment. This study sought to bring that out. 1.3 Research Objectives 1.3.1 Main Objective of the Study The main purpose of this study was to examine the effect of demonetization and Covid-19 on mobile money transactions in Kenya 1.3.2 Specific Objectives of the Study This study was guided by the following objectives: i. To determine the effect of demonetization announcement on the average monthly change in mobile money transactions (AMT) during the 25-month event window in Kenya ii. To assess the effect of demonetization announcement on the cumulative change in mobile money transactions (CMT) during the 25-month event window in Kenya iii. To find out the moderating effect of Covid-19 on the association between demonetization announcement and mobile money transactions in Kenya 15 1.4 Research Questions The study used the research questions below; i. Did demonetization announcement significantly affect the average monthly change in mobile money transactions (AMT) during the 25-month event window in Kenya? ii. Did demonetization announcement significantly affect the cumulative change in mobile money transactions (CMT) during the 25-month event window in Kenya iii. Did Covid-19 significantly moderate the association between demonetization announcement and mobile money transactions in Kenya? 1.5 Scope of the Study The research was limited to establishing the effect of demonetization on mobile money. Specifically, the scope covered the effect of demonetization on the number of mobile money transactions, the value of transactions as well as the rate of growth of mobile money. The study was based in Kenya. The study collected data from the CBK between January 2018 and July 2021. The scope also reviewed mobile money transactions during a period where Covid-19 was declared a pandemic and the government of Kenya issued measures to protect consumers from harsh economic times occasioned by the pandemic. This was in an effort to control against distortion of data by measures that would ordinarily affect the data under review. 1.6 Significance of the Study The findings of this dissertation will benefit different parts and aspects of society. These include policy makers, economists and planners. It would also benefit mobile money operators and regulators as well as academia and researchers. These are explained further below; 1.6.1 Policy Makers This dissertation will inform policymakers on the impact of demonetization on cashless transactions and its success in advancing the digitization of financial systems in developing countries, such as Kenya as well as in developed countries with similar demographics and monetary trends to those in Kenya. One of the main objectives of demonetization across the globe is reduction or curbing of black money. This study would also advise policy makers on the importance of demonetization and mobile money in reducing black money. According to a study 16 by Ghosh (2017), increasing digital transactions can curb tax evasions through unrecorded transactions in the unorganized sector. Further, an analysis of spikes in mobile money deposits after announcement of demonetization could signify attempts to hide black money. Sabariga and Syamsundar (2017). Policy makers could learn from this and plan prevention measures with mobile money providers to ensure the objective of capturing black money is achieved on demonetization. Bhatnagar (2017) argues that digitization of the economy and reduction of cash transactions through mobile wallets and e-payment platforms will enhance monetary transparency in transactions. He adds that digital money as opposed to cash is low-cost maintenance more convenient, helps in reducing financial exclusion as well as weeding out counterfeit and black money from the economy. Information on the extent by which demonetization reduces cash or increases mobile use is paramount in policy making on reduction of black money, tax evasion and managing counterfeits. 1.6.2 Central Banks Central banks and regulators will get invaluable insights into the effects of demonetization on mobile money and digitization in general. This will be paramount for regulators planning for similar policies more so if currency digitization is one of the objectives of the move. Additionally, the creation of a cash-less economy is an important milestone in reducing currency printing and circulation costs (Rogoff, 2015). Central banks will want to know the extent of this reduction in their planning through understanding from this study just how far demonetization goes in reduction of the mentioned costs. 1.6.3 Mobile money service providers This study will be of value to players in the mobile money sector globally who will obtain insights on what impact demonetization has on mobile money transactions. In the event that a similar demonetization policy is implemented in any of the countries in which they operate in, they can plan around it based on the findings of this study. 1.6.4 Academia/Researchers This study will add to the body of knowledge on demonetization since this specific area of study monetary economics has not been deeply researched in the country and in the continent. It will 17 serve as a point of reference and literature review source when conducting studies on the demonetization in Kenya or undertaking related research in subsequent periods. 