By Tarek Kamal, Managing Partner
In Bangladesh, the sixth largest country in terms of population, more than 63 million people live below the poverty line. A third of its 162.9 million people (2016) still live on less than $2 per day despite a per capita income of approximately $1,088 (2014). It is also one of the most densely populated countries in the world due to its relatively small land area. One would expect that wit a population density of 1252 people per sq. km. there would be more than only 5.9 bank branches per 100 sq. km. The picture is even more disconcerting when breaking this down by urban and rural branches. Although only 28% of the population resides in urban, 43% of all bank branches in urban areas.
The branches of microfinance institutions (MFIs) have compensated for the dearth of bank branches in rural areas. However, these institutions offer only a few financial services and for the most part in limited amounts. Financial behavior of MFI customers can be useful for the banks, but it only tells part of the story because daily transaction information of their customers is not available and certainly not independently verifiable as a bank account would be able to provide.
The advent of mobile banking has been heralded as the instrument of change with respect to financial inclusion. To some extent, this has already proven to be the case. However, the depth of financial inclusion leaves a lot to be desired because the main purpose seems to be the transfer of funds. In Bangladesh, it is remittance disbursements all across the country. As mentioned in a previous article, Pump Up The MFS Volume: Mandate Interoperability Now!, perceived higher cost of transactions and low literacy levels which essentially mandates face-to-face training of customers by bank representatives, have been a major hindrance in the uptake of mobile banking as much more than a fund transfer mechanism.
The biggest challenge in leveraging mobile financial services has been to offer other banking services such as bank accounts, bank loans, bill payment services, etc. across the country, is the low education level of the customers, particularly in remote areas of the country.
Therefore, there is a need for more rural branches that cater to a widely dispersed rural population, particularly for products and services that the MFIs cannot provide. The difficulty lies in the fact that a bank branch, no matter how small, needs to meet stringent criteria mandated by Bangladesh Bank, the central bank of Bangladesh. This is further exacerbated by the fact that banks have always paid higher wages than all but a few sectors. Therefore, the cost of doing business through brick and mortar branches has been an expensive proposition, particularly in more remote locations where the business volume remains lower than in urban areas.
A lower-cost model that gets closer to where the customers live and therefore attract their businesses can be more sustainable. Agent banking can, therefore, have a tremendous impact on the unbanked population as banks begin offering banking services in places that would not have been feasible for many years, if ever.
Agent banking began in Bangladesh with the launch of the ‘Guidelines on Agent Banking for the Banks’ in December 2013. The promise of agent banking rests on the potential for face-to-face interaction between individuals who have no bank accounts and banking sector representatives.
The agents are essentially small businesses that offer limited banking services through a bank. All software and security of financial transactions are the responsibility of the bank such that any financial transaction that takes place on an agent’s premises is the same as if they were done at a bank branch. The agent has a vested interest in not only opening bank accounts but also in becoming more active because the banks share part of the commissions and interest income with the agents.
The financial sector will be able to take even more of a leadership role in increasing the level of financial literacy in the country through awareness campaigns and customer training sessions at the agent outlets. The agent can reach out on behalf of the banks to educate the potential customers on a multitude of topics from benefits of transacting through the formal financial sector that allows for security of funds, access to savings schemes, loans, insurance, etc. and training in business and personal finance issues.
In densely populated areas where literacy levels are low, agent banking is likely to be a better tool for financial inclusion, in terms of both effectiveness and efficiency, than mobile banking. Certainly, agent banking is a more direct route to bringing people into the formal financial sector and with a wider variety of financial products offering. Once these individuals understand that they can deposit and withdraw money whenever they want, it can have a tremendous impact on their financial behavior and eventually of their quality of life. This would be a win-win activity as customers could be educated about the benefits of conducting financial transactions through formal financial channels and create a loyal customer base for the banks to sell value-added financial products and services to customers.
Although it has been successful in Brazil, Colombia, Peru, Malaysia, Kenya, etc. offering bills and pension payments, cash deposits and withdrawal, and money transfers. Unfortunately, many banks have tried and failed to adopt this strategy to the extent needed for the portfolio of small clients to generate sufficient income to keep a sustained interest in the business.
The Bangladesh experience in agent banking, to date, seems to be pointing in a slightly different direction with respect to what an agent outlet should be. A business, such as a generic retail store, offering some banking services on the side is not performing as well as agents providing dedicated financial services in premises that look like ‘mini bank branches’. These ‘branches’ seem to be attracting customers mainly because the higher investment needed to set up these outlets provide more credibility to the agent. It is true that most agents are not breaking even as yet, but being a dedicated banking service provider conducting financial training and building financial awareness is a step in the right direction for the long term sustainability of the outlets.
Adding other products on a regular basis and slowly including more and more people in the financial services space is the best way to get customers coming into the outlets and increasing the volume of transactions that they perform through the banking sector. It is more than likely that as agent banking picks up in these areas, the MFS services can become intertwined with the agent’s service offerings that will create the synergies needed to financially include everyone.