Agency Banking

A. Problem Analysis

 1. What was the problem before the implementation of the initiative?
The key problems that existed before agency banking was introduced were: (i) Financial exclusion - According to the 2006 National Financial Access Survey, only 18.9% of the Kenyan adult population were accessing formal financial services. 39.3% of the Kenyan adult population was financially excluded whereas 35.2% accessed informal financial services. Among the financially excluded were Kenyans in peri-urban, rural, remote areas with poor infrastructure. The formal financial institutions restricted their operations to urban centers and were out of reach to many Kenyans. (ii) High cost of establishing bank branches - Banks were not keen to establish presence in the excluded areas since it was costly to establish a fully-fledged brick and mortar branches. It is estimated that it costs more than USD 100,000 (Kshs 8.9 million) to establish a brick and mortar branch for a bank which is compliant with regulatory requirements.

B. Strategic Approach

 2. What was the solution?
Being cognizant of the challenges outlined in 1 above, the Central Bank of Kenya, as the regulator of banks, considered the need to introduce cheaper delivery channels that could lower the cost of establishing fully fledged brick and mortar branches. The Central Bank of Kenya therefore mooted the idea of allowing banks to use third parties to offer banking services on behalf of banks. The idea of agency banking model was conceived. Agency banking has solved the problems as follows: (i) It has promoted financial inclusion and increased access to financial services by taking banking services closer to the people. Bank agents do not have to establish brick and mortar branches or special premises to offer banking services. They offer the services in the same premises as their normal business activities. (ii) It has reduced bank’s costs of expanding and operating their business by eliminating the need and cost of establishing new brick and mortar branches. (iii) It has integrated banking services with existing commercial activities. This has simplified and improved banking experience for customers as transactions are carried out in a friendly environment familiar to the customers. (iv) Customers’ costs of doing banking business have been reduced by eliminating the need to travel to bank branches, where transaction costs are usually higher. (v) It has enhanced convenience and quality of customer service – Bank customers can now do banking business in their neighbourhood and avoid the inconvenience of long banking queues.

 3. How did the initiative solve the problem and improve people’s lives?
Agency banking was creative and innovative in the following ways: (i) Agency banking was a novel concept in Africa, with Kenya being the first country in Africa to establish and implement it. (ii) It has revolutionized banking by eliminating the need to visit banking halls to carry out transactions. Before the rollout of agency banking, people had to physically visit the big, suave, high tech and established bank branches to carry out banking business. With agency banking, banking business can now be carried out even in a simple one-room grocery shop. (iii) It eliminated the need to establish costly brick and mortar branches with trappings such as burglar proof doors, bullet-proof glasses, and vault rooms. (iv) Agency banking has created employment for many locals who are engaged by bank agents to assist customers carry out transactions. (v) Through adequate checks and balances put in place by the Central Bank of Kenya, agency banking allows third parties to receive deposits from third parties without compromising the safety and security of the deposits. (vi) It has taken banking services closer to the people and eliminated the need to travel to banking halls to carry out banking business. (vii) It has involved the use and development of new technology to ensure banking business is carried out efficiently and on a real-time basis.

C. Execution and Implementation

 4. In which ways is the initiative creative and innovative?
The rollout of agency banking was implemented as follows: (i) Alignment with Government Policy – CBK involved the government through consultations with the Ministry of Finance to ensure that the proposed agency banking model was in keeping with the Government’s financial policy. (ii) Consultation with banks – As banks were ultimately responsible for the rollout of agency banking, CBK sought their input on the proposed initiative. (iii) Amending the legal framework to provide for agency banking – Prior to the rollout of agency banking, the Banking Act did not permit banks to carry out their business through third parties. CBK therefore spearheaded amendments to the Act to accommodate agency banking. (iv) Knowledge exchange tour – In preparation for implementation of agency banking in Kenya, officers from the Central Bank of Kenya(CBK), Kenya Bankers Association(KBA) and Ministry of Finance, conducted a knowledge exchange tour of Brazil and Colombia from 19th - 30th October 2009 to study their models and research on how to implement agency banking in Kenya. The overall objective of the tour was to provide practical insights on agency banking and to draw from the experiences of regulators, commercial banks and agents in the two countries. (v) Development of a Supporting Regulatory Framework - CBK as the Regulator formulated Prudential Guidelines to among others provide for agent banking, outline activities which can be carried out by an agent, provide a framework for offering agent banking services and most importantly to serve as a set of minimum standards of data & network security, customer protection and risk management to be adhered to in the conduct of agent banking. (vi) Sensitization of Institutions – CBK sensitized banks on the operations of agency banking and the attendant legal and regulatory framework for the same. One of the key points was to make the banks appreciate that they would retain ultimate responsibility and oversight over their appointed agents. (vii) Public Sensitization – CBK carried out public awareness in places such as trade fairs and shows to enable the Kenyan public appreciate and accommodate agency banking. (viii) Applications – Once the appropriate legal and regulatory frameworks were in place, banks made applications to CBK for approval of their agency business and their specific agents. (ix) Commencement of operations – Upon approval, the agent set up business tools in his business premises and commenced agency business. (x) Surveillance and Oversight – The banks are responsible for the ultimate supervision of their agents. CBK retains surveillance over agents through the reporting requirements in the Prudential Guidelines. Banks are required to submit to CBK monthly data and other information on agent operations and annual reports on their agent banking operations for the previous year.