18 CHAPTER TWO LITERATURE REVIEW 2.1 Introduction This section contains comprehensive literature and research on demonetization and cashless transactions. This literature review summarizes a broad range of views on the impact of demonetization on the amount of transactions involving mobile money, the rate of mobile payment transactions and the usage of mobile money platforms. The chapter therefore has literature review for all variables, conceptual framework, theoretical framework and summary of the literature as well the research gap. 2.2 Theoretical Literature This is the basic structure that supports a theory of research study. This study relied on Technology Acceptance Model which is broken down further into three other models that relate to the study in different aspects. The theoretical framework not only introduces the research gap but also describes and explains why the research problem under study exists as well as the relevance of each theory to this study. 2.2.1 Technology Acceptance Model The theoretical foundation of this research is derived primarily from the Technology Acceptance Model (TAM). In 1986, Fred Davis came up with the Technology Acceptance Model to try and explain when and how users decide to accept and use a technology. The major elements of this model are “perceived usefulness” and “perceived ease of use.” According to TAM, when users are presented with say a new software package, “perceived usefulness” and “perceived ease of use” influence their decisions about how and when they will use it. Recently, numerous studies have been conducted using the original TAM-or an extended version of TAM-to examine the usage of IT. Chuttur (2009) points out that the wide acceptance of this model is due to the fact that the model has a relatively clear and sound theoretical assumption as well as practical effectiveness. From the time is was proposed in 1985, the model has been improved and refined further, enabling it to incorporate variables and relationships obtained from the theory of reasoned action (TRA) of 1975 by Fishbein and Ajzen. 19 What came out of the adjustments was a more refined model that proved essential for anyone intending to review technology acceptance theory and its relation to novel technologies such as digital payments and transactions. The model was designed to show how users come round to accepting and using a technology. The theoretical basis is built around the premise that when users are presented with a new technology, their decision on whether to accept it or not and when to accept it is pegged on three major factors. The first determinant is the new technology’s perceived usefulness (PU), the second is its perceived ease of use (PEOU), while the third determinant is ‘the user’s attitudes towards usage (ATU). According to Davis (1989), perceived usefulness (PU) is the degree to which a user of a new technology believes that use of that particular technology would enhance whatever the user aims to achieve in the said system. For instance, a user of a mobile money payment platform would perceive mobile money to be useful if it is faster than cash or any other method, or is available when or where others are not. Perceived ease-of-use (PEOU) on the other hand, is the level to which a user of a new technology believes that in using that particular system, he would do it with little or no effort. In other words, it is the degree to which consumers or users perceive a novel technology as being better than its substitutes. This assumes that the less time it takes to use cashless transactions, the greater the chance that they will embrace them. Chen et al. (2011) argue that perceived usefulness (PU) and perceived ease of use (PEOU) positively affect the attitudes toward usage (ATU) of a technology. Although the TAM model has different advantages, such as outstanding calculation properties, conciseness, generic soundness for users and empirical soundness (Schierz, Schilke & Wirtz, 2010), the drawback of this model according to Assegaff (2015) is that it offers general details on ease of use and has also been criticized for its parsimony by many researchers. The relationship between these determinants can be illustrated by the model in Fig. 2.1 as suggested by Davis. 20 Figure 2. 