Banking on the Unbanked

Published on 10th July 2007

Banks adverts are a daily phenomenon on Kenyan dailies. This was not the case a couple of years ago. Back then, breaking into a bank would have been considered much easier than getting a personal loan from any main stream bank. The innumerable necessities one needed to be eligible for a loan were extremely deterrent.

Banks were not (and still are not) bothered with the small loan seekers whom they considered as high risk. Their main profit contributor was the government due to the high interest rates the government treasury gave on their fixed securities. All a bank had to do was to buy them and recoup on the interest. Other main clients were corporate businesses, who deal with large amounts of cash transactions. This gave banks higher returns per transaction handled.  

Many small income earners therefore resorted to keeping their monies in their houses, in such places as mattresses and holes in their backyards. This type of ‘banking’ did not offer any interest on the amount saved. It was however convenient for the small saver than to have it in an account which costs him more for just holding the money and accessing it between 9.00 am and 3.00 pm only. Even with an ATM card, things are still difficult. In rural areas, ATM machines either lack cash or have technical problems. And let’s not forget that to get to the bank you need to travel to the nearest town.

Economically, saving leads to investment, assuming that everybody saves in the main stream banks.  But where saving is done in mattresses and six feet deep holes in the backyard, the investment bit goes down with it. This makes banks to have less money to lend consequently charging very high interests on the small amount they lend. We then end up with a society that does not invest. It even becomes difficult for the government to control the level of money circulating in the economy. Cash money available becomes scarce and the treasury is forced to print more money, even though there is an eminent risk of increasing inflation.

Lack of banking services that are convenient and give some interest to the principle saved has led many small savers to pyramid schemes. Perpetrators of such schemes are exploiting this loop hole left by the mainstream banks. They come with promises of doubling or even tripling investors’ money. Many small savers easily fall into this trap and deposit their hard earned money to these schemes only to discover when its too late that it was a fraud hence losing their savings. But as long as banks continue with their rich-man way of handling clients, more and more people will be lured into such fraud schemes. This is a wake up call for banks that if they provide and market services to suit the common citizens, more people will be willing to buy their services.

Banking systems in most African countries have clearly left large proportions of the population unbanked. The rural majority have been left with few options on how to save their money. The question that we need to ask ourselves is if this problem is brought about by the negligence of the main stream banks or just a development issue that needs to be addressed by the government.

Some banks, like Equity Bank in Kenya, have already started exploiting this loop hole left by the big banks and have created a niche in small savers who are no-go-zones to mainstream banks. Equity for example, has not only eased the processes of opening an account and accessing a loan, but also segmented their banking services to meet nearly all the needs of  small savers. The most recent initiative is banking that will be exclusively for women. Other banks such as Barclays Bank and Standard Chartered have realized the potential that small savers have and are now developing strategies to harness this niche. They have realized that small savers are the largest in most African countries.

The public ought to be educated on the benefits of saving through the main stream banks. Incentives, such as fixing low interest on loans and the Duplum rule, will enable the borrowers to easily access and service loans. The number of banks too can be increased by reducing the requirement of forming a bank. However, this should be monitored to avoid formation of dubious banks. Cooperatives ought to  be revitalized to address the needs of small savers.

With this in place more banks will move towards servicing the unbanked population. Banks cannot keep on ignoring the fact that a vast majority of the people do not have bank accounts. There are hundreds of millions of people in Africa who are certainly underserved by the financial services sector, but who are economically active and would benefit from access to financial services such as mobile banking. This will increase the level of investment. Thus, the journey towards economic growth and development will be on track.


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