In the outskirts of Nairobi, at Ruaka Estate, a small shop has just been repainted.
From a distance one may be forgiven to think it is a new Equity Bank branch since the colours are similar to those splashing the bank’s branches across the country.
Located deep into the crowded market centre, miles from the nearest police station yet without a strong security wall, stands a model of the bank, the most tangible evidence of the birth of agency banking in Kenya.
The agent bank offers the same services as a real bank —cash deposits and withdrawal, disbursement and repayment of loans, payment of salaries, pension, transfer of funds, and issuance of mini-bank statements, among others.
The agent also facilitates new account opening, credit and debit card application, cheque book request and collection and is linked to Equity Bank’s systems electronically, eliminating the need for the commercial bank to have a branch in Ruaka to do business.
This is being replicated across the country, especially in rural areas, with Equity Bank saying that already 1,000 banking agents have started operating.
The Central Bank has licensed four banks, including Equity, to carry out agent banking business and approved 8,809 specific agents since last year.
Should the remaining over 7,000 agents roll out their services as expected early in the year, then this would deeply boost penetration of banking services in the country even as banks eliminate costs on physical branch expansion in areas with low volumes.
“The main gain for us is that we shall be able to reach more people—the unbanked, without the need to open new branches or employ new staff members,” said Equity Bank CEO James Mwangi in an earlier Interview with the Business Daily. “We expect as a result that our margins will improve significantly,” he added.
According to the FinAccess National Survey (June, 2009), banks have billions at their disposal yet most of this goes to big corporate organisations and high net worth clients while the majority of Kenyans remain excluded, with only 23 per cent of the country’s population aged above 18 years holding bank accounts.
A recent World Bank survey into Kenya’s financial sector—Banking Sector Stability, Efficiency, and Outreach in Kenya—vindicates this survey, showing that 34 per cent of the population is excluded from access to financial services, but still puts Kenya ahead of her peers in the East African region.
Players in the banking industry have already warmed up to the idea with Kenya Commercial Bank and Co-operative Bank planning to have their agents working in the next few weeks.
“The agent banking model is designed to assist banks to lower their cost of offering banking services that has been a major impediment to inclusion while at the same time improving their earnings as more Kenyans are offered an opportunity to access financial services,” said Central Bank Governor, Prof Njuguna Ndung’u.
But analysts reckon that there is need for thorough scrutiny of the agents and monitor their operations to ensure that Kenyan’s embrace the concept as was the case in the uptake mobile transfer solutions, and banks don’t lose out the benefits inherent.
Francis Ombese, a credit risk analyst at Metropol East Africa, says the government should boost the legal framework to seal any loopholes in agency banking but admits that the greatest task will be upon the commercial banks to ensure that the appointed agents do their work efficiently, since they will be the only visible contacts with a bank’s customers in the rural areas.
“Agency banking is no doubt the solution to the country’s financial inclusion prospects. However, banks must ensure that their agents are up to the task since they are the first point of contact with the banks in the rural areas,” said Mr Ombese. “In a competitive environment, mistakes and poor service delivery by the agents may make a bank unpopular at the grassroot, costing it business,” he added.
Existing rules provide that for one to be an agent they will be vetted for reputation and morals, have a certificate of good conduct and must have a good history for loan repayment.
In the case of a legally registered company, it must have records of audited accounts and be of good financial standing.
However, the regulations put responsibility to the bank to determine, based on agent risk assessment, which services a particular agent should provide.
The profile of agents includes village town wholesalers, consumer goods distributors, supermarket owners, and petrol station operators.
Saccos and microfinance institutions are expected to be at the fore since they already have most of the requirements and the experience.
Agents must also invest in a robust IT infrastructure to capture transactions, set up basic security measures and ensure steady availability of cash.
They may also be forced to train their staff on good customer service, and invest in branding.
“Agents will be appointed from ongoing businesses which are able to generate substantial cashflows, not new entities,” said Mr John Wanyela, Kenya Bankers Association outgoing executive director, adding that banks will absorb the cost of hiring and retaining agents, cushioning customers from additional charges from the agents’ side.
For the model to work, players say that banks must also address concerns arising from third party risks like misappropriation of funds, delayed payment, short payment, excessive transaction charges and non-delivery of services when needed most in appointing and retaining agents.
“The success of both the agency banking model and the mobile platforms will heavily rely on the ability of banks to ensure security of their customers accounts since they are both based on ICT,” said Mr John Wanyela, Kenya Bankers Association outgoing executive director.
“Physical security for both staff and the money will still be a priority for banks since money is involved and the risks get bigger as one gets deeper into the rural areas yet this is where their target is,” said Mr Ombesse.
According to Mr Moses Simiyu, a technology expert, there is need to ensure that the agents remain online all the time and update any of their transactions real time to avoid cases of fraud where an unscrupulous individual can withdraw money from one agent and rushes to the next one to carry out another transaction before his account is updated.
“Banks must ensure that their agents abide by the rules barring them to operate or carry out an electronic transaction when there is communication failure in the system or carry out a transaction when a transactional receipt or acknowledgement cannot be generated,” said Mr Simuyu, “Failure to do this could be partly motivated by the need to earn commissions by an agent while exposing a bank to fraud,” Mr Simiyu added.
This comes at a time when banks have stepped up branch expansion while shedding off corporate tags that has been cited as a bottleneck in the banking industry’s pursuit of growth, with some shifting attention to the fringes of urban centres which host informal businesses that oil the wheels of the economy to tap into the low end market.
Co-operative, KCB and Equity banks have been among the most active in branch expansion, with some expanding as far as into the East African region.
Co-operative Bank last year increased its branch network by 50 per cent to increase its footprint in Kenya.
Banks have also in the recent weeks slashed the minimum loan to as low as Sh700, in what industry players say is a sign of an intensifying battle for the lucrative mass market currently dominated by shylocks and microfinance institutions.
Co-operative Bank and Kenya Commercial Bank have lowered their minimum loans to Sh5,000 from Sh30,000 and Sh10,000 respectively, joining Family Bank, Equity Bank and National Bank among the financiers that offer micro loans to their customers.
The low amounts are also targeted at small business like those in the jua kali sector, effectively getting into the domain of micro finance institutions.