1 Technology Acceptance Model (Adapted from: Venkatesh & Davis, 1996) Fiat money is paper or symbol with which one can buy most things legally. It bears no intrinsic value but immediately assumes a trading value if its shortage can prevent trades that would have been deemed profitable in a non-monetary competitive equilibrium system Shubik (1971). With demonetization, there is a sudden shock in money supply (Chattopadhyay 2019). This shortage of cash creates a perceived usefulness in other forms of payments or measures or stores of value. This is where digital payments including mobile money become useful. With demonetization, other forms of payments will see an increase in perceived usefulness. Sobti (2019) comprehensively concluded that there was a forced adoption of mobile payment services by users in India through demonetization using perceived usefulness. These users found cashless options to transact during cash shortages quite useful. Chaurasia et al (2019) found a positive relationship between intention to use M-payment (a mobile payment system) and awareness about demonetization policy. With some knowledge on demonetization policy, these users either faced or anticipated a shortage in cash making the mobile payment system seem to have a perceived usefulness (PU) as outlined in the TAM. The papers by Chaurasia et al (2019) and that by Sobti (2019) both dwell on the premise that there was adoption of use of mobile money after a cash shortage was created through demonetization. This is consistent with the users seeing a perceived usefulness (PU) in other modes of payment other than cash which pushed them to have an attitude towards using the technology as well as a behavioral intention to use. Further, with demonetization, other non-cash forms of payment may have appeared easier to access and use fulfilling the other fundamental arm of the TAM which is ‘perceived ease of use. According to Patnam and Yao (2020), demonetization in India led to long queues at ATMs and 21 even stampedes. This additional effort in transacting using cash, pushes users to seek substitutes with more ease and less effort required to transact. One with a perceived ease of use (PEOU). Gupta and Arora (2020) investigated consumers’ intention to accept mobile payment systems using TAM and found that performance expectancy (PU), effort expectancy (PEOU), habit and facilitating conditions significantly predicted behavioral intention, which in turn significantly predicted behavior to use mobile payment systems. Ahmed and Sur (2020) found that convenience (PU and PEOU), perceived self-efficacy, demonetization, performance expectancy and pandemic effect had a significant effect on the attitude to adopt digital banking. Chauhan (2015) studied the acceptance of mobile money by poor citizens of India by integrating trust into the Technology Acceptance Model. He found that the trust and the core constructs of TAM such as perceived usefulness (PU), trust and attitude towards usage (ATU) contribute in influencing the intention to accept m-money. 2.3 Empirical Review This section entails empirical literature on the effect of demonetization on mobile money transactions. While demonetization is a fairly old phenomenon in monetary economics, the literature around it is not as wide as one would expect. This happens once or twice in a lifetime for an economy. While a number of studies have been conducted to study effects of demonetization on macroeconomic factors, not much has been done about its effects on modern phenomena such as digitalization. This study is an attempt to expand the literature by investigating the relationship between demonetization and mobile money. 2.3.1 Demonetization and mobile money transactions Bhatnaga (2017) in his study, Demonetization to Digitalization: A Step towards Progress, used regression models to argue that while demonetization in India in 2016 created lot of panic in the economy, it paved the way to digitalization. A cash crunch and availability of e-sources of transactions compelled many people to use alternative modes of payment including mobile wallets. Sachs et. al (2018) opined that India had long been a cash-based economy, but in recent years, the country has been in the process of transitioning towards a cashless society, in November 2016, this transition was accelerated when 87% of the country’s paper currency by value was demonetized. They add that while mobile wallets were popular in the months and years preceding 22 demonetization, Unified Payments Interface (UPI) based systems have since become more prevalent, largely thanks to the convenience of being able to skip the intermediate step of adding money to a specific account in favor of sending money directly to recipients via one’s own bank account. Nanda and Mohanty (2020) argued that card transactions and cashless payments posted healthy growth in the years subsequent to demonetization in India in 2016. The study was based in India using analyses of variances. Nagdev et al (2018) analyzed the results of a questionnaire applied to 370 respondents and found that demonetization negatively affected traditional banking as persons increased the use of credit and debit cards, reactivated internet banking accounts, and increased use of payment portals and other bank apps for doing payments and other transactions. Using an interrupted time series model, Nithin et al (2018) concluded that demonetization did not assist in getting persons to use digital payment methods. The authors suggested that the findings were due to infrastructure impediments and habits; recommendations included government interventions such as incentives, greater financial literacy and financial inclusion. Bharadwaj et.al. (2017) using an event study methodology concluded that demonetization's impact on the Indian stock market was significant. The