Using Alternative Business Channels to Bank
the Unbanked – the Reliance Experience
Presented By Mr. Ismaila Faal
This paper sets out to discuss the new alternative business channels that are being used to
serve the un-banked and under-served customers who prior to these channels have been
excluded from the formal financial system. This exclusion partly explains the poverty
cycle these important groups are in. It went on to look at the drivers behind these
innovations leading to an examination of the un-banked, their characteristics, differences
between the un-banked in developing countries and the developed world and the
importance of this market segment in the financial intermediation.
The paper argues why the intervention from MFI with a profit and development objective
is a more sustainable intervention in the fight for financial inclusion and poverty
Finally, the paper will share the experiences of Reliance Financial Services Company
Limited in using its kiosks as a means of reaching out to the urban and rural economically
What are these Channels?
Innovative Distribution Channels – This can be defined as the use of information and
communications technologies (ICTs) to deliver financial services through non traditional
channels (branches). These channels include Automatic Teller Machines, Kiosks, Agents,
Points of Sale terminals, and GSM Mobile communication and hand-held devices. The
need to explore these new channels by financial institutions is driven by the following:
? Cost efficiencies – To be sustainable and profitable financial intermediaries must
be very efficient in their operations. It is only when they achieve the twin
objectives operational and financial sustainability can be able to pass on the cost
savings to their customers through reduced rates and a wider choice of product
and service offerings.
? Scale – Institutions must have scale in order to realize the desired cost savings in
order to be competitive. This is particularly true when the operating landscape has
changed significantly with interest and competition coming from both traditional
and non-traditional players.
? Strong global public policy for financial inclusion.
? Need to strengthen risk management and back end processes.
? Moral suasion from global regulatory authorities cognizant of the tremendous
potentials for savings mobilization from this segment.
? Lower Transaction Cost for the customers.
? Customer convenience and enhanced security and the minimizations of cash
based transactions due to its costly nature.
The result of these key drivers is that new market opportunities for unmet needs open up
through widening the customer segments to include the economically active poor who are
working and resident in remote areas. Additional spill over benefits include an expanded
product and service offerings to include savings, insurance, payments services,
remittances and credit. The drivers will also present competitive challenges by providing
more options for new participants as we have seen in the growing number of new MFIs,
scaling up of business operations, traditional banks downscaling and the disruptive entry
of non-financial service companies such as mobile network and cement operators and
more recently supermarkets leveraging on their operating platforms, extensive
distribution channels and huge existing client database to deliver payment services to
All these innovations are intended to reach out to the majority un-banked and under-
served customers who form the majority of the population in sub-Saharan African
countries. The fight against poverty will not be successful until such time that this group
is integrated into global financial system and be given opportunities to work their way out
of poverty through entrepreneurship.
Who are the un-banked?
The un-banked are, “People with limited or no access to financial services including
savings, credit, money transfer insurance or pensions) through any type of financial
sector organizations such as banks, non bank financial institutions, financial co-
operatives and credit unions, financial companies and non governmental organizations”
Some of the characteristics of those who are Unbanked include the following:
? They are young;
? Of low income and wealth;
? Have poor awareness of banking;
? Are dependent on the family extended system or
? People who were voluntarily excluded because they are largely cash based and
have no need to use banks.
These above characteristics of the un-banked are applicable to people from the
developing and the developed countries. In addition however, there are other key
differences in developing particularly sub-Saharan African countries like The Gambia.
? The formal versus the informal sector. The greater the size of the informal sector,
the less likely the impact if any of new financial services distribution channels.
For this group, cash is king as a means of effecting payments. And in terms of
finance, people may make greater use of substitutes to banking that may be
available to them in the informal sector. From the perspective of opening savings
accounts, the ALM requirements (given that most of the rural population do not
have official documents) and more recently the mandatory requirements of having
Tax identification Number in The Gambia poses more onerous challenges.
Estimates on the size of the informal sector vary with benchmarks being put
around 15% in the industrialized world and around 40% in developing countries.
? Urban versus rural. Information asymmetry from a lending standpoint is key. This
can be seen in terms of the various community schemes where participants do not
seek profit. The important issues here are access and information. Those with
funds through the community schemes may have better information about
borrowers and may be able to exert more influence to ensure loans are repaid. It is
important for banks to overcome such information asymmetries if they are able to
offer banking services to a much broader group of society. And from a savings
point view, accessibility in the form of branches and alternative channels is key.
