Introduction
The third world countries and more so in Africa have experienced rapid growth in the banking sector. Kenya has not been any exception to the tread in other third world countries. The rapid growth of the demand for banking services in Kenya has resulted to an increased consumer base for most banking institutions. Agency banking has been proposed as an ideal solution for the banking institutions to meet the customer demands without straining their infrastructure and financial capital in opening new branches.
Agency banking model allows basic banking transactions which would have otherwise been carried in the banking hall to be executed through the agents. These services include but not limited to withdrawals and depositing. This ability to deposit and withdraw cash using the agents is referred to as ‘cash in and cash out transactions’ (Adero & Liu 2011).
Despite the numerous advantages of the agency banking, most Kenyans are yet to embrace this new development (Bank of International Settlement 2009).This can be attributed to the limited information and knowledge on how agency banking works as well as security fears in transacting through the agency banking (Daley-Harris 2009).
Apart from decongesting the banking hall in major banks, the agency banking model has the potential to enable the unbanked majority to access financial services. Research studies in Kenya indicate only about 19% of the Kenya adult population have access to formal banking services (Financial Sector Deepening 2011). A further 38% of Kenyans don’t have access to any basic financial services (Financial Sector Deepening 2011).
This study will be instrumental in investigating on ways in which agency banking can be useful in helping making financial services accessible to a majority of people in third world countries. The study will also examine the challenges confronting agency banking in third world countries using Kenya to illustrate the same.
Rationale and research questions
Most banking institutions in third world countries operate in highly competitive environments and Kenya is no exception. In Kenya, most banks have adopted the low-margin-high-volume business model in order to remain competitive and profitable.
However, this model has led to low customer satisfaction due to congested banking halls. This has necessitated the banks to formulate and implement prudent strategic approaches aimed at consumer satisfaction. This is imperative in the efforts to achieve sustainable competitive advantage in the market.
Despite the obvious advantages of the agency banking model, agency banking operations are not clear to a majority of Kenyans and banking executives. The nature of agency banking and the challenges associated with the same has not been adequately researched in Kenya.
This can be seen in the regulatory environment in relations to the agency banking that can be best described as evolving in nature. These are the knowledge gaps that this study intends to fulfil.
In order to tackle the above knowledge gaps, the researcher formulated the following research questions.
- What context has led to the emergence of agency banking?
- What services are provided by agency banking?
- What are the advantages and disadvantages of agency banking?
- What are some of the challenges confronting agency banking?
Literature Review
What is agency banking?
Modern day banking has evolved to provision of basic banking functionalities outside the confines of a traditional brick-and-mortar physical bank branch. In this context, several terms have emerged in the banking circles such as “agent banking”, “agency banking” and “branchless banking” to describe such scenarios. The Bank of Ghana (BOG) (2008) gives the following definition of branchless banking.
Branchless Banking (BB) represents a significantly cheaper alternative to conventional branch-based banking that allows financial institutions and other commercial actors to offer financial services outside traditional bank premises by using delivery channels like retail agents, mobile phones etc (BOG 2008,p.1)
On the other hand, the United States Agency International Development (USAID) (2009) defines branchless banking as “…the delivery of financial services outside conventional bank branches often using agents and relying on information and communications technologies to transmit transaction details –typically card-reading point-of-sale (POS) terminals or mobile phones.” (p.4).
It is clear from USAID’s definition of “branchless banking” that it implicitly provides for both third parties (agents) and the bank itself offering banking services outside the confines of physical bank premises.
Agent banking models
In the context of agent banking, Lyman et al (2006) traces two models of branchless/agent banking emerging at the global level; bank driven agent/branchless banking and non-bank driven agent/branchless banking. According to Lyman et al (2006) the bank driven agent/branchless banking places the bank at the centre of all the branchless activities.
In this context, the bank develops financial products/services which it distributes through various agents. The agents also handle most of the customer interactions. The agent is equipped with either “… a mobile phone or an electronic point of sale terminal that reads cards” (Lyman et al 2006, p.5).
On the other hand, in a non bank driven model, the customers deal with a non bank institution such as a mobile phone service provider or a prepaid card issuer. In this model the customer exchange the physical cash with electronic equivalent of the money or e money stored in a virtual e money account.
Money in this virtual e money account is transferrable to other users or can be used for day to day purchases. Alternatively they may store the money in this virtual e account to act as a bank and of which they can redeem to the hard cash at a retail agent (Lyman et al 2006).
Risks and Challenges of agent banking
There are several risks and challenges associated with agent banking. Some of these challenges include the terrorism financing and money laundering, technological challenges, illiteracy, and fraud amongst other challenges. Money laundering remains one of the significant challenges associated with agent banking primarily due to the technology used and the set up of operation of agent banking.
