Recalibrating for new standards

Most developing countries are striving to catch up with their more developed counterparts in putting in place appropriate measures to regulate their fiscal economies. The regulation of banks and their operations plays a big part in this regulation. This need for ...

Are strict banking sector standards and close supervision of banks’ good for developing economies?

Most developing countries are striving to catch up with their more developed counterparts in putting in place appropriate measures to regulate their fiscal economies. The regulation of banks and their operations plays a big part in this regulation. This need for closer scrutiny of the financial markets and their operations can be traced to the financial crises of the eighties and early nineties in, culminating in a conference that was held to discuss and recommend standards for the supervision of international banking groups and their multinational operations in 1992 in Basle, Switzerland. The standards that were set as a result of this conference known as the 1992 Basle Committee standard for the supervision of international banks with multinational operations helped calm their concerns about their businesses in developing countries which were considered to be at risk without proper national banking regulations and supervision. This kicked of the widespread banking sector reforms that began in the mid-nineties which have continued to date.

For developing economies, these banking sector and financial markets reforms became crucial as they have been directly tied to the nations’ access to the international financial markets. The structural adjustment programs that were implemented in most developing economies during the nineties were as a result of these worldwide reforms in the financial markets.


Banks in developed economies avoid risk at all cost

The end result of the banking sector reforms stemming from the Basle Committee standards has been to mitigate risk at any cost. These standards and regulations have excluded the two major functions of banking that are crucial to developing economies, mainly to provide developmental capital that spurs growth in the economy and open up new opportunities for aspiring entrepreneurs who are so instrumental in developing a nation’s economy in its developing stage. The Basle Committee standards on banking and other financial markets regulations are to a large extent adverse to risk which is what drives the entrepreneur spirit and stimulates rapid growth in a developing economy. Strict banking sector standards on capital requirements completely ignore the fact in a developing economy, there are some risks that are not only worth taking, but just might make the difference between a rapidly growing economy and a stagnant one.


Primary functions of banks in developing countries

It has been speculated among economists that one of the basic diving forces behind the rapid growth of the United States economy in its early stages was the existence of an aggressive banking sector which was willing to take risk, as it operated in a less regulated environment. A lot of banks failed as a result of this willingness to take risks, but even those that folded after backing high risk ventures left behind numerous developments and enterprising projects that spurred growth during this very important stage in the country’s economy. In the past few decades, the direction taken in the banking sector of avoiding risk at all cost may have actually slowed down growth in the economy for many developed countries. Minimal capital requirements established by the Basle Committee standards entirely disregard the basic life lesson that there are some risks which are worth taking. These minimal capital requirements reward “low risk” investments with additional cost saving benefits at the expense of “high risk” investments which limits the amount of financing available for venture capital and other investments that drive growth in a developing economy. The credo that a stable banking sector is the panacea for long term economic growth does not take in to consideration the stage at which the nation’s economy cycle is. Economies require different stimulus at certain stages in their growth cycles.


Thinking outside the box

Moving away from the traditional banking standards such as the ones that were set by the 1992 Basle Committee, there are a number of recent innovations that have disrupted the banking sector and financial markets in general. These recent developments have changed the face of banking particularly in the developing world. Technological developments have made it possible for bank customers to carry out most of their transactions from the comfort of their homes or wherever they may be located at a given point in time. Some of these innovations have greatly transformed banking in the developing world and in the process have become an integral part of how we carry out our banking needs, becoming the “new normal”. If we were to think “outside the box”, these innovations can be considered to be new standards that will shape the future of banking and the financial markets.

Here in Kenya as in the majority of African countries, banks have had to move from traditional banking methods and adapted to these new innovations to remain relevant and compete in what has become a very competitive industry with a dynamic demographic that expects their service providers to keep up with new technological advancements in the sector. Some of the recent innovations that have become the “new normal” are:

  • Digital Banking – The New Frontier
    Digital Banking by definition is the transfer of all of a bank’s activities on to an online platform that is accessible from both personal computers and mobile devices. It must be differentiated from Online or Internet Banking which is limited to banking activities that are related to account management, such as online deposits, money transfers and the payment of bills. Digital Banking on the other hand encompasses all of bank’s functions that would normally be transacted in the banking hall. It is essentially the transfer of all of the bank’s activities on to an online platform, making physical visits to the bank by customers redundant. The global banking industry has not entirely embraced this innovation, many players across the divide still have faith in the traditional banking model of having banking halls and operating physical branches, their only concession to the digital age being the provision of online or internet banking. For banks to survive in this digital age, they have to embrace digital banking or perish. Conservative estimates put the amount of transactions currently being conducted on a digital platform in the more developed economies at 30%, meaning that this amount of the bank’s revenue is being generated through digital banking. This percentage is constantly rising as more and more consumers discover the ease and convenience of banking at one’s own terms and from anywhere that they choose, whether from the comfort of their homes, at the office or on the ago while commuting to and from their place of work.

