In October 2015, the National Bank of Ethiopia (NBE) came up with a new regulation to make the financial industry sound. In the eyes of private banks, the regulation is a disaster. They argue that it is a mechanism to make the sector more conducive for the public-owned banks. Anyway, this regulation will be the roadmap for banks over the next five years.
The regulation contains many components, like capital requirement to grow to two billion, increasing branch numbers, including agent banking, to increase by 30pc in the consecutive years.
But the whole debate on the regulation seems to circulate around the minimum capital requirement. This may be because it was unexpected by almost all stakeholders, and because it is difficult for private banks.
A rather low level concern is the regulation on agent banking. For one, the media and most of the stakeholders are not aware of what agent banking is. It also seems simple to do. Equally, the rationale behind the regulation seems not to have been well conceived.
Agent banking is a system by which a financial institution extends services without directly opening a branch. It is done through potential certified agents.
This way is the most cost-effective and accessible form of providing financial services for the customers. Agent banking enables individuals to deposit and withdraw money, transfer funds, pay bills and other related services simply by holding an agent account.
For countries like Ethiopia, where financial accessibility is very low, agent banking is in suitable in many ways. It enables financial institutions to become accessible in terms of time and place. The mobile revolution in urban and rural areas also means a golden opportunity for the growth of agent banking.
This form of service provision can be used to clear the road for branch operations. With agent banking, it is possible to collect a small number of customers around each agent and introduce the name and the service of the bank to potential clients. This will ease the operation of a new branch in the area.
For the clients, agent banking reduces the time and money needed to visit a branch each day to deposit and withdraw their money. They can complete such transactions from the shop next door. This opportunity motivates fast but small cash movers, like retailers, to put their extra money into the banking system every day.
For the agent, the system is a source of income as it works on commission basis. It enables the agent to earn a good reputation from the bank with which it is affiliated and perhaps, get some preferential rights, like credit.
In the Ethiopian financial market, Dashen Bank is the pioneer in agent banking operations. But United Bank is the one with deep engagement.
Agent banking in Ethiopia started in 2014. Yet, now, it looks like it is at a standstill. I think inability to attract clients and lack of trust are factors contributing to the passivity.
Most banks are not involved in the agent service but now that it has become obligatory, they might have to change their paper plans to reality. I would argue that NBE’s regulation is a right decision, since this is the only way to serve the unbanked population.
In the system where banks are concentrated in a given area, agent banking is a good mechanism to address the public need for financial services. The reverse is true as agent banking would give banks more resources to leverage.
As this service is at an introduction stage, there are many ups and downs. Banking should not be afraid of the challenges. The one and the most important factor they ought to make sure of, is that they have the trust of clients.
Obstacles to building this trust and a dearth of capable agents who can handle complex banking procedures as ably as the bank employee, are difficult challenges to be overcome. Another problem is fraud from the side of the agents.Yet, with a thoughtful approach, all these possible problems can be solved.
The whole hoopla of inclusive finance cannot happen without agent banking. NBE has acted in the right direction by making it mandatory for banks. It is now time for banks to adapt to the new state of affairs.
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