By Charitha Ratwatte –

Total Financial Inclusion (TFL) is the dream of all those who are concerned about exclusion of the poor, marginalised and displaced, from the formal financial sector.

The poor, even when they manage to pull themselves out of poverty, often fall back into poverty when faced with a financial shock, with which they are unable to cope. They have to raise emergency funds to meet expenses connected to death, sickness, crop loss, livestock theft, etc. This is where micro insurance schemes can play a vital role.

In the absence of micro insurance, the local money lender or pawn broker is the recourse if the victim is not a member of a group of micro savers such as those set up by financial service providers such as micro finance institutions or a Seetu group (ROSCA, Rotating Saving and Credit Group.) India has resorted to an interesting experiment, Bank Agent Networks.

Praja Naya Niyamaka

In many ways this is similar to the Praja Naya Niyamaka (PNN) with which Sri Lankan State banks experimented in the late 1980s. The issue there was also this inability to reach out to the poor and marginalised, the ‘last mile’. The formal financial service sector was unable to provide access to their funds to the poor and marginalised. There were institutional, bureaucratic, systemic and attitudinal problems.

The PNN system, as far as I can recall, worked as follows: Selected State bank branches were asked to select customers with a good credit history and offer them a fixed amount of funds at a concessional rate which they would then be allowed to on lend to people known to them with an entrepreneurial capacity, within an approved spread.

Large amounts of funds were moved out, but the scheme was shot down when the Government changed, allegedly as institutionally-traditional and hidebound bankers were against the scheme. There were all sorts of scaremongering stories about corrupt bank branch managers lending to relatives and friends under this scheme.

President Premadasa was the driving force behind the PNN and that allegedly resulted in local political power brokers, nominating persons, totally unsuitable according to the criteria, but politically close to them, to be Praja Naya Niyamakas.

The local political hit men allegedly threatened and brow beat the local bank branch managers and PNN to lend to their nominees, threatening reprisals at the highest political level, if they stuck to the rule book and strictly applied the criteria, laid down in the State bank circulars. The scheme was not given a fair chance to prove or disprove its efficiency and soon after President Premadasa’s assassination, it was scrapped.

Banking agents

The concept of banking agents is not new. It is a retail outlet contracted by a financial institution or a telco mobile network operator to process client’s financial transactions. Rather than a bank employee sitting behind a teller’s counter, it is the owner or an employee of the retail outlet who conducts the financial transaction.

Such banking agents can be at a variety of locations, supermarkets, pharmacies, retail shops, post offices, telco agency outlets and many more similar institutions. These banking agents are equipped with various types of advanced technology today, ranging from point of sale card readers, mobile phone connectivity and barcode scanners, to scan bills for bill payment transactions, personal identification number pads and even personal computers that can connect with the banks server using a personal dial up or other data connection.
Clients who transact with the agent may use a magstripe bank card or their mobile phone to access their bank account or e-wallet respectively. Customer identification is through PIN, but may even involve biometrics such as India’s Adhara card.

Bank agents help financial service institutions to solve the perennial ‘last mile’ problem in reaching out to customers. Convenience to customers located a distance away from a branch is the main factor. Establishing a branch involves costs which are not covered by transaction numbers and volumes of business in rural areas. Further the access issue, rural unsophisticated customers feel more comfortable dealing with their local retail store keeper or sub post master or telco agent, rather than walking into an imposing air-conditioned edifice, where the entrance is guarded by an armed and aggressive looking security guard, to deal with some nattily-dressed banker!

Banks and financial service providers in India are now increasingly adopting self-managed agent networks. However, building and managing an agent network is not an easy task. The Sri Lanka experiment with the PNN scheme clearly indicated this aspect.

Banks and financial service providers have to develop competencies and support systems required to build and manage the bank agent network. Issues such as standardisation and scalability, reducing dependency and the workload of branch staff, balanced roles and responsibilities, reduce turnaround time, and the training of agents take time.

Institutional Agent Managed Networks

Institutional Agent Managed Networks (ANMs) which are popular in India have the advantage to having access to dedicated resources and a trained work force. The success of bank managed agent networks is highly dependent on the motivation and attitude of the staff of the bank’s branches. Branch managers are oriented to show their branches as effective profit centres, the effort of supervising and managing bank agents may seem to take away from this task.

The PNN scheme, during its short life span in Sri Lanka showed all these difficulties very clearly. Sometimes busy branch managers use the bank agents for back office work in the branch; in India this happens, especially when the bank agents are salaried, in addition to their commission. The lack of training of the bank agents was another factor which has been highlighted in India and which was applicable to the PNN scheme as well.

The banks are oriented to training their in-house staff; bank agents have to be trained on a whole different set of skills, which may not be a priority to human resource development departments of commercial banks. The challenge which the banks and financial service providers face in covering the ‘last mile’ in reaching out to the marginalised and the poor, may find a solution in a properly operated bank agent scheme.