research employed 16 companies that actively trade on the National Stock Exchange India as its sample which ranged from 2012 to 2016 and for 5 months separately from November 2016 to March 2017.An optimum portfolio was constructed using SIM and the values for the risk and return were subjected to examination for both periods in the pre and post demonetization period. However, Chauhan and Kaushik (2017) did a similar event study on the impact of demonetization on stock market. The study analysed the stocks of S&P BSE 100 and analysis was similarly done for both the pre and post demonetization window and the results for both periods compared. They established that demonetization had no impact on stock market. In their study, a sample was drawn from Prowess IQ and the prices of closing stock of 100 companies under the S&P BSE 100 index were considered from October, 30th 2016 to November21st 2016. The study found that this short period downfall in the stock prices can be due to some other factors. The research was done in India and focused on the longitudinal research design. Another event study was carried out by Sunil and Smitha (2017) to ascertain the demonetization impact on the stocks of selected sectors. Data on closing stock prices was collected for a period of 6 months, beginning 7th September 2016 to 8th March 2017. This consisted of 2 months’ prices 23 recorded before demonetization and prices of stocks in the remaining 4 months after demonetization. A sample of 5 sectors was used with 5 companies being selected from each sector. Companies considered for this study included; Telecommunication, Banking, Real estate, Automobiles and Consumer durables. Analysis was carried out using ANOVA on the BHAR in the three windows. The study concluded that demonetization had no impact on stocks returns. Uke (2017) researched demonetization in India and its consequences. The research concluded that the Indian demonization had both positive and negative effects. The research was based on secondary knowledge in journals, magazines, and articles. They specifically concluded that demonization has had a detrimental effect on Indian financial markets over a short period of time. The analysis showed the real effect in the future. The effects of demonetization on financial inclusion in India were sought by Mahajan and Singla (2017). Demonetization has explored the effects of the drive toward financial inclusion on many participants, including the ordinary citizens, informal industry, rural people, SMEs, NBFC MFIs and e-wallets firms. The study has shown that ordinary people are among the most adversely affected. Demonetization for a new type of deposit called benami deposits has also been developed. Efforts are required to allow technology to the bottom of the pyramid so that financial integration and India becoming a cashless digital economy are achieved. In Kenya, Adika and Ochieng’ (2020) looked at the effect of demonetization on Securities Market Performance in Kenya. The study employed an event study methodology which evaluated the performance of NSE 20 share index prices. The sample consisted of twenty firms listed and included under the NSE 20 share index and whose stocks traded in the entire period under consideration for this particular study. Results from the study were based on the comparison between performance of the NSE 20 share index prices during the pre-demonetization and post demonetization period. The comparison revealed that demonetization had a statistically significant effect on securities market performance in Kenya. Bhat (2017) in his study analyzing the effects of demonetization on the economy in India, concluded that the monetary policy of demonetization negatively affected the Treasury bond market in India. The results show that average yields of treasury bonds were decreasing immediately after the announcement of demonetization and implementation of goods and services taxes in India. An event study methodology was used to measure how short and long-term Treasury 24 bond yield were affected by the announcement of the demonetization. The study contributed to literature that demonetization may have negative effects on the economy. It however did not touch on effects of demonetization on mobile money transactions. Akinyemi, Mushunje and Feng (2020) studied the growth of mobile money. Specifically, they investigated the determinants of mobile money adoption in rural areas of Africa. They analyzed data from Research ICT Africa Access Survey using the two-part model. They concluded that age, bank account ownership, and net monthly income determine both the adoption of mobile money and the amount of money received using mobile money technology. Mahmoud (2019) studied the Determinants of mobile money adoption. He used panel data analysis for a sample of seven African countries for the period from 2013 to 2017. Data is analyzed using the linear regression model for each dependent variable of the mobile money adoption using nine explanatory variables. He concluded that mobile money policy such as distribution networks, regulations, financial regulatory limits and others