In the developing world good banking access is confined to the urban areas;
where the un-banked problem is supposed to be less severe. Furthermore many
rural areas lack banking facilities because of the concentration of poverty.
The answers to the above challenges of informal versus formal and rural versus urban
facing more the developing world is to embrace the new delivery channels to provide
access to the economically active poor especially the customers resident in the rural part
of our countries. By being closer and through business development and advisory
services, practitioners can help build the capacities of the customers with a view to
remove the information asymmetries for example.
Access to finance is a critical aspect of economic development and economic progress.
Although an issue for developed countries, it is a sine qua non for developing countries
especially in sub-Saharan Africa. Strong well regulated and adequately capitalized
banking sector that is efficient, competitive and transparent is a pre-requisite for
economic success. The importance of extending financial services to help reduce poverty
and to improve living standards is a key consideration.
Whilst the developed world still has some challenges of integrating the un-banked into
the formal financial system especially in new democracies in Eastern Europe and the
former Soviet Union, the lessons from the developed world highlights the challenges
facing developing countries. According to the World Bank, the usage of banking services
may be only one –quarter of the population, compared with the 90% in the developed
world. Yet even within this there appear to be huge variations, from less than 5% in
Tanzania and Uganda to almost 60% in Jamaica and more than 75% in The Gambia. This
data itself may be misleading, being heavily based on urban areas, and thus the numbers
that are unbacked could be even higher.
The way forward is for Sub-Saharan Africa to begin to fully exploit the opportunities
presented by the wide variety of channels available to the developed world built on the
integrated e-banking and e-commerce platforms where cash is less significant in the day
to day activities of customers. Instead, new channels such as internet, SMS banking, POS,
and ATMS etc are the order of the day.
For Profit MFI Approach
Poor people can save and do want to save, and when they do not save it is because of lack
of opportunity rather than lack of capacity. During their lives there are many occasions
when they need sums of cash greater than they have in hand and the only reliable way of
getting hold of such sums is by finding some way to build them from their savings. They
need these lump sums to meet lifecycle needs, to cope with emergencies, and to grasps
with opportunities to acquire assets or develop their businesses. The job of financial
services for the poor then is to provide them with mechanisms to turn savings into lump
sums for a wide variety of uses (and not just to run micro-enterprises). Good financial
services for the poor are those that do this job in the safest, most convenient, most
flexible and most affordable way especially for the rural folk.
The microfinance industry is in its adolescence. There have been encouraging
breakthroughs in the last two decades but the potential for growth and improvement is
huge. However, when there are 4 billion people living under $2 a day, reaching a few
thousands is like a paracetamol in the face of a raging cancer. Through the ages we have
come to associate profit with greed and serving the poor with self-sacrifice. Following the
remarkable successes of the world’s leading microfinance banks – Bancosol in Bolivia,
Grameen & ASA in Bangladesh, Bank Rakyat in Indonesia, Equity Bank in Kenya,
Credit Mutuelle du Senegal (CMS) and more recently Compartamos in Mexico with one
of the most successful IPO ever, banking at the base of the economic pyramid has now
taken centre stage as an integral part of emerging market finance. With these successes,
socially conscious investors have started agonizing about earning market returns while
serving the poor. By continually focusing on their motivations to helping the poor rather
than alleviate poverty itself, they have failed to realize and appreciate the realities of the
problem they wish to address.
Any intervention that seeks to genuinely roll back poverty – whether it is microfinance,
education, primary health, housing or access to basic services such as water and energy
must fulfill four basic conditions:
? Scale. When there about 4 billion people living below 5 USD a day, reaching out
to a few millions on a global scale is like diagnosing a cancer patient with
paracetamol. The world is well aware of the successes of operators like Grameen,
ASA, Equity and SKS Microfinance just to name a few but the challenge is on
and ever so real the provide financial services to the majority of the world’s
economically active poor to enable them to work their way out poverty within the
shortest time possible.
? Permanence. For any intervention to be meaningful and effective, we should be
able to serve today’s generation and their children and their children’s children.
This implies that the champions and promoters of the programs on offer today
will be outliving by their respective countries – problem in most sub-Saharan
African countries. Again to achieve this noble and lofty objective, we need to
embrace leadership and good corporate governance.
