Tough economic times cuts SME led agency banking transactions

Transactions done by banking agents dipped with cash deposits reducing by almost 10 per cent, signalling the tough economic period that shadowed the better part of the year, a new report shows.

The latest Bank Supervision Annual Report 2023 by the Central Bank of Kenya (CBK) shows a drop in cash deposits, withdrawals and transfer of funds transactions done through agent banking.

The only transaction that had a positive increase was the payment of retirements and social benefits. This went up 42.1 per cent.

The drop in transactions and amounts is despite an increase in the number of agent banking outlets by 5.7 per cent in 2023 compared to 2022.

While CBK indicates in the report that the drop is associated partly with an increase in mobile transactions, it also cited tough economic times.

Agent banking is conducted by micro, small and medium enterprises (MSMEs) such as hardware shops, general shops, pharmacies, or petrol stations which are authorised by commercial banks or microfinance banks (MFBs) to carry out specific banking businesses on their behalf.

These MSMEs earn a commission based on the transactions they handle and are key to increasing financial inclusivity, especially in areas where the physical presence of banks is not available, while also reducing traffic in banking halls.

The report shows the number of transactions dipped from 158.4 million to 145.3 million. In percentage, the most drop was in mini statement requests at 35 per cent, followed by payment of bills at 25 per cent and transfer of funds at 19.8 per cent.

The number of cash withdrawal transactions dropped to 39.1 million from 43.7 million, while cash deposits reduced to 69.4 million in 2023 from 74.5 million in 2022.

“The decrease in total transactions was mainly a result of a decrease in transactions relating to cash deposits, cash withdrawals, and payment of bills. The decrease was attributed to increased use of mobile money and internet banking,” reads the report.

According to the report, cash deposits in 2023 dropped to Sh1.4 trillion compared to Sh1.5 trillion in 2022 - a 9.6 per cent dip. Cash withdrawals also reduced from Sh295.4 billion to Sh261.8 billion, a drop of 11.4 per cent.

Payment of bills also reduced. This speaks of the challenges Kenyans had to pay their utilities due to suppressed incomes partly associated with increased taxes, as the amounts went down by Sh5.4 billion. This is a 16.9 per cent dip.

Social benefits

Transfer of funds also reduced during the period - from Sh804 million to Sh690 million, a 14.2 per cent drop.

However, payment of retirement and social benefits went up from Sh7.9 billion to Sh11.3 billion. “The unfavourable business and economic environment was influenced by factors including high cost of doing business, rising interest rates and the depreciation of the shilling,” the report says. “Other factors included adverse effects of climate change and geo-political tensions.”

President William Ruto’s first Finance Act that came into effect in July 2023 saw the increase of value-added tax (VAT) on fuel to the current 16 per cent, from eight per cent, which effectively rippled through other sectors leading to a spike in the cost of doing business and commodities as well.

The Act also introduced an Affordable Housing Levy at 1.5 per cent of gross income. This, together with the coming into force of the National Social Security Fund (NSSF) Act 2013 that enhanced contributions from Sh200 to Sh1,080 significantly reduced disposable income for the majority of Kenyans.

While inflation was stabilising from a high of 9.1 per cent in December 2022, the Kenyan shilling was also unstable at the time with the exchange rate inching closer to Sh170 to the US dollar.

Due to runaway inflation, the CBK Monetary Policy Committee (MPC) raised interest rates in 2023 from 8.75 per cent as it was in January 2023, closing the year at 12.5 per cent.

The rate now is 13 per cent. This reduced cash flow for businesses and individuals as well due to increased cost of credit that consequently shrunk profits. 

In 2023, the report says, the value of banking transactions undertaken through agents decreased from Sh1.8 trillion in December 2023 to Sh1.7 trillion in December 2023.

“The decrease was attributed to increased use of mobile money and internet banking. This reduction,” the report adds.

The decrease in the number of transactions and value was despite an increase of 4,811 in the number of agents who participated in the transactions which brought the total to 87,531 in 2023.

As of December 2023, the CBK report shows that commercial banks recorded 82,780 bank agents, while MFBs agents were 921.

“The change was an increase of 4,409 commercial bank agents (5.6 per cent) and a decrease of 277 MFB agents (25.1 per cent),” the report says.

It adds that over 90 per cent of the approved bank agents were concentrated in three banks with the largest physical branch presence namely: Equity Bank with 40,211 agents, KCB Bank Kenya with 24,055 agents, and Cooperative Bank of Kenya with 15,519 agents.

“On the other hand, for the MFBs, over 90 per cent of the agents were contracted by the two largest MFBs – Kenya Women Microfinance Bank Ltd (127 agents) and Faulu Microfinance Bank Ltd (409 agents),” the report says.