such as GDP, crime index, literacy and banking penetration are the determinants of mobile money adoption. Mishra and Rathore (2019) examined the effect of demonetization on the Indian framework of digital payment. Using a survey, they concluded that demonetization led to an expansion of digital payment and web-based payment platforms. Thomas and Sebastian (2019) studied the extent of Influence of Demonetization on Digital Banking using a descriptive and analytical study methodology based on both primary and secondary data. They conclude that demonetization initiative seems to have influenced digital banking habit of people which in turn partially fulfilled motive behind it. Prabhu et al (2017) argued that demonetization created greater demand to digital banking services where cashless transactions are prioritized. Dinesh and Reddy (2018) evaluated the impact of demonetization on digital payments using exploratory data analysis indicated that there was a significant effect of demonetization on digital payments. Madhukar (2018) in his paper Demonetization and cashless transactions: impact on retail business markets used an analytical study methodology and concluded that traders have faced many problems due to non-availability of cash in the market. This situation moved them towards cashless transactions. Consistent with the empirical reviews mentioned in the previous paragraphs as well as provided theoretical background, this study tested multiple hypotheses; For the first objective, the hypothesis was, 25 𝐻𝑜: Demonetization announcement did not significantly affect the average monthly change in mobile money transactions (AMT) during the event window in Kenya. 𝐻𝐴 : Demonetization announcement significantly affected the average monthly change in mobile money transactions (AMT) during the event window in Kenya. And for the second objective, the hypotheses used were; 𝐻𝑜: Demonetization announcement did not significantly affect the cumulative change in mobile money transactions (CMT) during the event window in Kenya. 𝐻𝐴 Demonetization announcement significantly affected the cumulative change in mobile money transactions (CMT) during the event window in Kenya. As expected, there has not been much literature on Covid-19 and more socovid-19 and mobile money noting that the pandemic is a very recent and ongoing occurrence at the time of this study. According to the WHO, emergence of SARS-CoV-2 was first suspected when several cases of an unexplained pneumonia were noted in Wuhan city, China. There has not been much literature on Covid-19 and mobile money. Katusiime (2021) while investigating the effects of macroeconomic policy and regulatory environment on mobile money usage and expansion in Uganda, found that in the long run, mobile money usage is positively affected by economic activity, inflation and the COVID-19 pandemic crisis while mobile money customer balances, interest rate, exchange rate, financial innovation and mobile money tax negatively affect mobile money usage. She used an autoregressive distributed lag model with data spanning the period March 2009 to September 2020. Tang and Ren (2020) argue that mobile payments can help individuals avoid coming in direct contact with any paper or coin money. They recommended the promotion of mobile payments during the COVID- 19 epidemic. Tonuchi (2020) did a study on how to improve mobile money service usage and adoption in the era of Covid-19 in Nigeria. Using a sample of 300 targeted informal sector operators using questionnaires and 200 respondents online he concluded that poor mobile network (infrastructural deficiency), transaction costs security concerns, and poor complaints resolution top the biggest hindrance facing mobile money adoption and usage in Nigeria. 26 Gardan et al (2019) did a study on the impact of COVID-19 on consumer behavior in retail banking in Romania. The study was done through a field survey among consumers in retail banking using questionnaires with a sample size of 738 valid responses from the metropolitan area retail banking consumers. The research brought out insights on retail banking services consumption during the pandemic while validating uptake of internet and mobile banking services. The research’ results highlighted, among others, that the variable concerning the perception of the COVID-19 pandemic effect on consumers’ lifestyle has a direct and positive influence on the variable representing the attitude toward internet and mobile banking services. The study introduced mediating variables in safety of internet and mobile banking use as well as trust in banks. The study recommends that banks should create awareness through financial education courses and online tutorials to familiarize customers with the use of digital channels. Toh and Tran (2020) did a study trying to find out if the COVID-19 pandemic would reshape the digital payments landscape. As the COVID-19 pandemic continues, more consumers are likely to adopt digital payments. Aided by various legislative and industry initiatives, consumers and businesses are adapting to the new realities of the COVID-19 world by going digital. Whether this