The next big thing in banking

• You could soon apply for a loan in a supermarket and get it through your mobile phone on your way to the village

On Thursday last week, Central Bank of Kenya stepped up efforts to encourage financial institutions to open up their services to a wider reach by appointing retail stores such as supermarkets, chemists and postal outlets to conduct business on their behalf.

That comes just about two years after the industry regulator took an unprecedented step to approve mobile phone money transfer services in the country and later on mobile phone banking.

Against the opposition and risk involved CBK Governor Prof Njuguna Ndung’u’s defence was that the move was “a step towards making financial service accessible to all Kenyans.”

The success of the mobile phone money transfer services or M-money as now popularly known, has been phenomenon moving about Sh1 billion everyday.

According to the 2009 Financial Access report, produced annually by Financial Deepening Sector Kenya, mobile phone money transfer services has helped push up the number of Kenyans sending money to 52 per cent in 2009 compared to only 16.5 per cent in 2006.

And more than 26 people in every 100 are now using the service to save money, something previously not possible while one in six are using the service to store value for use while travelling.

That success is what is encouraging CBK to pull in agent banking to leverage on mobile banking to serve the unbanked, mostly the economically active poor, low-income households and small and medium sized outfits in both rural and urban areas.”

The idea being to lower the cost of providing financial services resulting from the need to put up the expensive brick and mortar branches.

“Now, with this new innovation, they do not have to; they only need to look out for the appropriate agent,” said Prof Ndung’u during the Thursday’s workshop on agent banking.

But the possibilities go beyond just making access to the unbanked. Envision this, it is 8 p.m. and you have just finished your day’s work and remember that you need to have gone to the bank to apply for a loan.

Visiting the bank the following day is not an option as you have an early morning travel out of town for an engagement that will take a week. But as you shop in your local supermarket, you notice that your bank has been ‘stocked’ among the many counters in the supermarket, your bank having appointed the retail outlet as its agency.

You fill in the application form that is passed on to your bank the following morning where it is reviewed, approved and money uploaded to your account 48 hours later.

And because your bank allows you to access your account through your mobile phone, being in a remote part of the country, you access your account and withdraw cash to your M-Pesa, Zap or yuCash money account.

Financial supermarkets

A visit to your mobile phone agent will see you access money that would have taken two weeks to access in just a a matter of days. Well invested, it means that individuals are able to make financial progress at faster pace than was possible before.

With the overall economy growth being a factor of individual wellbeing, it follows that the country’s economy gets better on an equal pace.

It is not difficult to see how this will happen. A study conducted in 2006 by the respected London Business School showed that by increasing the number of people using mobile phones by 10 per cent, wealth in developing countries as measured by gross domestic product (GDP) increased by 0.6 per cent.

In Kenya, for example, that would mean if the increase in GDP was to be shared equally among the estimated 38.3 million Kenyans, each would earn Sh3,300 from mere use of phone only. By adding value to phone use and also agent banking the growth rate should increase.

But there is a wider picture.

The two models – agent banking and M-Money – will also play a key role in helping the country realise the grand economic plan that is Vision 2030.

The blueprint’s overall objective is to make Kenya a middle-income country by 2030, by creating wealth and reducing the number of people living in poverty.

The central driver of Vision 2030 is the country’s ability to mobilise resources to finance the planned projects.

“To ensure that Kenya does not become overly dependent on foreign financing for its future development, it will be imperative to ensure the bulk of the investment effort is domestically funded,” says the government in the vision strategy.

This objective will only materialise if more Kenyans start saving while those already saving increase the amounts to aggregate the gross national – government and the public sector – savings to about 26 per cent of its wealth by 2012 and 29 per cent of GDP by 2030.

Currently Kenyans are only saving 15.6 per cent of their money.

Introduction of M-money and agent banking is part of a strategy to deepen “penetration of banking services, especially to rural areas to help drive increased domestic savings.”

In this, the government aim is to explore and implement innovative models that will help drive the cost of financial services down breaking one of the barriers to banking.

But it is not just mobilisation of saving that the two models will benefit. The success of the two will help in development of the rural areas where banks have no presence by creating channels to offer rural financing.

Poverty reduction

“With about 73 per cent of Africa’s population living in the rural areas and experiencing high incidents of poverty, improved rural finance is crucial to achieving pro-poor growth and poverty reduction goals,” Ms Betty Kibaara of Tegemeo Institute of Agricultural Policy and Development wrote in paper Rural Financial Services in Kenya: What is working and Why?

The paper was presented at the Food and Agriculture Organisation meeting in Rome, Italy in March 2007.

Where rural finance is crucial in the fight against poverty, Ms Kibaara cites the high cost of delivering financial services to small, widely dispersed customers as the biggest hurdle.

The two models should then be able to help address the problem as financial institutions will not need to have any physical presence to serve such customers.

In helping finance the rural areas, the overall economy will get a big boost as credit is noted to be “an important input into the production system and it contributes to increased food productivity”.

Studies done by Tegemeo show that households that received credit for maize production had a higher productivity averaging 7.65 bags per acre as compared to 6.5 bags among households that did not receive credit.

“Access to credit increases the farmers’ working capital enabling them to buy productivity enhancing inputs such as good quality seeds, fertilisers and chemicals,” says Ms Kibaara.

Mobilising savings

With agriculture contributing to 23.9 per cent of Kenya’s national Gross Domestic Product (GDP), 60 per cent of the total export earnings and 80 per cent of Kenyans deriving their livelihood from farms, it is not difficult to see how increased funding in rural economy will change the country’s overall economic wellbeing.

For those in towns, it would mean that remittances to rural areas decreases, as the rural population, which is currently highly dependent on those in urban areas, become self-reliant. Less remittance means more disposable income that can be invested in economic activities that can bring meaningful return.

It is not just the effort to ease poverty level that will win in this drive, the government’s effort to mobilise savings will get a boost.

In the same paper by Ms Kibaara, Tegemeo Institute says that in one of the studies “rural folks have a higher demand for a safe haven for their money rather than for credit or borrowing.”

By figures, cumulative saving per member averaged to Sh19,000 while amount borrowed loan averaged only Sh7,215. Only 38 per cent of the clients were interested in obtaining loans.

wkangaru@nation.co.ke