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Agent Banking: Up-Scaling Outreach For Increased Profitability And Impact

Presented by DIPO FATOKUN

Director, Banking and Payments System DepartmentCentral Bank of Nigeria, Abuja

at the D-8 Workshop on Microfinance for SMEs & 7th Annual Micro, SMEs Finance Conference, held at Transcorp

Hilton, Abuja

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• Introduction • Definitions of Agent Banking•Principle and Logic for Agent Banking•Countries experiences on Agent Banking•Highlights of Nigeria’s Agent Banking Guidelines•What Agent Banking Means to the various Stakeholders•Permissible Activities to be carried out by the Agents•Prohibited Activities of Agents•Benefits of Agent Banking•Challenges of Agent Banking in Nigeria • Conclusion

Outline

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•In the last decade, there has been an explosion of different forms of remote access financial services that is beyond banks’ branches. These have been provided through a variety of different channels, including mobile phones, Automatic Teller Machines (ATMs), Point-of-Sale (POS) devices and agent banking.

•In many countries, these branchless channels have made an important contribution to enhancing financial inclusion by reaching people that traditional branch-based structures would have been unable to reach.

•Studies conducted by Enhancing Financial Innovation and Access (EFInA), 2012, showed that 34.9m adults in Nigeria are financially excluded.

•One of the factors that is responsible for this is the distance from financial services centers which is a direct result of the high cost of establishing brick and mortar branches, and staffing such branches. This when juxtaposed with low volume of business and low interest rates creates serious disincentive to serving remotely located clients

Introduction

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• Agent Banking, especially in developing economies are rapidly evolving and making tremendous impact in the economies and lives of its citizenry

•Financial Institutions have successfully expanded their outreach by engaging local agents to offer their services, among which are; cash in/cash out, electronic transfers, bill payments, pre-approved credit lines, accounts opening, international remittances, government and other micro credit payments and other banking transactions that may be permissible by the Financial Institution and CBN

•Nigeria had begun the process as far back as 2007 with the development of the Payments System Vision 2020 document, which has charted the course for the recent developments in the payments system

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Introduction

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What is Agent banking ?

•Agent banking (or Branchless banking) is the provision of financial/banking services by an authorized third party on behalf of the Principal (Financial Institution), to customers through a single business unit or distributed networks of retail or postal outlets. Banking agents can be pharmacies, supermarkets, post offices, kiosks, etc. The best suited are however, businesses that have built good customer relations and gathered experience in handling cash floats.

• Agent banking is also known as correspondent banking, this is a model for delivering financial services whereby a bank partners with a retail agent (or correspondent) in order to extend financial services in locations for which bank branches would be uneconomical. Agents can be both banking (small banks) and non-banking correspondents (post offices, gas stations, and retail shops). Agent banking is a delivery channel that holds high potential for closing the location gap.

Definition of Agent Banking

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Principle and Logic for Agent Banking

•Despite being the most populous African nation, Nigeria is a mid-level player in the Sub-Saharan financial sector and lags behind some of its peers in Africa with respect to Financial Inclusion.

•In setting out the Financial Inclusion agenda, the Bank identified Agent Network for banking as one of the channels with great potential to overcome the distribution challenges and increase the use of financial services to the unbanked and the under-banked.

•To achieve this objective, the Bank issued the Guidelines on the Regulation of Agent Banking and Agent Banking Relationship in Nigeria in February 2013.

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Principle and Logic for Agent Banking

•Leveraging mobile payments and agents' banking networks will allow Financial Institutions to focus on product innovation and diversification

•Microfinance agent banking could increase the linkage of rural cooperatives to microfinance banks as was done in various other countries.

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•Agent banking is quickly becoming recognized as a viable strategy in many countries for extending formal financial services into poor and rural areas.

• In recent years, agent banking has been adopted and implemented with varying degrees of success by a number of developing countries, particularly in Latin America.

•Brazil is often recognized as a global pioneer in this area since it was an early adopter of the model and over the years has developed a mature network of agent banks covering more than 99% of the country’s municipalities.

•Other countries in Latin America have followed suit, including Mexico (2009), Peru (2005), Colombia (2006) and Brazil (2000)

Countries Experiences on Agent Banking

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In Malaysia, agent banking initiative has already produced promising results. Three financial institutions, namely Malayan Banking Berhad, RHB Bank Berhad and Bank Simpanan Nasional have a combined agent network of 4,120 agents as at end-December 2012, which includes post offices, petrol stations, retail outlets and telecommunication agents. Compared with branches, financial institutions reported that agent banking channels delivered cost savings in terms of set-up costs of more than 80%, while agents have also benefitted from the increased customer flow to their business premises.