trend will continue post-pandemic remains to be seen—much will depend on whether the initiatives and momentum arising from this pandemic lead to sustained improvements in the ability of financially or digitally underserved consumers to participate in. Bisong et al (2020) studied the effects of COVID-19 on remittances to Africa comparing it to past major events. Specifically, they compare the effect of the COVID-19 pandemic on remittances with effects of the 2008 financial crisis and the Ebola crisis of 2014. Using graphical analysis and comparison, they conclude that remittance flows proved to be relatively resilient during the 2008 financial crisis as well as the 2014 Ebola epidemic. However, due to lockdown measures implemented in host countries, many migrants lost their jobs, consequently reducing remittance flows to developing countries. They note a historical decline in global remittances of US$110 billion, with sub-Saharan Africa (SSA) declining by about 23.1%. They recommend that policy makers in countries that send remittances to relax stringent identification requirements demanded of migrants for them to remit. They additionally recommend incentives granted to encourage the use of digital platforms, and to finally protect migrants from job losses. They recommend that policymakers in remittance-receiving countries should ensure remittance-providing centers are in service despite lockdown measures 27 and to promote digital financial inclusion by expanding money operator networks, and to eliminate or reduce transaction fees on remittances. A 2020 GSMA study on connections between the virus and mobile money concluded that many governments responded with fiscal and monetary stimulus measures to counteract the disruption caused by COVID-19. Mobile money has proven to be an invaluable tool for fostering resilience by facilitating safe and efficient money transfer and payments services. The COVID-19 pandemic has brought about unprecedented challenges for the global economy. It has affected global health systems, affected peoples’ livelihoods and will, invariably, leave long lasting economic effects. (Muthiora, 2020). The empirical reviews above assisted in developing the third hypothesis of the study. The hypothesis is 𝐻𝑜: Covid-19 did not significantly moderate the association between demonetization announcement and mobile money transactions in Kenya. 𝐻𝐴:Covid-19 significantly moderated the association between demonetization announcement and mobile money transactions in Kenya 2.4 Summary of Reviewed Literature and Knowledge Gaps Demonetization is a once in a generation event that affects various aspects of the society and economy wherever it is done. For this reason and more, empirical research on its impact on the financial sector and commercial environment needs to be continually updated. Abrol (2020) did a critical review of the impact of demonetization on Kenyan economy. The study was descriptive and tried to identify the meaning and reasons of demonetization along with the sector-wise impact of demonetization and positive and negative impacts of demonetization on Kenyan economy. The study used secondary data from Research Papers, Journals, & Publications. There however exists a growing research gap to empirically investigate the impact of demonetization on various aggregates as more and more demonetizations are announced. In addition to mobile money which is studied in this dissertation, studies should be conducted to test effect of demonetization on other forms of digital payments such as EFTs and plastic money. The 2019 demonetization should also be studied with an aim of reviewing its efficacy on its set objectives as well as its effects on 28 financial inclusion. However, none of the reviewed studies focused on the effect of demonetization on mobile money transactions in Kenya. Therefore, this study seeks to bridge this gap by establishing the effect of demonetization on cashless transactions in Kenya. The research gap is presented in Table 2.1 Author Topic Methodology Major Findings Major contribution Research gap Filling the gap Bhatnaga (2017) Demonetization to Digitalization: A Step Toward Progress Regression analysis Demonetization increased alternative payment methods in India Cash crunch pushed people to alternative payment modes The study was based in India This study will focus on demonetization in Kenya Sachs et. Al (2018) India; Towards Digitalization Graphical data analysis Digital transition was accelerated with demonetization Unified Payments Interface (UPI) based systems have since become more prevalent than mobile money The study was based in India This study will focus on demonetization in Kenya Nanda and Mohanty (2020) Demonetization and its Effects on Digital Payment Regression analysis Cashless payments grew after demonetization in India in 2016 There was short- term shift to card payments on demonetization The study was based in India and did not cover effects of demonetization on mobile money his study will fill the gap by investigating the effect of demonetization on mobile money in Kenya Nagdev et al (2018) Sentimental analysis of demonetization on digital transactions Survey of 370 respondents Increased use of credit and debit cards, reactivated internet banking accounts, and increased use of payment portals after demonetization Demonetization led to increased use of payment portals The study was based in India and did not cover effects of demonetization on mobile money his study will fill the gap by investigating the effect of demonetization on mobile money in Kenya 30 Bharadwaj (2017) Impact of demonetization on the Indian stock market Event study through a selected portfolio with an event period of 5 months approx. 