? Efficacy the ability for the intervention to become better each passing day and
year and through time.
? Continuous Efficiency – the capability for the intervention to become cheaper
and cheaper on a sustained continuous basis.
Throughout the history of development finance, it has been proven that the first responders to this global crisis have been structurally unable to deliver on these four critical success factors. This may have much to do with the intractability of poverty despite the historic levels of time, treasure and talent that the world has thrown at it since World War II. At their best, the non profit and philanthropy organizations give birth and nurture ideas that can change the world. Development agencies on the other hand allow these ideas to be tested in the field but none of these all important sectors are structurally designed for scale and permanence. But while the public sector can deliver the wide outreach and sometimes sustain it more than one electoral period, the states have failed dismally as a guarantor of continuous efficacy and efficiency.
It has now become globally acceptable that the only way to deliver consistently and simultaneously the four critical success factors of scale, permanence, efficacy and efficiency are through private enterprise. This is not the result of any single firm –
individual enterprises are born, prosper and die, but of the emergence of an entire industry. And industries are born out of the union of two factors: economic activity and above-average returns.
The impact of this on poverty is revolutionary. Since microfinance became credibly profitable in the early 1990s, it has been able to have access in capital markets, first as borrowers and lately as issuers of debt and as regulated financial intermediaries. No longer constrained by funds, the number of poor people reached and the volume of capital disbursed grew exponentially.
Like in any other industry, it is high returns that attract competition. And competition is what ensures that the benefits of this growth flow not only to investors but to the ultimate end-user. The lowest interest rates, the widest array of financial products and the best customer service for the poor in Latin America can be found in Bolivia, where the native chola with her 10 skirts and tilted bowler hat has gone from an invisible to a sought-after
client of world-class microfinance institutions, all with higher ROAs and ROEs than the average conventional bank. The outstanding returns of Banco Compartamos and the success of its IPO have ensured that this process will soon occur in Mexico. So if you want to put your money in microfinance just to feel good, by all means direct it to the organization that most pulls your heartstrings. But if your objective is to roll back poverty and change the world, don't believe those that have been telling you that returns on your investment are the icing on the cake. It is the cake itself
The Reliance Journey Thus Far
Reliance Financial Services Company Limited is a for profit Greenfield microfinance thinstitution licensed by the central bank of The Gambia on 11 December 2006 and thcommenced operations on December 19 2006.
Reliance’s strategic focus is to serve the mass individuals, SMEs and micro-enterprises in
The Gambia who contribute in excess of 75% of GDP but have either been excluded from the formal financial system or underserved by the traditional commercial banks. From our experience, the key barrier to financial services has been the lack of access mainly due to limited or unsuitable channels which has a direct impact on product development hence the high minimum account opening and operating balances of an average USD150 in a country where the GDP per capita is an average of USD320. The other form of exclusion is the strict collateral (landed property) requirement to access bank loans. These two factors combined have led to a situation where about 90% of the population does not have a bank account.
Whilst Reliance is founded by 3 Gambians, the founders strategically chose to invite 2 international shareholders namely Shorecap International (www,shorecap.net) and Triodos International Fund Management (www.triodos.com) to participate in the equity
(USD1 million) of the institution. Apart from augmenting the capital of this young institution, they brought along strong leadership at the board level and sharing of international best practice and good corporate governance.
From inception the management and board has identified some critical success factors in our quest to become sustainable, profitable and to achieve our development objective of effectively contributing in the fight against poverty. Some of these factors are strong capital base, a very strong management team and staff, robust IT platform, stable low cost deposit, value based branching strategy, strong risk management, sound credit portfolio just to name a few. Amongst other attributes, management has put a special emphasis on stable low cost deposit as the best option to leverage a microfinance institutions balance sheet and the rest of the paper will be devoted to the innovations in this area to provide banking services to the Unbanked especially in the rural areas. Management’s decision to focus on stable low cost deposit is also influenced by a fiercely competitive financial services industry where there exists 10 banks, the oldest being around for 115 years and one time issuer of the currency and the newest being part of a very strong regional work with presence in excess of 20 African countries. As if this is not competitive enough, Reliance came into existence after a bank failure (Continent Bank) whose target market was very similar to Reliance’s customers - the underserved
whose confidence about the banking industry has been shaken. In addition to these big banks, there exist 5 other licensed non bank financial services companies and 70 village savings and credit associations (VISACA).