 5. Who implemented the initiative and what is the size of the population affected by this initiative?
The stakeholders involved in the initiative were: (i) Central Bank of Kenya – Mooted the whole initiative of agency banking, provided financial and human resources and coordinated activities leading up to the rollout of agency banking. (ii) The Government of Kenya – The then Ministry of Finance was responsible for the government’s financial policy. It provided the policy framework as well as human resources to assist in the rollout of agency banking. (iii) Kenya Bankers Association – The umbrella association for banks CBK provided human resources in the implementation of the strategy. (iv) Commercial Banks – Provided insight and input on the proposal to roll out agency banking. (v) The Alliance for Financial Inclusion(AFI) – Funded the knowledge exchange to Brazil and Columbia.
 6. How was the strategy implemented and what resources were mobilized?
The resources expended in the project included: (i) Human Resources – The Central Bank of Kenya contributed the majority of staff knowledgeable in bank supervision law and to undertake research on the viability of agency banking before rolling it out. Kenya Bankers Association and the Ministry of Finance also provided officers to assist in the implementation of agency banking in Kenya. (ii) Financial resources – The initiative was financed by the Central Bank of Kenya and the Alliance for Financial Inclusion. The resources were mobilized through Central Bank of Kenya acting as the overall coordinator and liaison for the project. Central Bank of Kenya also provided most of the logistical support for the project.

 7. Who were the stakeholders involved in the design of the initiative and in its implementation?
(i) Agency banking has increased the number of banked persons and enhanced financial inclusion – According to the 2013 National Financial Access Survey, Kenya's financial inclusion landscape has undergone considerable change with the proportion of the adult population using various forms of formal financial services rising to 66.7% in 2013 from 27.4% in 2006. This rate of expansion is partly attributable to agency banking which took banking closer to the people. (ii) Agency banking has taken banking to the convenience of the public who save transport costs and time previously taken to visit bank branches. The transport costs and time saved can therefore be ploughed into other productive activities thus growing the economy. (iii) Kenya being a pioneer of agency banking in Africa has attracted accolades and attention from other African countries seeking to implement agency banking. It has hosted delegations from other jurisdiction who seek to learn from its experiences with a view to rolling out agency banking in their home countries. (iv) The agency banking model has enabled banks to expand their reach to areas they would otherwise have not, due to such limitations as the viability of establishing a brick and mortar branch, establishment costs, and lack of infrastructure among others. (v) Agency banking has added another revenue stream for Kenyan banks and enhanced their performance. Since rollout of agency banking in May 2010, banks have engaged 29,776 agents spread across the country who have moved more than 115.6 million transactions worth KShs. 625.03 billion (USD 7.1 billion) over the same period. (vi) Agency banking has created employment through the agents engaging attendants to carry out or assist customers in carrying out banking transactions. (vii) Agency banking has reduced the cost of expansion and doing business for banks as banks no longer need to establish costly brick and mortar branches in order to penetrate new geographical areas. (viii) The solid performance of agency banking has enhanced the financial sector’s contribution to Kenya’s Gross Domestic Product (GDP). (ix) Agency banking has taken financial services closer to previously marginalized population who had no access to banking services, thereby contributing to greater financial inclusion.