COUNTRIES EXPERIENCES ON AGENT BANKING

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•In Kenya, agent banking is continuously improving and growing, and as it grows, the level of financial inclusion is also growing proportionately.

•Other countries around the world have also utilized the agent banking model to expand financial services, including Pakistan, Philippines, Venezuela, South Africa, Uganda, India, etc.

Countries Experiences on Agent Banking

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Countries Experiences on Agent Banking

Country Year Agent banking was launched

Year Regulation was introduced

No of Agents currently functioning

Brazil 2000 2000 151,958

Colombia 2007 2006 9,843

Mexico 2010 2009 9,303

Kenya 2010 2010 8,809

Peru 2008 2005 6,028

Nigeria 2013 2013 >4,000???

Source: Central Bank of Brazil, MIDAS, SBS, CNBV, 2010

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Studies have shown that increasing the area covered by agents within the country has had the effects of increasing the reach of the financial services to the people, thus raising the levels of financial inclusion.

Countries Experiences on Agent Banking

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Highlights of the Nigeria’s Agent Banking Guidelines

•The Guidelines for the Regulation of Agent Banking and Agent Banking relationships in Nigeria outlines the minimum expectations to be observed by FIs that intend to undertake agent banking. Broadly, the Guidelines aim to facilitate the implementation of agent banking in un-served/under-served areas, in a reliable, safe and sustainable manner whilst safeguarding consumer interest and confidentiality.

•The Guidelines operate on the premise that Financial Institutions (FIs) retain the ultimate responsibility and accountability of all agent’s banking activities

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Highlights of the Nigeria’s Agent Banking Guidelines

Other aspects of the document include:

•Application and Approval Requirements: Documentary requirements, Agent Structure, Information requirements for agent structure, Renewal of engagement and Monitoring of Agent Banking relationships (Further clarification issued to remove the need for approvals)

•Minimum Requirements of Agent Banking Contract: Amongst other things it states the FIs full liability with respect to customers, obligation of the FI and the agent, services the agent can conduct on the principal’s behalf, fees & charges to be stated in the contract, etc

•Establishment of agent Banking relationship: Agent eligibility

•Assessment of Agents: Suitability assessment of an agent, Moral and professional suitability of a prospective agent, Agent due diligence

•Key Roles & Responsibilities of the Financial Institution: Management of agent banking business, Permissible activities, Prohibited activities, Operational and Transactional Limits

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Highlights of the Nigeria’s Agent Banking Guidelines

•Rules on exclusivity of agents: No exclusivity of agent banking contracts between the FIs and agents

•Supervision of agents: FIs shall put in place prudential and operational risk measures for monitoring the activities of agents

•Settlement of transactions and the technology requirement: Real time transactions, Minimum IT requirements for the operation of agent banking, Data and Network Security Requirements

•Money Laundering: Put in place customer due diligence (daily and transaction limits, minimum IT security requirements, authentication of each customer’s transaction), Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) requirements,

•Consumer protection measures: Ensure appropriate consumer protection systems against risks of fraud, loss of privacy and loss of service

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What Agent Banking means for key stakeholders

•Banking agents help financial institutions to divert existing customers from crowded branches, providing a complementary and more convenient channel.

•Financial institutions, can utilize agents to reach an additional customer segment or geography. Reaching poor customer in rural areas is often prohibitively expensive for financial institutions, since transaction numbers and volumes do not cover the cost of a branch.

• In such environments banking agents that take advantage of an existing retail infrastructure and lower set up and running cost, can play a vital role in offering many low-income people their first-time access to a range of financial services. Also, low-income customers often feel more comfortable banking in their immediate environment than walking into a FI’s branch

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• Cash deposit and withdrawal.• Bills payment (utilities, taxes, tenement rates, subscription etc.).• Payment of salaries.• Funds transfer services (local money value transfer).• Balance enquiry.• Generation and issuance of mini statement.• Collection and submission of account opening and other related

documentation.• Agent mobile payments/banking services• Cash disbursement and cash repayment of loans.• Cash payment of retirement benefits.• Cheque book request and collection• Collection of bank mail/correspondence for customers.• Any other activity as the CBN may from time to time prescribe.• It shall be the responsibility of the FI to determine, based on agent risk

assessment, which services a particular agent may provide.

Permissible Activities of agents

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An agent shall not:i. Operate or carry out any transaction when there is communication failure with the FI.ii. Carry out a transaction where a receipt or acknowledgement cannot be generated.iii. Charge the customer any fee.iv. Give any guarantee.v. Offer banking services on its own accord.

