Banking Services to the Unbanked Sector – A

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Banking Services to the Unbanked Sector – A study on East African

Countries.

By Syed Gulam Abbas Abdi

Branch HeadABC Capital Bank Ltd

Kampala, Uganda Africa(ExPGDM 2013-14 Batch SIMS)

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CONTENTS  Introduction

   Background Information- EAC

   Constraints to reach the rural/Poor

   Regulatory Environment   Initiatives to Reach Rural – Mobile phone, agent banking, microfinance institutions, etc.

  Service required by unbanked   Banking the unbanked studies

  Conclusion

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INTRODUCTION 

UNBANKED:- is describing a person or group of people who do not have a bank account at any bank.

  UNDERBANKED:- is describing a person or group of people who have one or more of

bank accounts, but conduct many of their financial transactions with alternative service providers.

  FINANCIAL INCLUSION:- is delivery of banking services at an affordable cost to the vast

sections of disadvantaged and low income groups.

  By 2009, half of the World adult population was unbanked; i.e. 2.5 billion people were

unbanked.

  In Africa, only 4% are banked while 96% are either underbanked or unbanked. More

than 700 million people out of more than 1 billion people in Africa do not have bank account.

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INTRODUCTION 

Few decades ago, poor people were classified as unbankable, unprofitable, and of no significance in conventional banking environment

  Successes of Grameen Bank in Bangladesh and growth of Microfinance Institutions

globally and especially in Developing World have proved this myth in the opposite  Equity Bank- Kenya and Tanzania Postal Bank studies also proves that the poor can be

profitable

  There are however significant challenges to overcome Sustainability, profitability,

efficiency levels required, right technology, proximity etc)

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BASIC FACTS

Population 138 million   Total GDP of the regions US$ 83 million   Area 1.82m square km (including water

surface)   Population Density 78 persons per km

  More than 70% of the population do not

have access to formal financial services.

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BACKGROUND INFORMATION GDP and Population Distribution – East African Countries

 Total GDP of the region stands at US$82,839 million.  

Total population of East African countries is around 138 million.   77 million or 56% are of adult age from 20 years and above who can have their own bank accounts presenting bankable

population. 

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WHY FINANCIAL INCLUSION?   Financial inclusion is delivering banking facilities or financial services to all the people

in a transparent and equitable manner at affordable cost. 

  Financial Inclusion improves the livelihood of the unbanked 

  Financial inclusion also provides business opportunities for the financial institution. 

  Profitability is a serious challenge but it can be achieved.

  Economically and socially empowering poor is part of CSR (Corporate Social

Responsibility)

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CONSTRAINTS TO REACH RURAL AND POOR Customer Perspective:- The major challenge is not to get unbanked to a bank but instead to get a bank to

unbanked. 

Most adult people who do not have bank account say they don’t have enough money to save in banks.

  There are people who say bank accounts are too expensive to operate. They cite bank

monthly fees, withdrawal charges and balance enquiry fees.  Still there are those who say banks are too far from their homes.  Documentation is yet another barrier. Banks need to observe Know your Customer (KYC)

principle before authorizing an account to be opened.  Banks offering products that does not meet customer’s primary needs.  Banks are not providing credit facilities easily and takes time to process loan applications.

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CONSTRAINTS TO REACH RURAL AND POOR Bank Perspective:-  It is too expensive to establish a branch in rural areas. Payback period is too long or end up

making losses.   The level of literacy in rural/poor areas is low Lack of economic infrastructure including

electricity, roads and communications.   Requirement by regulator for viability report prior to opening a branch.

Population in the rural are more dispersed.   Capital adequacy ratios.   Demands of shareholders- dividends.

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REGULATORY ENVIRONMENT

   Central banks of the countries in the region regulates the financial system.

   Central banks are responsible with licensing banks to start business but also supervise

their activities through offsite and onsite examination.

   Their key focus is stability of financial system

   Better performance of banks is another important priority rather than financial inclusion

   AML and KYC Regulation does not necessarily recognize these financially excluded groups

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INITIATIVES TO REACH THE UNBANKED:-   Barriers listed above either from people or bank perspective might be the cause of having big number of unbanked population in developing countries compared to developed countries. In developing countries various initiatives are being used to increase the number of access to financial services. Among the initiatives includes:- 

  Mobile Phone Channels;    Agent Banking;

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MOBILE PHONE CHANNELS:-   Africa has more mobile phone users than fixed line subscribers.

   Africa has become the world's fastest growing mobile phone market.

   Africa’s mobile phone use has increased at an annual rate of 65%, twice the global average.

   Mobile banking is now developing to become fully fledged banking. (Mpesa/Airtel Money

experience).         

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AGENT BANKING:- 

  Agent Banking model enabling banks to use third party agents to provide

banking services   Agents to include shops, pharmacies, supermarkets, Telco agents, Post Offices,

SACCOs and MFIs   Services to be offered at agents include deposits, withdrawals, loan

disbursements and payments, account opening and loan application origination   Using agents in provision of financial services need close care by banks in terms

of KYC, regulatory compliance and risk management.   Dormancy rates are high- as high as 70%

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TYPES OF SERVICES REQUIRED BY THE UNBANKED Majority of the unbanked people would like to access same product and service

package as any other mass retail customer which include:- 

– No or low initial amount needed for account opening 

– Low level or no minimum operating balance – Possibility of depositing small irregular amounts as often as possible

 – Withdrawal any amount at any convenient moment more flexible – Contractual savings which will enable a Customer to convert small savings into big lump sum

 – Low fees in proportion to the amount transacted – No ledger fees rather have low charges per transaction

– Simple KYC

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CONCLUSION:-  Banking industry have a large market opportunity especially in the region where more

than 70% of the adult population do not have account with a bank. 

The traditional approach of extending outreach using bricks and mortar form of branch is no longer important and expensive to implement.  

Regulatory environment to see technological changes as an opportunity to foster quick and efficient financial services delivery to the unbanked. 

Banks cannot continue to work in isolation rather work closely with other agents in other to ensure quick, reliable and efficient financial services availability to unbanked people for them to choose.  

Types of products and services to be introduced to the unbanked must fulfill the gap and meet the needs of these people.