Why Agent Banking is a Must for African MFIs

How is your Microfinance organisation doing in the African region? If it is doing well, you are lucky. But if it is not, there must be something wrong with your operational strategy. Over the past decades, the microfinance industry in the African continent has seen significant growth; however, except for a few, most microfinance organisations are still struggling to survive and make a profit. Agent Banking can save your organisation if you want to get out of that situation. Let’s discuss how!    

The financial landscape of the African region is constantly changing, and microfinance has been playing a pivotal role in promoting financial inclusion and economic growth. However, the journey toward microlending remains difficult for most startups and mid-level MIFs. But the question is why?

Africa’s microfinance market is saturated, and people live in remote places, which often makes it difficult to reach that market. Even if most MFIs reach those borrowers, the daily operation increases cost. Besides, most MFIs are unable to extend their services to remote and underserved areas with the traditional brick-and-mortar banking infrastructure.

It is where the concept of agent banking comes in as a transformative solution. Agent banking offers a strategic framework through which MFIs can overcome geographical barriers, leverage technology, and effectively reach the unbanked and underbanked populations.

In this blog, we are going to talk about the imperative of agent banking for African MFIs. Moreover, we will highlight its potential to drive financial inclusion, expand customer outreach, enhance operational efficiency, and ultimately contribute to the socio-economic advancement of the continent. But before that, let’s learn what agent banking is in the context of microfinance.

What is Agent Banking in Microfinance Operation?

Before diving into why agent banking is a must for African MFIs, it is important to learn what it is.

Simply put, agent banking refers to a banking model where Microfinance Institutions (MFIs) collaborate with local entrepreneurs or businesses and set them as agents to provide basic banking services on their behalf. Moreover, it is usually done in areas with limited access to traditional MFI infrastructure. In this banking model, the appointed agents act as intermediaries, conducting transactions on behalf of the MFI and extending its services to underserved communities. This innovative approach has gained traction across Africa due to its potential to bridge the financial services gap.

Let us give you an example for a better understanding.

Suppose your microfinance is working in rural regions of Kenya, and you have a physical branch of your microfinance in the biggest town around. Now, you want to expand your customer outreach to some remote places that are not easily reachable from the existing branch. But you don’t want to open a new branch either. So, what do you do then?

In that case, agent banking can help reach that remote location through representatives from that community. For instance, your agent can be a local shopkeeper with a mobile device linked to your MFI’s core banking solution. Your agent can offer services such as opening membership accounts, receiving repayments, disbursing loans, etc. The agent acts as a point of contact, building trust within the community and facilitating financial transactions that once seemed impossible.

Why Agent Banking Is A Must For African MFIs?

Among African countries, a significant portion of the population lives in remote places, and due to high operation and outreach costs, MFIs often avoid those places. Thus, those remote places have a vast untapped market. If you can reach those people, it can be a game changer for your microfinance. And in this situation, agent banking is the instrument you need to deploy. Let’s see why you should go for agent banking for your MFI!

1. Agent Banking Helps Expanding Reach to the Unreachable

Expansion is important when it comes to business growth. But not at a higher operation cost because if you expand your business with a higher expense, it is going to hurt your profit, which can lead to significant damage to your business. In Africa, microfinance institutions often suffer from these expansion challenges. However, with agent banking, you can easily overcome these challenges.

Imagine reaching the most remote villages, where traditional microfinance services are virtually non-existent. Agent banking bridges this gap by utilising local entrepreneurs as your extensions, bringing lending to the doorstep of underserved communities.

Currently, many microfinance institutions are leveraging agent banking and managing a good presence in areas where brick-and-mortar branches were a distant dream. For your MFI, this dream is not far, and with proper core banking solutions and the right agents, you can lead your MFI to an exponential increase in account holders, opening up new avenues for financial inclusion.

2. Enhancing Customer Experience and Trust

Finding borrowers has always been a struggle for loan officers, especially when exploring new locations. Moreover, it takes more time and a lot of money before MFIs establish their business in that community. However, here comes agent banking to save the day.

Customers are more likely to engage with familiar faces from their community. Therefore, if you can set up agents who are well-known among the people, you can easily start lending to many people. It can reduce the outreach cost and keep the operation cost as low as possible. Agent banking will facilitate transactions and build a strong foundation of trust. Agents became their go-to source for financial advice, demystifying borrowing complexities for hesitant customers. Alternatively, agent banking can also leverage borrower evaluation at its best. By adopting agent banking, you’re not just providing services but fostering lasting relationships.

3. Agent Banking Utilises Existing Infrastructure

One of the beauty of agent banking lies in its ability to capitalise on existing businesses. For example, you can appoint agents who already have a shop or local business in that community. Those agents can work like your MFI representative, and their shop or business location can serve as the office for your MFI, enabling them to distribute loans, collect payments, and offer financial literacy.

In this way, agent banking can boost their local business as well as your business in general. Moreover, this collaboration can boost the entire local economy while enabling your MFI to integrate financial services seamlessly.

4. Cost-efficiency and Scalability

Cost cutting is probably the most important task for every microfinance because it is what makes an MFI profitable. Microfinance institutions lend small loans to deprived people without guarantees or mortgages as traditional banks do. But no matter how small and risky the loans are, operational costs are always the same. On top of that, loan frauds are eminent in the microlending. Therefore, MFIs are less profitable than traditional banks.

On the other hand, traditional MFI branches demand significant investment and upkeep costs. And agent banking can slash these expenses substantially. Many MFIs are embracing this model and achieving impressive cost savings while rapidly expanding their reach. With lower operational costs, your MFI can allocate resources to vital growth initiatives and innovative product offerings.

5. Catalyzing Economic Growth

By extending financial services to the grassroots, agent banking contributes to economic empowerment. In many parts of Africa, the agent banking model empowered women entrepreneurs to expand their businesses and uplift their communities.

Besides, with agent banking, local businesses can benefit from being agents. They can earn commissions as well as increase their own business by reaching a lot of people. As a result, your microfinance can actually work as a catalyst of positive change in the local community, fostering economic resilience where it matters most.

6. Embracing Technological Advancements

Now, a question may arise: How would you manage the whole agent banking process for your MFI?

In this case, you need to embrace technological advancements. While deploying your agent banking method for your MFI, you need the means to control all the agents and monitor them regularly for the most effective operation.

Hybrid Core banking solutions are the best technology systems to help you in this process. A comprehensive one comes with all the necessary features to handle everything. With it, you can install your app on your agent’s mobile, with which they can conduct all the tasks. They can receive repayments both manually and through mobile payments. The system can also help them generate reports and check the repayment progress occasionally. This modernised financial transactions and paved the way for financial literacy campaigns and digital education.

Agent banking is not just a strategy; it’s a lifeline for African microfinance institutions. By embracing agent banking, you can drive financial inclusion and rewrite the narrative of economic progress across the continent. Simply put agent banking in the context of microfinance can cut costs, increase the market reach, and boost the local economy and your overall microfinance profit. The time to act is now, and the possibilities are boundless.