150 trading days Demonetization had a significant positive impact on the Indian stock market Industries more dependent on cash affected more rather than those industries where dependence on cash is low The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Chauhan and Kaushik (2017) Impact of demonetization on the Indian stock market Event study on S&P BSE 100 for one month approx. 30 days Demonetization had no impact on stock market Short-term downfall in the stock prices can be due to some other factors The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Sunil and Smitha (2017) Impact of demonetization on the stocks of selected sectors Event study with a sample of 5 sectors with 5 companies from each sector The study concluded that demonetization had no impact on stocks returns Demonetization had little effect on the performance of heavy commercial industry such as Automobiles The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money 31 Adika and Ochieng’ (2020) Effect of Demonetization on Securities Market Performance in Kenya Event study of NSE 20 share index prices Demonetization had a statistically significant effect on securities market performance in Kenya. Demonetization in Kenya achieved its objective with minimum disruption to the economy The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Bhat (2017) The effects of demonetization on the economy in India Event study Average yields of treasury bonds were decreasing immediately after the demonetization announcement Demonetization negatively affected the Treasury bond market in India. The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Feng et at (2020) Determinants of mobile money adoption in rural Africa Two-part model analysis of a survey Monthly income Age, account ownership determine the adoption of mobile money Mobile money adoption is correlated with bank account ownership The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money 32 Mahmoud (2019) Determinants of mobile money adoption Linear regression model Mobile money policy such as distribution networks, regulations are the major determinants of adoption Mobile money adoption is correlated with Regulation The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Mishra and Rathore (2019) effect of demonetization on the Indian framework of digital payment. Survey demonetization led to an expansion of digital payment and web-based payment platforms Demonetization led to a move away from cash The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Thomas and Sebastian (2019) Influence of Demonetization on Digital Banking descriptive and analytical study methodology demonetization initiative seems to have influenced digital banking habit of people Demonetization achieved the digitalization objective The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money 33 Prabhu et al (2017) Towards a cashless economy Exploratory that demonetization created greater demand to digital banking services Demonetization pushed more digital banking The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Dinesh and Reddy (2018) impact of demonetization on digital payments exploratory data analysis that there was a significant effect of demonetization on digital payments that there was a significant effect of demonetization on digital payments The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Madhukar (2018) Demonetization and cashless transactions: impact on retail business analytical study methodology traders have faced many problems due to non- availability of cash and moved digital Demonetization moved the retail sector to digital payments The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Katusiime (2021) effects of macroeconomic policy and Regression with an autoregressive mobile money usage is positively affected by The study did not test the relationship This study will fill the gap by investigating the moderating effect of 34 regulatory environment on mobile money usage and expansion distributed lag model economic activity, inflation and the COVID-19 pandemic betwee: Covid- 19, demonetization and mobile money covid 19 on the relationship between demonetization and mobile money transactions in Kenya Tonuchi (2020) improve mobile money service usage and adoption in the era of Covid-19 in Nigeria Survey of 300 targeted operators poor mobile network, transaction costs and security concerns, hinder mobile money adoption in Nigeria. The study did not test the relationship between : Covid-19, demonetization and mobile money This study will fill the gap by investigating the