Boosting the Business Case for Agents

This is the second piece in the five-part series launching CGAP’s Agent Management Toolkit. The toolkit is based on more than a year of research that yielded data on more than 16,000 agents in Brazil, India, and Kenya. In-depth interviews were conducted with 466 agents, agent network managers and providers, including mobile network operators, banks, MFIs and technology companies.

Today’s guest blogger is Prakash Lal, from Financial Inclusion Network & Operations Ltd. (FINO), which we found to have sophisticated insights on managing agents. FINO agents and technology connect more than 27 million Indians with 23 banks, 10 MFIs, 5 insurance companies and 15 government entities, via more than 11,000 POS terminals covering one-third of India. We’ve asked FINO to shed some light on how they boost the business case for their agents (referred to in India as “Business Correspondents”).

FINO was founded on 13th July, 2006 with the single objective of building technologies to enable financial institutions (FIs) to serve the under-served and the unbanked sector and also to service the technology requirements of entities engaged in servicing the bottom of the pyramid customers. Every step we’ve taken on technology, we’ve taken an equally important step forward in developing a highly-distributed, reliable network of Business Correspondents (BCs), whom we fondly call “Bandhus”, connecting clients to our technology and onward to the financial institution of their choice.

BCs are a critical link in our service delivery channel, and we invest a great deal in ensuring that working as a BC is attractive. Most of our BCs have other sources of income as well, meaning FINO needs to provide enough income to ensure that BCs will devote an adequate share of their time to the FINO business. We calculate that extra income to be, on average, INR 2500-3000 (USD 55-65) per month. This amounts to around USD 2 per day, which may not sound significant, but for a rural Indian it is welcome incremental income. Further, many of our BCs are also motivated by the desire to help their community and the social standing which comes with being allied with a high-tech product.

In addition, there are four points which strengthen the business case for our BCs:

Multiple Products: FINO has a complete suite of products to meet the financial inclusion needs of financial institutions. A multiple product suite roll-out enhances a BC’s option of increasing the number of transactions, hence an increase in their commission, as per the varied customer requirements. Product innovation in FINO is derived from its deep insight into the requirements of the client segment gained from pioneering work done with MFIs, banks and research organizations.

Financial Literacy: A regular saving habit by the customer will ensure regular transactions and thus more commission for the BC. FINO is doing various financial literacy projects with World Bank, International Finance Corporation (IFC), Microfinance Opportunities (MFO), UNDP and NABARD. FINO puts up the capital for our BCs and our staff play a large role in helping agents manage liquidity. FINO Block Coordinators manage approximately a dozen BCs and typically visits them every one to two days to retrieve excess cash or deliver new cash. In other words, if we look at the 9 drivers of the agent business case in CGAP’s Agent Management Toolkit, FINO removes the first two: upfront capital, liquidity management. We internalize that into our own business, making it much easier and more attractive for our BCs. We also pay our agents a fixed salary, in addition to per transaction commissions. This creates some certainty for our BCs as far as their income is concerned. We believe these are the best ways to build a viable network of agents in rural areas.

Take the case of one of FINO’s BC in Uttar Pradesh state, Md. Saleem. He runs a general store and also works with FINO. He handles 24 transactions on a typical day. His largest cash transaction on any given day is US$107 (INR 5,000), which effectively determines his cash-on-hand required to handle the largest transaction. A FINO Block Coordinator usually visits daily to pick up and deliver cash, and can get there within a few hours in case extra liquidity is needed for a very large deposit or withdrawal. Saleem uses his place of work—the general store—to conduct most agent transactions, obviating the need (and expense) for a dedicated agent location. As part of FINO’s “doorstep banking” model, Saleem also travels to client homes in three surrounding villages, incurring a transport expense. He nets a daily profit of US$1.84, which is very close to our target for BCs.

By FINO'S Prakash Lal for CGAP blog

Remittance: a step towards financial inclusion

Financial Inclusion is the buzzword doing the rounds in the social sector these days. Financial inclusion is an umbrella term used to represent access to various financial services by the poor (bottom of the pyramid!). One of these services is the transfer of money i.e. remittance; a field which is seeing a lot of developments lately.

Remittance in common parlance refers to the transfer of money by a person abroad to his family/friends in his/her home country. Various reports by World Bank, United Nations University show that remittances form the second largest source of international finance to many developing countries of the world, often surpassing the official development flows. International Fund for Agricultural Development (IFAD) 2006 estimates put the total flow of remittances to developing countries at $301 billion (including informal channels) while the World Bank estimates are $250 billion (excluding informal channels), which mirrors the huge market potential.

And we are not just talking about the rich or middle-class but the poor too. We have known through personal experience or news stories about the sheer no. of unskilled labour who have migrated to areas for e.g. Gulf (from Kerala) in search of livelihoods. And it is this section of migrants that the development sector needs to concentrate on by ‘introducing’ formal channels to them which can be better leveraged to promote economic development.

Remittances make a real difference to people, a difference that’s measured not in money but in its ultimate utilization for better food, medicines, education and healthcare. But what’s the connection between remittance flows and financial inclusion?