The ‘last mile’ conundrum

In Sri Lanka the Co-operative Rural Banks have a history of over 100 years; this institution was created to break the stranglehold the money lender and pawn broker had on small entrepreneurs and low income households. Money lenders were regulated by legislation, also Seetu systems [Rotating Savings and Credit Associations (ROSCAs)].

Most of these regulators are presently in deep slumber. Debt relief was institutionalised by the setting up the Debt Conciliation Board by law. Presently Sri Lanka presents to the micro borrower a mixed salad of institutional and informal financial service options – ranging from the money lender, prawn broker and seetus to Co-operative Rural Banks, micro finance institutions, Divi Neguma Banku Sangam, finance companies, licensed commercial banks, etc. Presently non-governmental, non banking, non finance company, micro finance institutions and Divi Neguma, which succeeded Samurdhi are not supervised by an independent prudential regulator.

Allowing financial service institutions which come under a prudential regulatory scheme of the CBSL or other institutions, including licensed commercial banks, finance companies, cooperatives, to establish and operate an agency banking system may be a method of solving this ‘last mile’ conundrum.

The fact that the ‘last mile’ has not been covered by the formal financial sector is shown by the estimate that as much as 40% of finance for asweddumisation of paddy lands is generated through pawning family jewels. In a country which has over a century’s history of rural credit schemes, this is shameful.

The financial services sector has failed to come up with a financial instrument to service the largest demand for rural credit. This and related tasks by and large has been left to the money lenders, pawn brokers and the micro finance sector. In Sri Lanka today, the bulk of micro finance activity is in the non commercial banking sector.

The Co-operative Rural Banks and Sanasa have a history of over 100 years in the sector. Sarvodaya Seeds and its successor Deshodaya Finance, the National Youth Savings and Credit Cooperative (NYSCO) have over a quarter century’s experience. More recent interventions such as the Sewa Lanka Finance, Janashakthi Banku Sangamaya of the Women’s Development Federation, Hambantota, the Wilpotha Kantha Iturum Parshadaya of Wilpotha, Puttalam, the Batticaloa YMCA, have also built up experience and capacity. The marginalised poor, youth and women have really benefited from these interventions.

Regulatory process and operational issues

The National Development Trust Fund (NDTF, formerly the Janasaviya Trust Fund [JTF]) has been operating from 1989 and is the biggest provider of wholesale funds for on lending to the MFI sector, including the regional development banks.

The JTF credit window is now being operated by the Sri Lanka Savings Bank (SLSB). The partner MFIs in this scheme are for all purposes agents of the SLSB. Under the CBSL consolidation plan for the financial sector, it is reported that this SLSB will be absorbed by the Bank of Ceylon. One hopes that the MFI window, having a unique history of more than two decades, will be continued.

Together with the NGOs in the sector there are huge numbers of organisations, outside the commercial banking sector, involved in MF in Sri Lanka today. A draft Micro Finance Regulation Bill has been prepared and is pending enactment for an inordinate amount of time.
In any event, the fact is there is a regulatory process in place, first the market itself, with so many lenders, the borrowers have a clear choice, and there are a plethora of laws, which give the state immense supervisory power over the sector, ranging from the Cooperative Act, the Monetary Act, the Voluntary Social Service Organisations Act, the Companies Act to the Divi Neguma Act, to name only a few.

Operational issues abound; the Institute of Policy Studies recently did a study on Samurdhi and found that 43% of the real poor are not receiving the program’s benefits, whereas 40% of the beneficiaries that get benefits are not the targeted poor. Further, the Vinstar Report of October 2000 reported that the Samurdhi Banku Sangam (SBS) must be counted as one of the most expensive large MFIs in the world. The operating cost (excluding cost of funds) of an average performing SBS is around 73% of its average gross loans outstanding! Grameen in Bangladesh is only 9%! We trust the successor, the Divi Naeuma Banku Sangams, to do better.

Indian approach

In attempt to solve this ‘last mile’ issue, the Reserve Bank of India (RBI) recently released the report of the Committee appointed to report on Comprehensive Financial Services for Small Businesses and Low Income Households, which was chaired by Nachiket Mor, a board member of the RBI, which was tasked with framing a clear and detailed vision for financial inclusion and financial deepening in India.
The Mor Committee outlined six vision statements to achieve this goal:

1. Every Indian above 18 must have a full service, safe and secure electronic bank account.
2. Every resident of India must be within 15 minutes walking distance of a payment access point.
3. Every low income household (LIH) and small business (SB) must have access to a formally regulated lender that is capable of meeting their credit needs.
4. Each LIH and SB would have access to a provider that can offer them suitable investment and deposit products at reasonable charges.
5. Every LIH and SB must have access to providers that have the ability to offer them suitable insurance and risk management products to manage risks such as: commodity price movements, longevity, disability and death of human beings, death of livestock, climate risks and damage to property.
6. Every LIH and SB must have the right to be offered only suitable financial services and the legal right to seek redress, if due process to establish suitability has not been followed or there was gross negligence.