moderating effect of covid 19 on the relationship between demonetization and mobile money transactions in Kenya GSMA (2019) Impact of mobile money on monetary and financial stability in Sub- Saharan Africa Regression analysis Mobile money is linked with a higher money multiplier and linked with a decline in money velocity Mobile money can enable more effective monetary policy by transferring currency and assets into the formal financial The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money 35 system enhancing financial depth Gardan et al (2019) Impact of COVID- 19 on consumer behavior in retail banking in Romania Field survey using sampled questionnaires COVID-19 pandemic effects on consumers’ lifestyle has a direct and positive influence on attitudes toward internet and mobile banking Banks should create awareness through financial education courses and online tutorials to familiarize customers with the use of digital channels The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Bisong et al (2020) Effects of COVID- 19 on remittances to Africa Graphical data analysis Covid-19 caused a decline in global remittances of US$110 billion, with sub-Saharan Africa (SSA) declining by about 23.1%. Covid-19 had a bigger impact on remittances than Ebola and the 2008 economic crisis The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money 36 GSMA (2020) Impact of Covid-19 on Mobile money Governments responded with fiscal and monetary stimulus measures to counteract the disruption caused by COVID-19 Mobile money has proven to be an invaluable tool for fostering resilience by facilitating safe and efficient money transfer and payments services The study did not cover effects of demonetization on mobile money This study will fill the gap by investigating the effect of demonetization on mobile money Table 2. 1 Research Gaps 2.5 Conceptual Framework A conceptual framework is a diagram that illustrates the perceived relationships between the variables in the study. This study’s conceptual framework is shown in Figure 2.2. In this dissertation, the independent variable is demonetization which is denoted by the announcement by government to withdraw the KShs. 1,000 note. The dependent variable is mobile money transactions. In the study, this variable is measured using monthly change in mobile money transactions (AMT) and cumulative mobile money transactions (CMT). Covid-19 was used as a moderating variable in the study. Figure 2.2: Conceptual Framework Source: Author conceptualization Demonetization Government announcement to withdraw the KSh 1000 note from circulation Covid-19 Mobile Money Transactions  Monthly change in mobile money transactions (AMT)  Cumulative mobile money transactions (CMT) Moderating Variable Independent Variable Dependent Variable 38 2.6 Operationalization of the Variables Table 2. 2 Operationalization of the Variables Variable type Variable name Indicators Source Analysis tool Independent Demonetization Date of announcement of demonetization was used as point of analysis CBK Descriptive statistics, trend analysis, Mean adjusted model, and T- statistics Dependent Moderating Mobile money transactions Covid-19 Volume of mobile money payment transactions by agents Dummy variable CBK Source: Author conceptualization 39 CHAPTER THREE RESEARCH METHODOLOGY 3.1 Introduction Research has been defined by (MacKenzie, 2012) as the systematic investigation or experiment targeted at a discovery or interpretation of the facts. The main purpose of research is to inform thought or action as well as to highlight issues and concepts that may have remained uncovered earlier. The purpose of this study is to examine the impact of the demonetization on mobile money. The researcher adopted different methods and techniques in an attempt to achieve the requisite rigor expected in this analysis. In this chapter, the researcher has discussed the methodology adopted for collecting, analyzing as well as reporting the necessary data for completing the study. 3.2 Research philosophy The research philosophy is all about the way in which data about the research issue has been gathered, analyzed and used. The research philosophy can be positivism, interpretivism, realism, subjectivism, pragmatism, among others (Ahmed, 2016). In this dissertation, the researcher has adopted the positivism philosophy. As a philosophy, positivism relies on the argument that only facts and knowledge gained through the processes of observation like measurement is trustworthy. Positivists assume that reality is fixed, directly measurable, and knowable and that there is just one truth, one external reality. Positivists claim there is a single, objective reality that can be observed and measured without bias using standardized instruments. In contrast, naturalistic researchers assume that reality constantly changes and can be known only indirectly, through the interpretations of people; they accept the possibility that there are multiple versions of reality. For the positivists, the goal is a universal truth, a rule or explanation that is always true so long as specified conditions hold. This study relies on positivis