 8. What were the most successful outputs and why was the initiative effective?
Some of the systems in place to monitor and evaluate agency banking include: • Continuous monitoring – The banks retain overall oversight of their agents and are required to continuously supervise and monitor their actions. This ensures integrity of the agency banking business • Reporting Requirements - The Reporting and Central Bank Oversight Requirements in the guidelines obligate banks to submit to CBK monthly data and other information on agent operations including information on nature, value, volume and geographical distribution of operations or transactions, incidents of fraud, theft or robbery, customer complaints and remedial measures taken to address customer complaints. Institutions are also required forward to CBK annual reports on their agent banking operations for the previous year. • Onsite Inspection – Whereas the banks retain overall supervision of the agents, the Central Bank of Kenya is empowered to carry out inspection of agents’ premises or books and obtain such information as may be necessary. •Regulatory meetings with Institutions – The Central Bank of Kenya engages with and holds regular regulatory meetings with banks to discuss among other things, the conduct of their agency business.

 9. What were the main obstacles encountered and how were they overcome?
•Novelty of the Initiative – Agency banking was an alien concept in Africa. There was limited knowledge on how the concept operated, its challenges and benefits. This was overcome through conducting thorough research including carrying out knowledge exchange tours of Colombia and Brazil in order to gain insight on the concept. •Capacity – The Central Bank of Kenya had limited human resources in terms of persons familiar with agency banking. This was also addressed through the knowledge exchange tour of Brazil and Colombia where Central Bank of Kenya’s personnel had first-hand exposure to agency banking. •Government – Another concern from the onset was to get the government’s support for the initiative. This involved ensuring that the initiative was in line with the government’s financial policy. This challenge was overcome by involving the government through the Ministry of Finance as a stakeholder. •Funding – The whole project was financially intensive. This was overcome through funding by the Central Bank of Kenya and the Alliance for Financial Inclusion (AFI). •Legal Framework – The legal regime at the time, the Banking Act did not permit agency banking. This was addressed through drafting and passing the necessary amendments to Section 3 of the Banking Act to incorporate agency banking.

D. Impact and Sustainability

 10. What were the key benefits resulting from this initiative?
The use of the agency banking model by banks in Kenya has continued to improve access to banking services and has also increased financial deepening in the country since it was launched in 2010. According to Central Bank of Kenya (CBK) reports, statistics show that as of December 2013, the number of banks conducting agency banking increased to 13 licensed banks in Kenya. Since 2010, a total of 23,449 agents had been contracted facilitating over 42.1 million transactions valued at USD. 2.624 billion as at December 2013 representing a 44% increase in the number of active licensed agents. On the other hand, the number of banks branches increased by 70 to 1,324 in 2013 from 1,272 branches in 2012 representing a 5% increase. This shows that agent banking as an alternative delivery channel is becoming a recent phenomenon in Kenya banking industry. The number of transactions increased by 40% from 30 million transactions registered in 2012 to 42.1 million transactions registered in 2013. A brief summary is provided in Table 1 below; Table 1: Type, Number and Values of transactions undertaken through Agent Banking December 2013 Type of Transactions Number of Transactions Year 2012 Year 2013 Cumulative (July 2010-Aug 2014) Cash Deposits 12,554,299 18,531,811 50,872,851 Cash Withdrawals 11,862,412 16,981,903 45,686,582 Payment of Bills 142,046 113,429 382,970 Payment of Retirement and Social Benefits 303,455 387,454 916,025 Payment of Salaries - - - Transfer of Funds 944 3,292 5,420 Account balance enquiries 4,770,829 5,771,490 15,921,064 Mini statement requests 43,376 30,776 116,104 Collection of account opening application forms 176,218 158,781 1,396,326 Collection of debit and credit card application forms 52,212 57,245 113,938 Collection of debit and credit cards 31,321 19,673 56,325 Total 29,937,112 42,055,854 115,649,860 Number of Agents 16,333 23,477 29,776 The increase was largely driven by transactions relating to transfer of funds, deposits and cash withdrawals which increased by 249%, 48% and 43% respectively in the year 2013. Cash deposits, cash withdrawals and account balance inquiries remained the major transactions carried out on the agency platform in 2013 representing 44%, 40% and 14% of the total transactions respectively. In monetary terms, the value of transactions carried out through the agency network grew by USD. 2.624 billion in 2013 - an increase of 59% from USD. 1.689 billion in 2012. The growth was largely driven by transfer of funds, cash deposits, cash withdrawals and payment of retirement and social benefits which experienced an increase of 89%, 59%, 49%, and 15% respectively. A brief summary is provided in Table 2 below: Table 2: Type and Values of transactions by bank agents Type of Transactions Value of Transactions (USD. Millions) Year 2012 Year 2013 Cumulative July 2010 - Aug 2014) Cash Deposits 1124.12 1786.55 4701.77 Cash Withdrawals 551.22 821.04 2196.34 Payment of Bills 2.65 2.79 9.66 Payment of Retirement and Social Benefits 11.83 13.93 36.11 Transfer of Funds 0.16 0.30 0.69 Total 1,689.97 2,624.62 6,945 The two tables highlight the tremendous growth of the agency model in both the number and value of transactions. The increased number and value of transactions demonstrate the increased role of agent banking in promoting financial initiatives being championed by the CBK and also due to the fact that banks and financial related institutions in Kenya are increasingly deploying the use of payments using agencies to enhance the quality of their financial services and increase growth.