Apart from the competitive challenges, there exists the challenge of the high costs associated with setting up branches. On average it costs USD100, 000 to set up a good
branch. Given the apparent risks associated with micro-enterprises and the associated high costs of profitably doing business in the rural and some of the urban areas where there is a concentration of MSMEs, it is usually not viable for traditional financial institutions to enter into such markets with their traditional models of doing business, who will often cite issues like negative Internal Rates of Return (IRR) and long payback periods and justifiably so.
Apart from the financial considerations, our objective was to develop a channel that will be different in terms of flexibility, mobility, environmental friendliness, technology driven but more importantly one that our customers will identify with easily by giving us the opportunity to take our financial service value proposition to their communities instead of asking them to come to us. In addition, the security of our customers and staff was also of paramount importance hence the reason for the heavy emphasis of the community engagement and ownership philosophy.
The flexibility factor was addressed by choosing materials for the basic structure that was different from the conventional brick and motor but to a large extent offering us relatively same durability. This was important given the space constraints in areas with large concentration of our customer segments. With the minimal space required, the kiosk gives us the opportunity to deliver the same products and services as we would with a conventional branch.
Mobility was also another flexibility factor for the simple reason that we wanted a channel that will give a bridgehead to test the markets in terms of economic and financial viability. If it turns out that the volume of business activity is less than was anticipated, the kiosk can easily be re-locate to other more promising areas with minimal switching costs.
As a triple bottom line company and with a strong determination to access remote towns and villages that are not served with the basic infrastructures such as national power supply, the channel should be conducive to renewable energy sources such as solar system to power the basic equipment needed to deliver our products and services. The chosen channel identified should also be adaptable to new technologies to allow us leverage on the productivity and efficiency of our back-end processes and customer service quality standards.
Finally the channel should be designed to allow us deploy it in even the smallest of spaces availed to us by the local councils in their markets, car parks and other areas with a large concentration of our target segments. Additionally, the internal décor and style should be simple and professional enough so as not to intimidate our clients but rather serve as magnate to draw them closer to our products and services.
In the final analysis we came up with the innovative Reliance Financial Services Kiosks as an alternative channel to bricks and mortar branches.
What is a Kiosk?
This could be described as a fabricated metal box measuring 4X4 meters square, the
interior is paneled with plaster board to give it a cooling effect, the floor is tiled and the
ceiling is done with gypsum suspended tiles, with a counter separating the customer
service assistants from the customer area. The kiosk has capacity to handle between 6-8
customers at any point in time with provision for a seating area whilst waiting.
In addition to the above factors, there was need to enshrine into the kiosk channel the
Scale – The kiosk should be easily replicable within a relatively short period of time and ready for operations once the prototype was complete and agreed upon with the suppliers.
Permanence – Management made sure and will continue to monitor this all important
alternative distribution channel to make sure that it will stand the test of time and will be
relevant to different generations to come. If the latest research and thinking is anything to
go by i.e. the need and importance for businesses to find innovative ways for financial
inclusion whilst preserving the environment, we are comforted.
Efficacy – The lessons learnt from the first pilot led to significant improvement in the subsequent one in the areas of space, ventilation, protection from the forces of nature
(rains) and the décor.
Efficiency – the operations in the kiosks are done electronically and linked to the head
office server using wireless technology. This enables the staff to process transactions on
line real time. Not only does this lead to improved efficiency but also reduces the risk of
suppressed transactions and significantly enhances the customer experience. The source
of the energy is from solar panels which are in line with our third bottom line objective
which is protection of the planet.
Reliance offers the following products and services at the kiosks outlets:
? Account opening
? Transactions services like deposits and withdrawals
? Foreign exchange
? Remittances (western union money transfer)
? Loan applications and disbursements
? Basic personal financial advisory
Geographic Presence – The kiosks are present in three major geographic locations
Western Region namely: Brikama, Tanji, & Lamin with a potential to serve in excess of
Northern Region – namely Barra and Amdalai where there is potential to serve in excess
of 100,000 inhabitants.
Greater Banjul Area – namely Latrikunda Sabiji, Serrekunda, Banjul Albert market,
Banjul Terminal with potential to serve in excess of 300,000 inhabitants?
Average monthly deposit mobilized:
Banjul Kanifing Municipality Western Region GMD GMD GMD 1,398,372 2,337,433 1,217,969