    Digital Banking is rapidly becoming the new frontier in banking, replacing the old “brick and mortar” model of maintaining a physical branch network and can in this light be considered to a banking standard for the future that no serious player in the banking industry can bypass and remain competitive in the financial markets.
  • Mobile Banking – The New Normal
    Mobile banking is an innovation that has opened a new frontier in the provision of financial services, making it possible to offer fast, personalized banking services to the average customer. This innovation has also made it possible to greatly increase financial services penetration in the developing world, reaching all corners of the population and giving the previously unbanked an efficient and reliable access to banking services at an affordable cost.
    According to the Communication Authority of Kenya (CAK) statistics, over 26m people and half a million businesses and corporates are currently using mobile banking in Kenya. Kenya Commercial Bank (KCB) was the first institution to offer mobile banking services back in 2005 with their product, KCB Connect which offered SMS based banking services followed by KCB Connect II in 2008 and KCB Mobi Bank in 2011. The bank was also the first institution in Kenya to offer virtual bank account opening using a mobile phone with Mbenki which was launched in 2013. Today, almost all of the commercial banks in the country offer mobile banking services in the form of platforms that are easily downloaded and installed, enabling the bank customer to start using the facility almost immediately.
    The Global Mobile Banking Report published by KPMG and USB  Evidence  Lab estimates that the number of mobile banking users will hit 1.8bn by 2020, representing a quarter of the world’s population.
  • Agency Banking – a banking innovation from the developing world
    Agency Banking by definition is the provision of limited banking and financial services to the underserved population by agents engaged under a valid agency agreement with a bank. The owner of the outlet that has a valid agency agreement carries out limited banking transactions on behalf of the bank. The Central Bank of Kenya (CBK) defines a Bank “Agent” as an entity that has been contracted by an institution and approved by the CBK to provide certain services on behalf of the institution, which is usually a bank or a deposit taking financial institution. The bank agent is equipped with a certified Point of Sale (POS) terminal in which they process deposits and withdrawals after the bank customer have swiped their bank debit or credit cards. The POS terminal is connected to a nearby bank branch by GPRS data connection using a telecommunications service provider.
    The agency banking model is being recognized in many countries as a secure, simple and fiscally viable tool in increasing the penetration of banking services by providing formal financial services in areas that the traditional banking methods have failed to reach. Globally, the agency banking model has proved a big success in Latin America where Brazil, which is considered to be the pioneer of agency banking worldwide, currently has 99% of its municipalities covered. Banks in Argentina, Columbia, Ecuador, Peru and Mexico soon followed Brazil’s example and now have extensive agency banking networks. Further afield, Pakistan, India and the Philippines have also embraced the model and in Africa, South Africa and Uganda have also adopted the model.
    Here in Kenya, Equity Bank owes a large part of its success from mobilizing deposits through its extensive agency network in the country, KCB and CO-OP Bank also have extensive networks spread throughout the country. In the Far East, banks in Bangladesh have also embraced agency banking e.g. Bank Asia in January 2017 announced that it would increase its agency network by the addition of 2,000 bank agents to the existing 1,200.
  • Banking on the future
    Agency Banking has the advantage of rewarding all the participants in the model, the bank agent benefits in income from the commissions earned in providing banking services on behalf of the bank; the bank customer benefits from the localized and easy access to banking services; the bank benefits from wider customer deposit base and income from fees and commissions on a larger number of banking transactions. The bank gains from an additional cost benefit, saving on the considerable expenses that it would have to incur in opening branches to provide the banking needs that are taken care of by its agents. For a developing country, agency banking is a very useful tool for financial services inclusion of the population, with the contracted agents acting as proxies’ for the banks in the provision of banking services.
    The agency banking model is a win-win for all parties involved and can therefore be considered to be banking standard of the future in the developing world.
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