 11. Did the initiative improve integrity and/or accountability in public service? (If applicable)
According to the FinAccess Business Survey 2013 findings, 25% of Kenya’s population is still excluded from access to formal financial services due to various reasons. Among the reasons cited is the absence of bank branches within their vicinity forcing them to travel long distances. Therefore, to reach the excluded formal financial institutions should device alternative delivery channels for example agent banking and mobile financial services. The CBK has been at the forefront in creating an enabling environment through regular reviews of policy options for better regulation of alternative delivery channels including banking agents. Recently, through the Finance Act 2013 and the Microfinance (Amendment) Act 2013, Sec. 2 (1) of the Banking Act and Sec. 2 (b) of the Microfinance Act 2006 were respectively amended to allow the sub-contracting of agents. This provision allows banks and microfinance banks to achieve scale in their respective agency networks while adhering to service quality standards. Furthermore, banks and microfinance banks will be able to enter into single contracts with Agent Network Managers (ANM) rather than multiple contracts with individual agents. Therefore, with such enabling amendments it will increase the number of agents who will in turn upscale the performance of their respective banks/microfinance banks. Channel innovation has revolutionized the face of banking around the world. Consumers’ adoption of multiple channels has fueled their expectation of true multi-channel banking, which allows them to transition seamlessly between touch points as they fulfill several, or even a single transaction. Therefore, for the banks to match the pace of the transformation, agency banking is an important channel innovation since it helps banks tap into other segments, by becoming an integrated component of multi-channel banking. The rise of the digital consumer and the high-cost infrastructure of setting up physical banking locations have led to a decline on the Return on Investments (ROI) for branches. Implying that if the branch model stays on its current course, it will become a financial burden to banks, cutting deep into cross-channel profitability. This is not to say branches will be wiped out, but branches remain an important interaction point, playing an essential role in complex product sales and relationship building for both retail and small-business customers. But as consumers transform the way they bank, the value proposition of traditional branches is in question. Evolving the branch strategy to align with changing consumer and economic realities can help banks boost ROI and position themselves for the future. So for banks to remain competitive and be able to safeguard their market share, agency banking would be very handy.

 12. Were special measures put in place to ensure that the initiative benefits women and girls and improves the situation of the poorest and most vulnerable? (If applicable)
The main lessons learnt include:- •The benefit of mutual partnership between the public and private sector in developing and implementing new policies. When the Central Bank of Kenya (CBK) received inquiries from banks to engage agents, CBK involved the National Treasury, the Kenya Bankers Association and the banks in developing the agency banking regulatory framework. This ensured that the framework was owned by all parties and its implementation and compliance was made easier. •Success of an idea depends on the speed at which it is exploited. When the banking sector players were convinced that allowing banks to engage third parties to offer services on their behalf (agency banking) was a good idea, CBK moved with speed to develop a regulatory framework and operationalized it within the shortest time possible. •There is no need to “reinvent the wheel”. CBK undertook study tours in Brazil and Columbia, which had operationalized agency banking. The lessons learnt from the study tours were only customized to Kenya’s circumstances and implemented with ease.

Contact Information

Institution Name:   CENTRAL BANK OF KENYA
Institution Type:   Government Agency  
Contact Person:   Matu Mugo
Telephone/ Fax:   +2540202863004
Institution's / Project's Website:  
Address:   P.O. Box 60000
Postal Code:   00200
State/Province:   NAIROBI

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