Money Laundering particularly thrives in financial environment that favours ambiguity (Lehman 2010). In this context, the Bank of Ghana (2008) has noted that “…special attention to threats that may arise from new technologies that favour anonymity” (p.5). Such a context conceivable in a non led bank model that often rely on the mobile phone SIM cards to execute transactions. In some cases it is easy to obtain SIM cards off the street without the necessary due diligence that would lock out potential money launderers.
The mechanics of agent banking
In the context of the mechanics of agent banking, this research will focus on four critical components of agent banking including services offered through agent banking, the technology used in agent banking, guidelines followed in agent banking and finally the agent banking outlets/models. According to the Central Bank of Kenya (2012), there are several permissible banking activities through agent banking including:
cash deposit and cash withdrawal, cash disbursement and cash repayment of loans, cash payment of bills, cash payment of retirement and social benefits, cash payment of salaries, transfer of funds, balance enquiry, generation and issuance of mini bank statements, collection of documents in relation to account opening, loan application, credit and debit card application, collection of debit and credit cards, agent mobile phone banking services, cheque book request, cheque book collection by customers, and collection of bank mail/correspondence for customers (CBK 2012, p.11).
Kenya seems to have the widest range of activities permissible within the context of agent banking. The Bank of Ghana allows far much lower permissible activities from those of the Central Bank of Kenya.
Several technologies are used in the context of agent banking including “…information and communication technologies, such as cell phones, debit and prepaid cards, and card readers to transmit transaction details from the retail agent or customer to the bank.” (Lyman, Ivatury & Staschen 2006, p.1).
There are several outlets that have been identified as agent banking outlets by various banking authorities. The Bank of Ghana (BOG) (2008) states that “…branchless banking can be done using agents like telcos, fuel distribution companies, merchants, post office etc…” ( p.2).Lyman et al (2006) cites that in Brazil branchless banking is available at “….over 12,000 lottery outlets, supermarkets, and even butcher shops” (p.1).
Methodology / Methods / Sample
The researcher adopted the descriptive research design for this study. According to Jacobs (2011) descriptive research designs “…collects data in order to questions about the current status of the subject or topic of study” (p.4). On the other hand, McNabb (2011) notes that descriptive research “…involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data” (p.3).
She further notes that descriptive research uses “…description as a tool to organize data into patterns that emerge during analysis (McNabb 2011). In particular, the researcher adopted the case study form of descriptive research. This research design is ideal for this kind of study as it captures an evolving phenomenon (Lois du Toit 2010)
Sampling is critical element of undertaking research. A sample is defined as a subset of the target population (Organization for Economic Co-Operative Development 2012). Samples are often used because they are cheaper to obtain and less tedious (Hale 2011). In the context of sampling, the researcher opted to use judgemental sampling techniques.
In this method of sampling the researcher relies on his judgement in order to draw the samples of his study. This judgement is based on subjects who are likely to be knowledgeable of the subject matter (Vaus 2000). Use of questionnaires was chosen as the means of data collection method. Questionnaires are easy to use as well as easy to analyse.
Ethical issues
The researcher is aware of the ethical consideration that needs top be put in place in regards to the conduct of the research. The critical ethical consideration is the need to inform the respondents on the use of the data obtained from him. The handling of the obtained data is also a critical consideration in which the data must be handled only by the people involved in the research and used only for the research purposes only.
Reference List
Adero G., & Liu, J. 2011. Maintaining Competitiveness Through Strategic Alliances- Case Study of Equity Bank Kenya. Web.
Bank of Ghana , 2008. Guidelines for branchless banking. Web.
Bank of International Settlement, 2009. Njuguna Ndung’u: Growth and performance of the Kenyan banking sector. Web.
Central Bank of Kenya, 2012. Guideline on agent banking – cbk/pg/15 2012. Web.
Daley-Harris, S. 2009. State of the Microcredit Summit Report 2009. Web.
Financial Sector Deepening, 2011. Financial consumer protection in Kenya: Key research findings & policy recommendations. Web.
Hale, J. 2011. The 3 Basic Types of Descriptive Research Methods. Web.
Jacobs, R. 2011. Educational research descriptive research. Web.
Lehman, J. 2010. Operational challenges of agent banking systems. Web.
Lois du Toit, J. 2010. A typology of designs for social research in the built environment. Web.
Lyman, T., Ivatury, G. & Staschen, S. 2006. Use of agents in branchless banking for the poor: rewards, risks, and regulation. Web.
McNabb, C. 2011. Descriptive Research Methodologies. Web.
OECD, 2012. Sample Design. Web.
USAID, 2009. International best practices and issues on regulating agent and mobile banking, and its relevance to Angola financial sector program. Web.
Vaus, D. 2000. What are research design. Web.