Growth in agency banking model signals deepening financial inclusion

On the face of it, the recent collapse of three commercial banks and a shrinking national branch network point to a sector in distress. Far from it.

The traditional banking hall is only giving way to agency banking—a model through which most of these financial institutions are taking some of their services to previously underserved segments.

Official data released last week indicates that agency banking has continued to gain more traction in the country, with Kenyans transacting more money through the model in 2017 as compared to 2016.

The banking supervision report of the Central Bank of Kenya (CBK) reveals the number of transactions undertaken by agents went up from 104 million to 139 million in 2017, representing a 34 per cent increase.

The value transacted through agency banking hit a record high of Sh1.07 trillion in 2017, up from Sh734 billion in 2016. The 46 per cent increase was attributed to increased efficiency of the model, among other reasons “The large increase is as result of growth in transactions relating to payment of bills, transfer of funds, cash deposits and cash withdrawals,” said the report.

Unlike the traditional banking hall where a teller is only available within the strict banking hours, agents – mostly the outlet owners – normally offer flexible time schedules even though they provide a limited range of financial services.

The CBK report indicates that the number of agents have been increasing countrywide, from 53,833 in 2016 to 61,290 in 2017. The additional 7,457 agents implied a 14 per cent increase in the number of outlets.

By comparison, the number of commercial banks, according to the report, had dropped to 40 after the recent collapse of three institutions with their national branch network also falling 23 per cent over the period from 1,541 in 2016 to 1,518 last year.

The agency transactions involving cash deposits were 52 per cent of all transactions, with customers depositing close to Sh800 billion through the informal banking outlets.

Similarly, a total of Sh175 billion was withdrawn from the agents last year. Other transactions involving payments of bills, balance enquiries among others, also ballooned in the period, commanding the remaining 13 per cent of the operations

Transfer of funds declined by 66.5 per cent in the period mainly due to competition from other alternative channels including mobile phone banking, Pesa-link and electronic bank- to-bank transfer services which are considered more convenient as compared to the use of agents. Also notable is that the number of Kenyans collecting loan application forms dropped to 0 from 75 in the previous year.

“The increase in total transactions was mainly as a result of increased transactions relating to the payment of bills, cash withdrawals, cash deposits and mini statements requests.” Added the report. Equity Bank had 28,663 active agents, more than KCB and Co-operative Bank combined. Together the three leading banks accounted for 90 per cent of commercial bank agents in the country. Out of the 40 operational banks mentioned in the report, only 18 banks offer banking agency services.

The improved performance of the model together with increased efficiency in technology was however noted as among the reasons of declining banking sector staff numbers. “Staff levels recorded a decrease from 33,693 in 2016 to 30,903 in 2017,” said the report. “Staff decrease has been as a result of reviews of business models, automation of processes and shift from “brick and mortar” to alternative channels.” It added.

The regulator remained pragmatic on the outlook of the model in 2018 and the years to come noting the increased market presence of banks, the products and services they offer will result in even more positive results.

“The increase in number and value of transactions underlines Kenyans’ growing confidence and acceptability of the agency banking model by banks and the public,” concluded the report.