The rapid advancement of financial-sector development in East Africa is a powerful testimony to the important role microfinance continues to play in emerging economies. The financial sector enables the growth of other industries, and its microfinance segment caters for a large number of self-employed entrepreneurs, small businesses, and lowincome households. The sector has been revolutionized by innovations in products, services, and delivery channels over the last two decades. These efforts are now being boosted by increased use of technology. In Kenya, we have the platforms, the technology and the mindset to advance financial inclusion at an unprecedented speed.  The current phase of microfinance is characterized by the rise of branchless banking and mobile money. Technology enables millions of low-income households to organize their private and business lives just as effectively and flexibly as more affluent ones.  It also allows cheaper delivery of more services to more people and increases the market potential of microfinance.

Branchless banking and mobile money facilitates faster inclusion of rural populations into financial systems, expanding the market potential of microfinance.

Branchless banking

Kenya is in the global vanguard of branchless banking.  This is the delivery of financial services outside conventional bank branches through the use of banking agents and information and communication technology. Banking agents are retail outlets contracted by a financial institution, whereby a shopkeeper is contracted and instructed to conduct transactions on a terminal and let clients deposit, withdraw, and transfer funds, pay their bills, inquire about an account balance, or receive cash transfers from government, relatives or employers. The regulator decides what institutions are allowed to offer services via agents, what services can be offered, and how operations such as cash transport, customer identification, and consumer protection must be carried out. For customers, agent banking saves long and expensive journeys to brick-and-mortar bank branches. Customers can perform basic transactions in their accustomed, trusted environment and benefit from long opening hours, short distances, and less queuing. Retail outlets may gain new customers and higher footfall for their stores, and earn commissions. MFIs can vastly extend their client base at a fraction of the (mostly fixed) cost. Cost per transaction at a point-of-sale (POS) – enabled agent is roughly a third of that in brick-and mortar bank branches. The disparity is larger if the bank branch is underutilized, and thus fixed costs are distributed over a smaller number of transactions, whereas agents are only paid if transactions are realized. Lower transaction costs and the transaction-driven revenue model make agency banking the ideal business model to address low-balance, high-transaction microfinance customers. Agency banking has continuously enabled MFIs to serve in the rural areas. Kenya adopted agency banking in 2010 and, by end of 2012, counted 14,200 active banking agents who had performed 25 million transactions amounting to a volume of USD 1.65 billion. Agency banking is a milestone in microfinance. While it relies on a point-of-sale terminal operated by an intermediary, mobile money allows direct service delivery via technology, usually a customer’s mobile phone. There are 1.7 billion people in the world that do not have a bank account but possess  a mobile phone. The rationale for using mobile phones is straightforward, as the case of Kenya shows:

(1) Kenya has more than 30 million mobile phone subscriptions.

(2) 93% of Kenyan adults use mobile phones.

(3)Airtime is among the cheapest in the world.

(4) The ratio of mobile phone subscriptions to landlines is 120 to 1 in Kenya, while it is between 2 to 1 and 3 to 1 in most developed countries.

(5) Mobile money usage has become ubiquitous: 73% of Kenyan adults use mobile money, and 23% use it at least once a day.

