Agent banking as a tool of financial inclusion

After Independence, Bangladesh has come a long way in ensuring inclusive growth. But there is no room for complacency, when it comes to the state of financial inclusion in our country even after 42 years of Independence. The formal banking sector in the country has tried so many things to expand their outreach and bring the marginalised people in the society under its umbrella. But still more than 62 per cent people lack access to the formal financial service. To bring this large number of people under the coverage of the formal financial sector we need to think about devising some new mechanisms. Agent banking can be one such mechanism.

Agent banking is comparatively a new idea that can help the formal banking sector reach out to the marginalised people of the society through their agents, who will provide several banking services to the people locally. Understandably, agents will be appointed in such areas where it will not be feasible for a bank to open a full-fledged branch. Agents will provide banking services to the people on behalf of a bank and the nearest branch of the bank will provide necessary logistic support. Definitely the agents will be guided by profit motive in addition to the clearly-defined roles and responsibilities for them. The challenges for banks will be to devise a business model that will generate adequate revenue to compensate all parties in the value chain as well as shape up the agent network and tackle the operational challenges to selecting, training and managing agents. In short, agent outlets will be mirror bank branches. To make the business case work, banks may offer the operators guaranteed monthly payments at a certain rate of commission per transaction on top of it and may also provide armoured car services.

The Bangladesh Bank has come up with some guidelines on agent banking. According to the guidelines the following services can be provided under agent banking:

1.    Collection of small value cash deposits and cash withdrawals (ceiling should be determined by the BB from time to time),

2.    Inward foreign remittance disbursement,

3.    Facilitating small loan disbursement and recovery of loans, instalments,

4.    Facilitating utility bill payment,

5.    Cash payment under social safety net programme of the government,

6.    Facilitating fund transfer (ceiling should be determined by the BB from time to time),

7.    Balance inquiry,

8.    Collection and processing of forms and documents in relation to account opening, loan application, credit and debit card application from public,

9.    Post-sanction monitoring of loans and advances and follow up loan recovery,

10.    Receiving clearing cheques, and

11.    Other functions like collection of insurance premium including micro insurance etc.

Agent banking has worked wonders in several developing countries in different parts of the world like Brazil, Columbia, Peru, Malaysia, Kenya etc. Agent banking has been a revolutionary inclusion in the financial system of Brazil as the agents there deal with almost everything like bills and pension payments, cash deposits, withdrawals and money transfer. The list is not limited to these only, because the number of services provided by the agent bankers is increasing with the passage of time. Even in the early 2,000s about a quarter of Brazil lacked access to formal financial services which has been mitigated to a great extent after introduction of this mechanism. As reported by the Banco Central do Brasil, the central bank of Brazil, since the introduction of agent banking, 12 million current accounts were opened across the agency banking network within only three years and the total amount of transactions reached 2.6 billion reflecting the necessity of such a service. Columbia and Peru also turned to the mechanism. Although in Columbia the bank branches covered 73 per cent of the municipality, the agent banking helped raise the coverage to nearly 100 per cent. In 2009 the total numbers of transactions in Peru and Columbia were 67 million and 29 million respectively which were quite big compared to the size of their respective economy. Agent banking in all three countries has been most successful in easing payments made by different households such as utility bills, taxes etc. As data suggest, such payments account for more than 70 per cent of the total transactions in remote areas. Among other countries, Malaysia implemented agent banking under the guidelines of the Bank Negara Malaysia, their central bank, in early 2012. By the end of 2012 there were 4,120 agents deployed and they plan to increase it up to 5,000 agents by 2014. The rate of financial inclusion in the sub-district of Mukims in Malaysia was less than 50 per cent before the introduction of agent banking, but now this rate has increased up to 75 per cent. Agent banking was first implemented in Kenya in 2010, when 32 per cent of their total population lacked access to financial services. Since the launch of agent banking, 10,000 agents have been licensed to supplement the services towards this section of people left out. The impact was somewhat readily observed. Within 2011 the total transactions in terms of value rose to US$ 24 million and the financial exclusion was reduced significantly.

In Bangladesh, the outreach of microfinance institutions (MFIs) is vast with more than 650 licensed MFIs operating in different regions with a client base of up to 40 million. Most of the big organisations like BRAC, Grameen Bank and ASA have their outreach in almost all over the country while the BRAC, in particular, has been able to launch its services in the global arena as well.  Having targeted the poverty-stricken segment of people, they have done a great job in providing small-scale financial services to these marginalised people and making them included in the financial system. But the services provided by the MFIs have their limitations as well. They charge a high rate of interest and the procedure of collecting overdue payments is cumbersome. The regulatory framework of MFIs still needs to pass the test of time. The MFIs also have limitations in respect to providing a wide range of financial services to customers which a scheduled bank can provide.

The experience is not that encouraging, when it comes to the formal banking channel. There are about 56 commercial banks including the government-owned specialised banks and many other financial intermediaries actively performing in the market. Yet a large number of poor people do not have access to formal financial services as shown in a study conducted by the Institute of Microfinance. Keeping in mind the financial viability the formal commercial banks mainly focus on large-scale loans which prevents them from rendering services to a large number of people. Despite efforts of commercial banks to promote SME  (small and medium enterprises) banking, less than 10 per cent of the population lack access to formal credit. Another study conducted in 2011 by the Bangladesh Bank shows there are 67 bank branches and ATMs per 1,000 square kilometres in Bangladesh.

This reflects the fact that running any bank branch in a remote area is not very cost-effective. Setting up a formal banking branch involves a large amount of fixed cost and a high monthly variable cost for maintaining it. But the number of transactions that take place in rural, remote or less densely-populated areas is not enough to make up for those costs. For this reason, there are not enough incentives available for the formal banks to render their services in those areas by using their existing structure.

Agent banking can ensure the access of the marginalised people to several financial services, especially in remote areas. It can work wonders in financial inclusion and enhancing financial activity in remote areas. It can also prove financially viable for the formal banking sector. If the vibrant banking sector puts relentless efforts by following the proper guidance of the central bank, agent banking can prove an effective tool for enhancing financial inclusion and materialising the dream of a poverty-free Bangladesh.

A.N.M. Amin Ullah is Senior Executive Officer at Bank Asia Ltd's Uttara Branch. Email: [email protected]. Syer Tazim Haque is Research Associate,

South Asian Network on Economic Modelling (SANEM).

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