Drive for branchless banking gains pace

By James Anyanzwa

The banking industry is on course towards adopting a branchless banking model proposed by Finance Minister Uhuru Kenyatta in last year’s budget.

After publishing the draft regulations, Central Bank of Kenya (CBK) has engaged industry stakeholders to discuss details of its proposed regulations.

Mr Uhuru proposed amendments to the Banking Act to allow banks to extend their footprint through agencies with wide distribution networks.

In last year’s budget, Uhuru noted that in spite of the progress the country has made in the banking front, many Kenyans still remained unbanked due to the limited outreach by deposit taking institutions.

"One of the ways of reaching this objective is to increase the outreach of the banking sector to the vast under banked and unbanked Kenyan populace," he said.

Third party agents

The operationalisation of the Finance Act 2009 in January amended the Banking Act, allowing banks to use third party agents such as petrol stations, supermarkets, shops, Saccos and small retail outlets to reach the unbanked.

According to a report by the World Bank’s Consultative Group to Assist the Poor (CGAP), branchless banking is indeed cheaper than traditional banking, but the gap between the two may not be as wide as some may think.

According to Group’s research that compared 26 branchless banking pioneers and traditional banks with products aimed at the same kind of customers, on average, branchless banking is 19 per cent cheaper across eight use cases.

The average monthly cost of using a branchless banking service is $3.90 (Sh311) compared with $4.80 (Sh382) when using a traditional bank.

Certainly, the Group contends that branchless banking is particularly 50 per cent cheaper if clients use it for medium-term savings and bill payment.

The new banking concept is expected to reduce the cost of offering banking services as financial institutions cut down expenses associated with having a physical branch.

Commercial Banks are expected to leverage on additional cost effective distribution channels to offer financial services.

According to CGAP, the draft regulations for branchless banking facilitate the use of third-party agents by banks to provide banking services, but present a cautious approach to the expansion of agent models.

Banks will need to obtain annual approvals from CBK as to the overall use of agents.

They will also need to provide CBK with details about engaging particular agents, including names, locations, pre-existing commercial activities, a sample contract, and the services to be rendered.

Furthermore, banks will need to obtain CBK approval before closing any agent locations and will be permitted to do so only for particular reasons or offences, in the interests of reputation and service continuity.

Commercial entity

If the draft regulations are adopted, a range of entities will be permitted to be agents, subject to two requirements: an agent must be a commercial entity and must have carried out commercial activities for at least two years.

Also, banks will remain ultimately responsible and liable for the actions of the agent and for all compliance responsibilities with technical specifications and under anti-money laundering and combating financing of terrorism, and privacy.

Banks are also not permitted to engage an agent on an exclusive basis. As the regulations are currently drafted, agents will be able to offer a range of services, including cash-in/cash-out, disbursement and repayment of loans, bill payments, balance enquiries, mini-statements, collection of account-opening paperwork and loan applications, and mobile phone airtime top-ups.

However, agents will not be able to open accounts or appraise loans on behalf of banks nor will they be permitted to exchange foreign currency.

Agents will also not be permitted to charge customers fees.

As part of the new measures aimed at reforming the banking sector, banks and mortagage financial institutions are also expected to comply with a requirement to increase their capital base to Sh1 billion by 2012.

The initial proposal expected the financial institutions to hit the target this year, but Parliament in 2008 felt they needed more time to raise the funds.

The extension gave banks and mortgage institutions four years to recapitalise instead of the two proposed by former Finance minister Amos Kimunya in 2008/09 Budget.

Capital base

According to the amended schedule, the financial institutions will gradually up their capital base in four phases to Sh1 billion in an exercise expected to end in 2012. The law required the financial institutions to raise Sh350 million last year, Sh500 million by this year, Sh700 million by next year and to have fully complied by December 31, 2012.

The crippling economic crisis and shrinking profit margins are likely to force smaller players to consider consolidating, a move that will allow them to benefit from economies of scale in a highly competitive banking environment.