 Mobile money

The world’s most used mobile money service is M-Pesa, launched in 2007 by Kenyan telecom operator Safaricom. M-Pesa  is a money-transfer system that allows users to exchange cash for the M-Pesa  currency that can be sent directly to other users, who exchange it back into cash. Since 2007, M-Pesa has enhanced the lives and livelihoods of people without bank accounts, giving them access to essential financial services through their mobile phones. M-Pesa reported a 27.1 per cent growth in its active users across Africa, Asia and Europe in the year ended March 2016, hitting a total subscriber base of 25 million. British telco Vodafone, which owns 40 per cent of Safaricom, has been launching the money transfer service in various choice markets around the world. The mobile phone-based service has a presence in Kenya, Tanzania, South Africa, Democratic Republic of Congo, India, Mozambique, Egypt, Lesotho, Ghana, Albania and Romania. Vodafone Group Director of Mobile Money Michael Joseph says  the surge in usage is attributed to M-Pesa’s entry into Albania and Ghana as well as support from a network of over 261,000 agents in countries of operation. In Kenya, M-Pesa has about 19 million active users transacting an estimated Sh15 billion daily. By contrast, Kenya has an estimated 500 bank branches, 500 Postbank branches, and about 500 ATMs. This position makes it clear why M-Pesa  has caused a stir. However, in order to understand M-Pesa  in the broader financial services landscape, one has to look beyond the numbers. M-Pesa continues to expand, evolving  beyond traditional money transfers to encompass savings and loans, payment of salaries and benefits, settlement of utility bills and school fees, besides enabling vital health and agricultural solutions. It is transaction machinery driven by speed, safety, reliability, and scale. It is reported to handle more transactions in Kenya than Western Union does globally. M-Pesa  has dramatically cut into the markets of classic cash transfer providers like Western Union and Money Gram. In 2012, Airtel, another telecom provider, joined forces with Faulu microfinance bank, to offer microloans, while Safaricom launched a joint venture with Commercial Bank of Africa, an East African banking group, offering a short-term loan facility.

Challenges faced by mobile banking clients

To start with, fraud is a common concern because clients may lack confidence to use a mobile phone to send money. In some cases, especially in the rural areas, illiterate clients may hand over their phone and Personal Identification Number (PIN) to an agent.   Secondly, clients may face system downtime and lack of cash when they need it. Clients think twice about leaving value in a digital form or even putting value on a phone to begin with. This undermines trust in the service and raises the question: “if I don’t get my cash out now, can I get it later when I have an immediate obligation?”  Finally, first impressions matter. We hear from clients frustrated with the registration process due to lost paper work or difficulty with ID, PINs often forgotten and their reset complicated.

Facing the new reality

The types of technological challenges facing MFIs and banks have changed dramatically. Five to ten years ago, the financial institutions were looking at what technologies were available in the market and trying to fit them to specific operational problems to gain a competitive advantage. Today, the same institutions are spoilt for choice, with the decisions inverted such that financial institutions need to pick the technology that best fits their needs, rather than taking what is readily available and making it work for them. For the most common business challenges including outreach, efficiency, automation, security, cashless, paperless, off-line operations and others, institutions finally have access to multiple technological answers. With this shift in the market, what matters more today is what choices are made and how the technologies are used to further an organization’s strategy and business goals.

The impact of new technologies is visible in every aspect of the MFIs and banks operations. From the decisions to pursue a cashless and paperless strategy leveraging the mobile industry development (mobile wallets, mobile phone penetration, device feature enhancements, affordable communication channels), through constructing new fully automated products based on scoring models and data available via real time integrations, to overcoming significant environmental challenges by running systems on the cloud and having off-line units with adequate security, available features (camera, GPS, Bluetooth, GPRS/3G/4G) and authentication capabilities. We are witnessing more and more startups with fully automated operational models, where customers, agents and technologically equipped staff are participating together in various processes, and contributing equally to data collection, monitoring and enforcement of controls. We are seeing cloud based operations taking over, not only with delivery channels and front office, but also more and more on the back office systems like management information systems, insurance and even accounting. This brings new challenges such as how to construct operations, audits, controls, manage resources and of course how the transformation should be handled. One of the main important imperatives remains the fact that all these IT related implementations are in fact operational projects. They serve business needs and must be led by business (not IT) people to guarantee the systems are implemented to serve the organization and not the other way round. New technologies are the key for achieving financial inclusion goals and main enablers of the digital finance revolution. The challenges of outreach, customer and user authentication, data capture and analytics, efficient operations and effective management can all   be solved by technology. The main challenges are now moving into choosing the right solution, ensuring successful implementation, proper monitoring and maintenance and smooth integration into the overall IT ecosystem of the organization. In many cases, the correct starting point is not the development of the right IT strategy to reflect the business one, but the development of a business strategy that embeds technology as a pillar of the business.

 The writer is the chief executive officer, Association of Microfinance Institutions (Kenya). Email: ckaranja@amfikenya.com



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