Financial inclusion is the core of the Central Bank of Kenya's (CBK) reform agenda to support Kenya's development blueprint, Vision 2030. Since the CBK put the agency banking model into operation in May 2010, it has granted approval to 10 banks for the rolling out of their agency networks. To date, these banks have engaged a total of 7,820 agents across Kenya.
Revolutionising banking in developing nations
At the recent Clinton Global Initiative 2011 Meeting held in New York, Kenya's Equity Bank's agency model, was singled out and praised for having revolutionised banking in the developing nation.
Through cost-effective agency banking networks, customers can now access banking services in kiosks around the country, particularly in remote, previously unbanked territories. Agency banks offer normal banking services such as cash deposits and withdrawals, disbursement and repayment of loans, salary payments, pension payouts, transfer of funds and the issuing of mini bank statements, all through shared infrastructures. In addition, the agency network allows banks to reach new customers, who can open new accounts, perform credit and debit card applications, cheque book requests.
The benefits of agency banking
Financial inclusion results in a deepening of the market and creates economies of scale. It assists in bringing the cost of financial services down and allows for greater financial sector development. In addition to reaching the unbanked masses, the agency banks are also increasing employment opportunities across the country.
Agency banking means that traditional banks can now recruit other business with a nationwide footprint to offer banking services on their behalf, allowing them to have branches in areas that were not previously commercially viable.
In her paper on "How Agent Banking Changes the Economics of Small Accounts", Clara Veniard of the Bill & Melinda Gates Foundation found that agent banking systems are up to three times cheaper to operate than branches. She gave two reasons for the cost saving, firstly the bank's reduced need to invest in new infrastructure, and secondly, acquisition costs are lower for mobile-enabled agents and mobile wallets. By using mobile phones instead of payment cards, she states that customers can be acquired at less than 70% of the cost of a branch or POS-enabled agent.
Challenges facing the agency banking model
"James Mwangi, CEO of Equity Bank said, "We are facing problems converting these outlets into what we would be comfortable to call outsourced banks."
There are a number of challenges facing the agency banking model. For starters many of the banks that have embarked on the agency banking roll-out have found that agents lack the capacity to handle large transactions of cash and that they are not spending enough on security measures.
Our agency selection criteria is showing some weaknesses, and we are now re-organising what we demand of agents in order to favour cash heavy operations in order to meet this demand."
CBK statistics show that the regulator has licensed over 10,000 establishments to act as agent banks. Equity bank claims to have outsourced some of its operations to 5000 active outlets. In total CBK's data shows 8,809 agency outlets were opened in 2010 alone, most of which are operated by Equity and Co-operative banks.
Kenya Commercial Bank (KBC) intends to open 2500 agency branches in 2011 and Postbank is aiming significantly lower with its intended 500 branches.
The challenges of handling cash transactions efficiently for agency banks might be influenced by the more than 30,000 mobile money outlets currently operating across the country. This huge network has resulted in a smaller pool of cash-flush businesses from which banks can draw, in order to roll out the agency banking model. The Kenyan government has been advocating an increase in partnerships between the banks mobile network operators and this hurdle might just be the impetus needed to drive further cooperation and partnerships between the banks and the mobile network operators.
According to a recent report in Business Daily, Housing Finance, a Kenyan mortgage lender is also looking to adopt the agency banking model in a move that would see it expand into previously untapped territories. Again, it is the elimination of the need to invest in physical infrastructure that is appealing to Housing Finance according to its managing director Frank Ireri.
The use of agents would enable the lender to sell its home financing products in rural areas which are currently un-serviced.
Time will prove whether or not the agency system will be successful in Kenya but so far it has the proved it has the ability to reach the rural un-banked population. The Kenyan agency banking model does appear to be one that could be fairly easily replicated across Africa, depending on how quick the various governments are to get on board.
One of the biggest challenges on the continent to date, and the reason for some countries lagging in the mobile banking arena is the onslaught of red tape and delays as governments try to mitigate the perceived risks. The odds are high therefore that there may well be some hesitation and a lot of consultation before the sub-Saharan region follows Kenya's lead.
By Our Africa Correspondent