AGENCY BANKING AND THE QUEST FOR FINANCIAL DEEPENING

A very quick measure of an economy’s dynamism is the amount of money in circulation -- money in our hands, pockets and under our mattresses versus the total amount of money including that being held in the banks.

The less the money in circulation compared to the money in banks, the better for an economy. Banks play an intermediary between those with the money and those who need the money. Money in your pockets is not helping you or anyone else, its just seating there. But you shift that money in to an account and the bank can on lend it to someone who needs it to consume or produce.

"The trick is to create a mechanism to liberate people from their cash and pool it in a place that those in need can have access to it. The more efficiently society can do this the better for the economy...

On Monday last week the Ugandan Bankers Association (UBA), the Agency Banking Company (ABC) and German aid agency, GIZ hosted an event to assess the rollout and impact of agency banking in northern Uganda over the last five years.

Five years ago Bank of Uganda opened the doors to agent bankers, who collect deposits, effect withdrawals among other financial services for their clients.

The rationale was simple. Since it costs too much -- $300,000, by some estimates to open a bank branch, why not coopt the business community in providing banking services.

This had the effect of increasing the banks’ reach into our communities and easing the pressure on their banking halls.

Similar was found in northern Uganda though not at the scale we see in Kampala.

Since the central bank’s approval of agency banking UBA and its partners have been working to popularise this mode of financial services in northern Uganda.

Ravage by war during 1990s and early 2000s northern Uganda proved a challenge for banks to spread their branches. With little urbanization and populations spread far and wide across the region the traditional model of bank branches would be a hard sell or at least would take longer than desirable to make a traction.

The study showed that the number of agencies or distribution points increased to 692  by end of 2022 from nothing five years prior. This reduced average distance from user to agent to 1.8 km from 6.8km increasing the value of transactions during the period by 18 percent. As a result, just under a thousand jobs were created directly by the agent banks.

The numbers may be a bit underwhelming, understandable coming from a low base, but the researchers also pointed out that agency banking found better traction in the region’s urban rather than rural areas.

 A raft of recommendations were made among which were that agent banking should be further promoted in the region through sensitisation of agents and the users,  reduction of initial cost of investment for agents and organize the agents into associations with a view to improving the business model.

Invariably the model will be greatly helped by improvements in telecommunications technology and the uptake of these technologies by more people.

"The ground has been set and its possible the north will leap frog the rest of the country in adopting agency banking and therefore getting financial services to more people than the rest of us who were hung up on branch networks. From there it will be a small step to adopting fintech....

Returning to the earlier explanation about money being more useful in banks than in pour pockets, believe it or not there was a time our salaries were paid to us in cash. God forbid you were paid on a Friday.

Today they post salaries to your account. If you don’t drain your account immediately someone will use your money to consume or produce.

And this is more important than we appreciate. According to central bank figures more than half the local currency in circulation is in our hands – sh14trillion of sh24trillion in February 2022, the most recent figures available. In more advanced economies this figure is much lower at under 10 percent. That makes a world of difference.

"It suggests that money is transmitted more efficiently from those who have to those who need it and has a huge bearing on the cost of borrowing. Banks make their money mostly through lending, if their cash holding increase they will be under pressure to get it out of the door quicker and hence a lowering of lending rates...

The rise of mobile money can only be a boon for agency banking as it will quicken transactions and widen access.

Its still early days for agency banking in Uganda, but the initial signs are very promising.