The Mor Committee also laid down four design principles as a guide for development of institutional frameworks for financial services for LIH and SB: Stability, Transparency, Neutrality and Responsibility. It is important to note that the Mor Committee has said that ‘there is a need to move away from a limited focus on any one model to an approach where multiple models and partnerships are allowed to emerge, particularly between national full service banks, regional banks of various types, non bank finance companies and financial markets’.

Thus the recommendations of the Mor Committee seek to encourage partnerships between specialists, instead on focusing only on large and generalist institutions. The Mor Committee also recommends that the RBI seriously considers licensing with lowered entry barriers, but otherwise equivalent treatment more functionally focused banks like payment banks, wholesale consumer banks and wholesale investment banks.

Telcos to the fore

Payment banks would enable Indian mobile phone companies to replicate mobile payment technologies that have proved highly successful in African markets like Vodafone’s M-Pesa service which is used as a virtual currency by more than 70% of Kenya’s adult population, allowing users to store money, transfer funds to relatives or buy products in shops.

Chairman Nachiket Mor in an interview stated that allowing mobile phone companies (telcos) to offer bank like payment services would be one of the ‘most transformative steps’ in creating total financial inclusion a reality.

Given Sri Lanka’s mobile phone penetration, this would apply here too. It would be hugely popular, it means that you can remit money to your parents at your village using your mobile phone or receive funds from your brother in Dubai, and collect the cash at the local telco agent’s shop.

For Sri Lanka, given our virtual first world social indicators and the tremendous outreach of the MFIs, a more developed financial model is sensible and attainable based on the agency banking concept. MFIs are of utmost importance for financial inclusion as these institutions connect with the people constituting the lowest strata of society. But it is obvious that when an MFI targets customers with no recorded credit history, it increases the risk for its business. It is due to this inherent risk that it is extremely difficult for MFIs to raise money other than through their member’s deposits. It is vital that the new MFI law which would legalise the deposit taking by MFIs be enacted fast. The potential in this business is huge as Sri Lanka in particular and South Asia in general, is considered to be under seriously under banked.

Reaching unbanked areas

Bank agents, on the lines of Sri Lanka Praja Naya Niyamaka scheme, connecting up and linking with MFIs and self help groups is one method which has been successfully used by the ICICI Bank in India. The ICICI Bank Head of Rural Banking Rajiv Sabharwal says: “As far as the role of the private sector is concerned, micro finance is not an exercise in charity. Consensus is emerging in the industry that micro finance cannot be relegated to be a mere CSR activity.”

Moumita Sensarma of ABN Amro Bank of India stresses the need to find last mile solutions “reading customers’ mindsets presents a tough task for banks that need to reach unbanked areas. Banks are culturally seen as a foreign entity, thus technology that the bank chooses is crucial in approaching the poor. As the micro finance industry matures more opportunities will be created for domestic and international finance players to enter this market profitably, while contributing to poverty reduction.”

The formal financial system can realise the huge business potential coming from unmet demand for financial services from the financially excluded at the bottom of the economic pyramid. The focus should be on creating customised, composite and simple products and delivery through an accredited, trained, professional agent.

At the same time new products like micro insurance and foreign and local remittance services need to be developed. However as the banks themselves will not be able to cover the ‘last mile’ easily and will need the assistance of agents. MFIs have proved, in Sri Lanka, that they can cover the ‘last mile’ and reach the bottom of the economic pyramid effectively and profitably at that. There is a strong case for MFIs to have an agency relationship with the formal financial service providers on the lines of the Praja Naya Niyamaka scheme as the SLSB and former MFI partners of the Janasaviya Trust Fund presently have.

Need for innovation

It is logical in the next phase of financial service development in Sri Lanka that the formal financial sector enters into viable working partnerships with the MFI sector on the lines of the Praja Naya Niyamaka scheme, in order to cover the ‘last mile’.

There is a need for innovation in the delivery of banking products to the masses, including M-Pesa type mobile banking through telcos, which is a type of agency banking. One way is for the commercial banks to offer a full range of financial services to the economic players at the bottom of the pyramid, in a banking agent relationship with MFIs and telcos, including savings, transfers, short and long term credit, mortgages, insurance, pensions, remittances and leasing.

This would necessarily involve an overhaul of the nature of financial products being offered, delivery mechanisms, a change in the mind set of commercial bankers and even changes to existing law. The SLSB – former JTF/ MFI partner organisation collaboration – model is alive and well as a demonstration.