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Understanding the cost of affordable financial inclusion

MPESA

Mobile banking has been hailed as an enabler of financial inclusion. FILE PHOTO | NMG

Financial inclusion has been hailed as an enabler of seven out of the seventeen UN Sustainable Development Goals. The themes of these goals vary from poverty eradication, gender equality and empowerment, decent work and economic growth to reduced inequality.

Financial inclusion as defined by the World Bank refers to the share of individuals and firms that use financial services such as transactions, payments, savings, credit and insurance. To shake this up a little bit, policy circles insist that the financial services in use be in the formal sector, so this condenses the definition to use of banking services and insurance services.

The Kenyan market still has strides to make in terms of increasing reach in the insurance sector especially for individuals.The African Banking Survey, 2016, a report by PwC, pointed to the fact that bank CEOs’ priority is to secure and increase market share in the domestic regions.

Banks however have to grapple with the cost-effectiveness of their operations in an environment where regulatory costs increase and revenue streams are questionable. Likhit Wagle, a former PwC partner quipped that … ‘the real key problem in financial inclusion today is not so much in opening accounts-that’s happening fairly successfully-but we get stuck with the fact that these are very low balance accounts that are not very profitable’.

Most of financial exclusion is a manifestation of already existing social exclusion. In all regions, financially excluded persons are the marginalised people, where marginalisation has to be properly contextualised. Ethnic minorities, the elderly, women, single parents, those whose employment is in the informal sector, the unemployed and the illiterate are all socially excluded people prone to financial exclusion.

Closer home, in Kenya, to by all means bring all groups in the fray, banks and insurance companies continue to be innovative in a bid to bank even those deemed unbankable. Therein lies not only a research and development cost but also an opportunity cost.

Significant funds are spent developing highly differentiated products targeted at a client whose preference is low cost all the way.To make significant margins on such products, banks must target volumes in terms of sales.

This calls for expensive, aggressive marketing campaigns in the same space as other competing banks and alternative semi-formal and informal institutions. Another cost that cannot quite be quantified is the account opening process.

The KYC process for example, though a safety net, acts as quite the deterrent for the financially excluded especially when coupled with items such as minimum bank balances and number of forms to be filled out.In a bid to cut down on costs and also as a revolutionary way to do business, banks have taken to shutting down some branches.

Even with the best of intentions at heart, it is key to remember that this is a region where people trust padlocks more than they do biometrics as a security feature. Lack of a physical branch can deter a section of the population from trusting banks.

There are individuals who need to walk into a bank and have that human interaction as part of the financial inclusion process. It is imperative however that customers understand that they shall ultimately bear the cost of maintaining a physical branch.

As alluded earlier, some accounts that are maintained are not profitable enough to sustain the infrastructure and human resource costs needed to keep a branch open, even if absorbed by other bank branches. Mobile banking has been hailed as an enabler of financial inclusion.

The spike in both new accounts and credit advances by banks over the past five years can be attributed to this revolutionary disruption.

The cost attributed to transferring and accessing money via mobile money is however significantly disturbing. Some accounts that are created primarily experience lower transactions over time through mobile channels end up being dormant due to the transaction costs associated with operating the account.

The cost eventually outweighs the ease and convenience of operations. It is a delicate balance that needs to be struck to have financial inclusion thrive as a sustainable measure of economic progress in the country. With the involvement of regulators and adoption of best practice globally, affordable financial inclusion can be achieved in the country.

Victoria Wokabi, consultant, PricewaterhouseCoopers (PwC) Kenya’s advisory practice.