PROHIBITED ACTIVITIES BY AGENTS

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VI. Continue with the agency business when it has a proven criminal record involvingfraud, dishonesty, integrity or any other financial impropriety.vii. Provide, render or hold itself out to be providing or rendering any banking service whichis not specifically permitted in the contract.viii. Open accounts, grant loans or carry out any appraisal function for purposes of openingan account or granting of a loan or any other facility except as may be permitted by anyother written law to which the agent is subject.ix. Undertake cheque deposit and encashment of cheques.x. Transact in foreign currency.xi. Provide cash advances.xii. Be run or managed by an FI’s employee or its associate.xiii. Sub-contract another entity to carry out agent banking on its behalf except where thereis a super-agent structure in place.xiv. FI may in the contract document specify other activities, which the agent is prohibitedfrom undertaking.

PROHIBITED ACTIVITIES OF AGENTS

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Benefits of Agent Banking to Stakeholders

Benefits to a customer

•Cheapest means of accessing financial services with lower transaction cost

•Service closer to his immediate environment

•Longer opening hours

•Shorter lines than in branches

•More accessible for less educated, the very poor and less privileged who might feel intimidated in traditional bank branches

•Benefits of greater economic development to isolated communities

Benefits to the Agent/ Agent Network Provider

•Increased sales from additional foot-traffic

•Differentiation from other businesses the agent might normally operate

•Reputation from affiliation with well-known financial institution

•Additional revenue from commissions and incentives

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Benefits of Agent Banking to Stakeholders

Benefits to the Financial Institution

•Increased customer base and market share

•Increased coverage with low-cost solution in areas with potentially less number and volume of transactions

•Increased revenue from additional investment, interest, and fee income, Improved indirect branch productivity by reducing congestion

Benefits to Mobile Money Operators(MMO)

•Provides standards and guides for engaging Agent Network providers for the provision of mobile money offerings

•Non-exclusivity of agent network provides a shared platform for customer take-up

• Provides more geographic spread for the scheme

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Benefits of Agent Banking to Stakeholders

Benefits to the Government

•Facilitates financial inclusion

•Provides a tool for government to utilize for government to person and person to government payments (disbursements, microcredits/repayments, subsidies, tax/levies etc.)

•Facilitation of domestic remittances

Opportunities

•For the private sector and individuals to invest in and drive uptake for agent banking by signing up as agents with the expectation of generating revenues from transaction charges and other benefits that the Financial Institution will provide

•For Innovations: As has been with other similar jurisdictions, mHealth, mAgriculture, micro-insurance, micro-savings, will arise and these will have a positive impact on the economy. These innovations provide opportunities for businesses to customize their products offerings to suit the changing times

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Success Factors for Agent Banking

The Key Success Factors For Agent Banking rest heavily with the agents at the customer frontline

Credibility: The agent has to be a trusted brand, or member of the community

Proximity: Agent networks have to be easily accessible by the customer

Consistency: Offer similar customer experience regardless of location

Security: As the main interface with the customer, agents have to ensure compliance not only with KYC as required by CBN regulator but with all fraud prevention processes. As such agents will be responsible to ensure that their counter staff have the appropriate levels of training

Simplicity: Agents are the main human interface –it is their responsibility to explain the service, guide the user, and make the service simple and accessible

Liquidity: Customer experience is critical to the success of this venture…it is imperative that customers have immediate access to their cash. Agents will have to ensure minimum liquidity levels

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•Financial Institutions (FIs) are no longer required to apply for an approval before deploying Agent Banking.

 •FIs are however required to submit returns on their Agent Banking

activities as part of their statutory returns to the CBN.

•The stage has now been set for FIs to commence agent banking and agent banking relationships.

Success Factors for Agent Banking

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With every new system, there are bound to be challenges. Some of the major obstacles are mentioned below. However, it is worthy to note that CBN with the other stakeholders are working towards surmounting the challenges:

•Epileptic Power Supply •Poor Telecommunication Connectivity •Need for enhanced Customer Awareness, etc.

•WHAT ARE WE DOING?

Challenges

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Conclusion

•Successful Agent Banking all over the world have demonstrated that an effective agent network is paramount to the success of financial inclusion.

•Despite the fact that it’s not a ‘one-size fits all’ approach, agent network development and structures have certain critical aspects in common, not least of all is a clear and well understood selection & recruitment process, consistent agent monitoring and practical liquidity management procedures.

•As we begin this journey, It is worth noting that the afore mentioned will be the drivers for the increase in agent activity in Nigeria. This will be followed by the growth in the number of agents, increased activity of agents, increase in average number of transactions per agent and the requisite growth in financial inclusion and profit margins for the agents and their principals

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Thank You