Written by Ali Akram
Branchless Banking (BB), in its different forms and configurations, holds promise for expanding access of financial services. It has enabled financial institutions to break free from the conventional brick-and-mortar branch setup and has provided convenient access to financial services for those at the bottom-of-the-pyramid.
Pakistan has one of the highest per bank populations in the world, with roughly 15,000 persons per branch. At the same time, the limited banking network of 10,600 branches has greatly marginalised the rural population. Conventionally, Microfinance Institutions (MFIs) and Non-Governmental Organization (NGOs) have anchored their branches to those of commercial banks, which provide them essential services such as security, liquidity, and cash management support for micro-loan disbursements and repayments. Hence, the banks’ limited branch networks are also limiting the expansion of NGOs and MFI working for the uplift of communities in rural areas.
MFIs and NGOs in Pakistan started leveraging BB agents in 2011 and presently ten NGOs and MFI’s are utilizing the agent networks for disbursing and collecting micro-loan repayments. Transferring cash-handling out of their branches has allowed these institutions to improve transparency and reduce operating costs, freeing up resources to grow their deposit portfolios.
A recent assignment took me to Tharparkar, one of the most desolate and impoverished districts of the Sindh province in Pakistan. Largely a desert, it is ranked as the most food-insecure district in the country by the World Food Program, with hundreds of lives being lost each year to disease, drought and famine. It is there that I witnessed branchless banking not only holding true to its promise of delivering financial services efficiently in a remote, underdeveloped rural area, but also aptly transforming the scaling model of NGOs and MFIs.
A MFI in Tharparkar had succeeded in breaking the barrier of the bank-branch centric operating model by leveraging BB agents to expand its operational footprint. Working with BB providers, the MFI has cultivated a sustainable network of agents that provide it with vital cash management services, thereby allowing the MFI to expand its operations beyond the reach of conventional banks.
Previously, clients would deposit loan repayments at the MFI’s branches and a manual receipt was issued to the client by the branch account officer. The officer would deposit the collected cash in the nearest bank the same day and prepare a recovery sheet which was sent to the MFI’s area office along with the bank deposit slip. These were consolidated, reconciled and entered in the MIS every day by a dedicated staff person at the area office.
Having diverted 98% of all collections and disbursements to BB agents, the MFI has eliminated cash-handling, and digitization has eliminated the manual preparation and entry of daily collection records. By converting to branchless banking, the MFI does not require account officers at its branches and has reduced its operational costs to 12-14%, from a previous high of 22-24%.Cost savings were achieved primarily through reduced administration and personnel expenditures. Relying solely on BB agents for disbursements and repayments, the MFI has not only removed cash-handling at its branches, but also its existential dependency on bank branches. This change in practice is allowing the MFI to scale-up and extend the reach of its micro-finance activities into areas which were previously unserviceable. The agents have become an essential component of MFIs’ distribution channels and this transformation has also led to reduced risks thanks to the efficiency and transparency BB embodies.
Needless to say, the use of agents has immensely benefited clients as well. Enabling them to transact at the nearest agent location outside of normal banking hours provides them convenience and efficiency through reduced travel time and costs. One of the MFI’s clients professed:
“Almost a whole day would be wasted every month as I would have to walk fifteen kilometres to get to the nearest bank to make the loan repayment, now I do it at the merchant within my village on the way home after grazing my goats.”
Witnessing this transformation has greatly strengthened my belief in the potential for spurring development through this new model of banking, particularly in rural and remote areas. Meeting at the crossroads of finance and technology, banks, telco operators, merchants, and NGOs/MFIs are leveraging the best of what each has to offer through branchless banking. The service is allowing NGOs and MFIs to accomplish more with fewer resources and to increase outreach, providing them scale required for meaningful impact.