On March31, 2017 President Yoweri Museveni assented to The Financial Institutions (Amendment) Act, 2016 that provides for Islamic banking, banc assurance and agent banking among other things.
While these additions to Uganda’s financial sector are new, they are not completely new to the rest of the world.
In fact, Kenya and Rwanda embraced agency banking about five years ago and this has increased the level of formal financial inclusion in unserved and underserved areas in the said countries, reports say.
It is also worth noting that since 2007, Citibank Uganda Ltd appointed PostBank Uganda, a Tier II institution as its agent, enabling its customers to make deposits through the PostBank network in the country.
Through its Point Of Sale (POS) innovation, PostBank is increasingly reaching the unserved and unbanked in remote areas, with several agents countrywide.
This was however being carried out without proper legislation.
A number of seasoned bankers including Prof. Emmanuel Tumusiime-Mutebile, the Governor, Bank of Uganda (BoU) have repeatedly said agency and Islamic banking will deepen financial inclusion in the country and consequently transform Uganda’s financial sector.
A number of questions remains unanswered about these new products and innovations.
What is agency banking? Is agency banking still relevant where there’s Mobile Money operated by telecom companies? What opportunities does agency banking present to Ugandans? What risks could be associated with it?
In this article, Business Focus examines the extent to which agency banking can revolutionise Uganda’s financial sector.
Understanding Agency Banking
For starters, agency banking (also known as agent banking) is a model that allows banks to use fellow banks, shops, kiosks and field agents to open accounts, receive deposits, effect withdrawals and carry out other transactions with a purpose of deepening financial inclusion.
Under this innovation, financial inclusion is not limited to banking the unbanked but convergence of various bank and non-bank players to provide financial services at lower cost, a wider reach and greater convenience to all end consumers of financial services, unbanked or otherwise.
Patrick Mweheire, the Chief Executive Officer at Stanbic Bank Uganda (SBU), is ‘very positive’ that agency banking will boost financial inclusion in Uganda since it is cost effective.
He adds that SBU will no doubt embrace it because it will increase on its profitability.
“I can tell you that 20-30% of my (SBU) branches don’t make profits because they don’t have enough volumes yet operational costs are high.
Agency banking allows you to be a bank at a low cost,” Mweheire said in an exclusive interview with Business Focus.
“We hope to sign up to 1,000 agents,” he added.
BoU boss Mutebile has also decried high cost of doing business in Uganda.
During the closing of the launch of the Eighth Edition of the World Bank’s Uganda Economic Update: “Step by Step – Let’s Solve the Finance Puzzle to Accelerate Growth and Shared Prosperity” held at Serena Hotel on February 7, 2017, Mutebile said:
“As a result, annual operating costs average approximately 11 percent of income earning assets, which accounts for a major share of the large interest rate spread. Spreads will only be reduced when banks can become more efficient and reduce their operating costs.” He added: “I believe that automation and new technologies to deliver financial services will offer avenues for banks to reduce their operating costs over the medium to long term, although this will also expose banks to new forms of operating risks. Banks may also be able to exploit synergies with other financial services, such as insurance, to improve efficiency.”
Herbert Zake, a Consultant in Financial Services, PR and HR strongly believes that agency banking will pave way for many more Ugandans to access banking services.
“Currently, less than 8m Ugandans have bank accounts and access banking services. People in more remote areas away from urban settings will be able to access services through agents. It’s very expensive for a bank to set up a branch especially since it has to adhere to certain set standards,” the ex-banker says.
He adds: “The beauty is that banks work through already established agents and infrastructure to offer the services. Agency banking is a much cheaper and more convenient way of offering the services. I am very certain that it will be embraced.”
Business Focus understands that Centenary Bank has already recruited about 30 ‘Financial Inclusion Officers’ who will train the agents on how agency banking works and how they stand to benefit.
Sources say Centenary bank will start with about 10 districts before rolling out the model to other districts.
Efforts to get a comment from Centenary Bank were futile by the time this story went live.
Several industry sources say an agent will need Shs10m and above in addition to having a running business situated in a permanent location for some years in order to qualify to represent a bank.
However, while some banks are willing to work with trusted Mobile Money operators, others are unwilling to give them an opportunity.
Nonetheless, SBU’s Mweheire says he has no problem working with Mobile Money operators as long as they meet the set guidelines.
It should be noted that on March 29, 2017, commercial banks under their umbrella body, Uganda Bankers Association (UBA) revealed that they are set to roll out agency banking through a shared platform.
UBA has partnered with Eclectics International Ltd, a Pan-African private company to design, develop, deploy and operate the inter-operable shared platform that connects all member banks to the agent network spread across the country.
Overtaken By Events?
While bankers are jubilant about agency banking, Dr. Fred Muhumuza, a senior economist and admirer of inclusive growth, says that agency banking has been overtaken by events in the technology world.
“The rollout of mobile money to include banking and linking it to bank accounts has done much of what agency banking used to do. What is left is mere account opening, which is not profitable for agents. It is also a costly model to the banks and not many may be willing to invest in training the agents,” Muhumuza said in an interview.
In fact, telecoms subscribers have accounts with them and are at liberty to deposit, save and borrow although the amount is quite limited compared to banks.
MTN and Airtel are already giving out loans to their subscribers. And while the number of people with bank accounts are below 8m, over 20m Ugandans have Mobile Money accounts with trillions transacted via this platform.
In 2015, Shs32.5trillionions were transacted via Mobile Money, according to BoU. This means that the figure has since grown bigger as more people buy phones and open Mobile Money accounts.
Zake however says although Mobile Money has helped financial services to reach out to more users, it is limited in terms of functionality.
“Agencies should be in a position to accept deposits and pay out to bank customers. This is also in line with financial inclusion that Bank of Uganda advocates for,” he says.
He however says that security, power shortages and connectivity issues may affect this model of banking.
“There’s always a threat of robberies and security will need to be beefed up at these centres,” he says of the potential challenges, adding: “Availability of power could be another challenge. Many rural areas in Uganda don’t have access to electricity that is necessary to run the systems.”
He adds that agencies will need to receive money but also have some for withdrawing customers; they will need to have a “float” of available money to pay out to customers.
He says some agents just like Mobile Money agents can run out of float money.
“Banks are connected in terms of their systems and these use telecoms connectivity. Remote areas where connectivity might be unreliable could have challenges in terms of consistency of service,” he adds.
He further explains that being a new phenomenon it will take some time to build trust of usage.
“There will be a need to raise the levels of financial literacy to make the populace in remote areas appreciate the benefits of banking and using these agents that are bringing services much closer to them,” he says, adding: “One of the core principles of banking is confidentiality for customer information. Banking calls for a very high level of trust. This will have to be inculcated in the agents.”
In conclusion, branchless banking innovations like Mobile Money and agency banking offers a solution to some aspects of the problem of financial exclusion, although not all. Therefore, agency banking per se will not alleviate the main constraints facing the poor in accessing credit from formal financial institutions.