Branchless banking runs into headwinds

By James Anyanzwa

The road to branchless banking could run into a brick wall, a new report says. The Central Bank of Kenya (CBK) is pushing for the adoption of agency-banking to reach Kenya’s unbanked population.

But the proposal now faces hurdles, as fears emerge over the safety of huge amounts of money in the hands of a largely untrained businessmen.

A new report by the Financial Sector Deepening (FSD) programme, has recommended that commercial banks take insurance covers against operational risks, before staking their money with agents.

CBK Governor Prof Njuguna Ndung’u says MFIs should be integrated in the agency-banking model to up the banking population. Photo: File/Standard

According to the report, banks wishing to employ the services of agents to extend their reach, must first carry insurance covers, at least until their capability to manage agents has been demonstrated.

The report says operations of both branch and an agency networks expose a bank to operational risks linked to the robustness and integrity of systems and procedures.

The report, dubbed ‘Regulation and Supervision of Bank Channels: Policy Options for Kenya’, notes that while branch staff in banks may have more ability to defraud the bank than the agents, it may be harder to monitor and enforce procedures and controls across agents.

Adequate controls

While bank staff maintain a higher level of training, and are directly supervised, the report recommends real time IT systems with adequate controls, as a key risk management device in both cases.

The report says agents must also manage their existing physical security risks to sufficient standard to protect their stock and cash just the same way banks do. Bankable Frontier Associates conducted the study on behalf of CBK.

According to the report, short-term insurance is widely available, and already bought by banks to cover various risks, including loss of cash in branch or in transit due to robbery and loss of money through fraud.

The banks’ short term insurance also covers direct monetary loss arising from failure of electronic information systems to capture transactions in real time and accurately and loss resulting from fire, theft or damage to physical property.

The report also recommends that CBK drafts and issues guidelines for banks to acquire agents, arguing that regulations under the Banking Act may take some time to finalise and take effect.

"We therefore recommend that CBK draws guidelines embodying the main choices and procedures… which can be updated in response to experience, rather than regulations," says report.

"There is a need to guide and provide clarity to banks around the framework introduced by the Finance Act 2009."

The CBK is also expected to investigate the feasibility of establishing a central register to handle all banking agents.

Third party agents

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

Prof Njuguna Ndung’u, the CBK Governor recommends the inclusion of micro-finance institutions (MFI) into the agency-banking model. He says the slow uptake and integration of the MFI’s into the mainstream banking industry slows economic growth.

Ndung’u said, just like banks, MFIs also need to use third party agents as delivery channels to extend financial services to the vast under-banked and unbanked Kenyan populace.

The branchless banking model, proposed by Finance Minister Uhuru Kenyatta in the current budget, allows banks to extend their footprint through agencies with wide distribution networks. The 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.

Limited outreach

Most Kenyans have no bank accounts due to the limited outreach by deposit-taking institutions.

Studies show that that 32 per cent of Kenya’s bankable population remain outside the orbit of financial services, and many more are being served by the informal financial system.

The FSD programme was established in 2005 to support the development of financial markets, as a means to stimulate wealth creation and reduce poverty.

Working in partnership with the financial services industry, the programme seeks to expand access to financial services among lower income households and smaller enterprises.

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