Leveraging on Innovative Distribution Channels to include the

By Doris Cook,2014-05-16 23:15
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Leveraging on Innovative Distribution Channels to include the

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

    active poor.

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

    their customers.

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, and Triodos International Fund Management ( 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

    following attributes:

    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

    500,000 inhabitants.

    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


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