In countries like Ghana, remittances can account for up to half the household income. In Bangladesh, they can represent most of the household income. It is estimated that about 10% of the world’s households receive remittances (DFID). And while this money is used to support basic necessities like roti, kapada, makaan, it can have a multiplier effect. It is known that most often the excess money is further invested for genetrating profits for the family. The cumulative effect on the economy could be increased employments, increased money flow for investments, thereby stimulating growth. And it is this aspect that if encouraged, can help communities to come out of poverty.

Money is sent through formal channels like banking institutions or money transfer agencies or more frequently, as in case of poor migrants, through informal channels like friends, acquaintances or illegal Hawala channels. There a number of impediments faced in the informal fund transfer – higher charges, delivery issues, possibility of theft etc., which may not just mean reduced money to the beneficiary but may even further tax the family. On the other hand, the formal channels ensure easy transference of the entire amount in return for set charges. And as money transfers through formal channels often require the use of a bank account, remittances promote access to formal financial services for the sender as well as recipient.

However the problem lies in the fact that the penetration of the formal channels is much limited, due to the same demand and supply problems which are plaguing the banking sector - problems of availability and accessibility, identification, information gap, illiteracy, higher operational costs.

This situation if utilized efficiently can prove to be a win-win situation for all stakeholders. As Dilip Ratha(World Bank) points out, encouraging remittances through the banking channels (formal channel) can increase the development impact of remittances by encouraging more savings and furthering investment opportunities. Banks and other financial institutions can introduce their other products to its remittance customers thereby reducing their costs per customer. MFIs can make use of the history of the remittance receipts to map out the credit history of the potential customers.

Access to remittance services in rural and remote areas can be improved by encouraging the participation of the microfinance institutions, credit unions, and saving banks (including postal saving schemes) in the remittance market thereby effectively increasing the probability of usage of formal channels by the poor.

The opportunities are limitless; and if combined with initiatives by the financial institutions and policy and regulatory support by Governments have the potential to make a difference!

By Ms. Swati Vempati.

Need for sustainability in the quest for financial inclusion

A focus on “financial inclusion” has been there in India for quite some time now. If we look back we can see examples of policies aimed at financial inclusion at various instances in the past; most prominent amongst them being the policies that were enforced in the immediate aftermath of bank nationalization and in many subsequent policies even later. So if there existed policies for financial inclusion why it is that a vast segment of our population continue to remain outside the coverage of formal financial institutions and their products and services and continue to rely on informal sources of finances like moneylenders who charge exorbitant rates of interest.

Why it is that poverty characterizes vast tracts of rural India and people there aren’t able to use the ladder of access to alternative sources of finance to escape the clutches of poverty and the social and economic shackles that a poorly performing agricultural sector has imposed up on them. Why is it that large numbers of landless agricultural laborers AND farmers continue to be dependent on agriculture despite falling wages and incomes?

The answer to this is that though the architects of India’s poverty alleviation programs had their intentions right and realized that providing financial inclusion in the form of access to formal financial institutions and their services to the most impoverished segment of the population would help them to break away from their dependency on incomes from agriculture and also liberate them from the clutches of the moneylender (principally responsible for a large part of rural indebtedness); in implementation the “financial inclusion” did not go further than increasing the number of bank branches in rural India and emphasizing on credit requirements of the rural population; most of which again went to the land owning segments of the agricultural class who were able to muster sufficient collateral.

There was hardly any focus on providing the landless laborer with credit let alone other financial products and services including savings, insurance, etc. Thus the rural financial infrastructure that came about was quantitatively impressive but qualitatively poor.

What they forgot was that the approach towards making financial inclusion a reality needs to focus on perceiving the common man at the base of the pyramid not merely as a recipient of the financial services that institutions hand down but also as an important stake holder in the entire process; one for whom these products and services are a gateway to greater freedom from poverty and underdevelopment. The focus therefore needs to be not only on the quantitative but also on the qualitative. This poses interesting questions to us today. It forces us to ask ourselves are we providing the base of the pyramid with what they need or are we providing them with what we think they need? what difference is what we are doing making in terms of providing the base of the pyramid with a greater avenue of choices to escape the poverty and impoverishment that binds them?

It brings us to the realization that when we talk about financial inclusion we should not merely talk about the quantitative but also about the qualitative. There needs to be a focus on sustainability; on providing the base of the pyramid with access to financial services and products that are designed to help bring about transformational changes within the structure of rural society and economy that will help it escape from the clutches of poverty and grow while at the same time providing adequate protection to those making use of these products and services. The task of financial inclusion will be incomplete if the common man at the base of the pyramid, who is in a vulnerable position due to poverty and marginalization is not protected and is left even more vulnerable at the end of it.

it requires us to adapt and adopt newer systems and processes to cater to the demands of different geographical, economical and social environments with the purpose of breaking restraining forces that are inhibiting their economic development and hence fulfill the objective of achieving sustainable growth that is all inclusive

Posted By Vivek John Varghese. http://knowaboutvivek.blogspot.com