Banking on IT

Published on 10th May 2005

Sunny Bindra, in his article ‘India’s slow trek to an economic powerhouse’ was nostalgic about his school days when Kenya’s economy was at par with India’s.  Since then, a lot has changed and there nothing much to write home about in Kenya.


Today, it is evident that India’s economy has by all means bypassed Kenya and many other thriving economies.  As a matter of fact, Goldman Sachs, a leading Investment Bank, predicts that India will be the third largest economy in the world by 2050 after China and the United States.


One undeniable fact, and yet a hard reality for other Third World countries, is the rate at which India has harnessed Information Technology (IT), making it not only an exporter of IT personnel but a leader in software solutions. India’s software today has dominated the banking industry among small and big players alike.


It is no exaggeration to say that core systems can make or break a bank. They impact on every link in the value chain, affecting costs of service, the products a bank can offer, competitive flexibility, and the degree of responsiveness to changing customer demands, even a bank\'s ability to respond at all.

Yet, like drivers who can afford new cars but continue to drive jalopies, a lot of financial institutions still operate systems based on mainframe technology that was state-of-the-art in the 1960s and 1970s, but now obsolete in an increasingly technology-savvy world. Why do so many otherwise sophisticated banks allow their competitiveness to rest on the durability of antique core systems?

Unlike India and other global leaders, Information Technology development in the banking industry in most African countries could only be described as pathetic.  It wasn’t until lately when some banks started setting the pace. For most of them long and winding queues is the true symbol of a banking culture and the more the staff, the better the public image.  This has done no less than frustrate many clients who have ended up transferring their funds to other larger banks.

While it is clear that the multinational banks set the pace for ATM use in Kenya, the trend is slowly picking up momentum among indigenous ones.  One would, however, argue that the ATM era is still not mature in Kenya, as in many Africa countries, compared to First World nations where the machines are no hype at all since Internet banking has already taken center stage.


It is not until recently that many banks introduced the “ATM for all” sort of campaign.  Smaller banks later got into the frenzy but even before they realized it, the larger banks had already cranked out newer strategies like the all-inclusive ATM/debit card. Concurrently, banks’ IT systems have been integrated to enable inter-branch activity.


Three market leaders in ATM growth are the Kenya Commercial Bank, Standard Chartered Bank and National Industrial Credit (NIC) Bank). Smaller banks are now feeling the heat and they, too, are striving to stay on the competitive edge, which is long overdue.


Most banks have had to recruit many staffers just because they have not integrated IT into their operations.  There is the fear by most banks on how much human labor IT can replace. The argument is two sided as service delivery is enhanced but, on the other side, personal attention is not given priority.


Take the example of a large and small bank.  The larger one, fully Kenyan-owned has seen the growth of 15 new branches in the past one-year, all concentrated in two major towns - Nairobi and Mombasa.  The smaller bank has in the past one year experienced the growth of 17 new branches. In the former, staff numbers have increased from 256 to 257, whereas the latter’s employees have increased from less than 150 to 407. Which one, economically speaking, has achieved long-term efficiency?  It is not hard to guess whether it is the one with high expenses due to staff costs or that with very low operating expenses.


What we are experiencing today are clients who are not excited by staff numbers but an obsession with IT.  This is what would explain the increased client-base at NIC after the introduction of the MOVE account.  That explains why everyone moved to the Standard Chartered Bank after the introduction of the all-in-one tariff.  Perhaps for the unwired, the only solution for now is to embrace IT and keep pace in order so as to stay competitive.


It’s not only in the ATM technology that banks have harnessed the technological advantage but also in financial reporting.  Banks have sought newer financial reporting software to ensure books are in agreement with the International Financial Reporting Standards (IFRS). For some, investing over $2.6 million (Kshs200 million) on IT is a worthy cause as the benefits are always forthcoming.


With the pace at which IT is changing, however, some systems have been left redundant due to the development of new systems and models with a higher degree of efficiency. More and more banks have switched from Dos-based operating systems to Windows-based operating systems. IT in banking is arguably changing faster than in any other industry.


Efforts are being made by other players to get the industry fully covered. The latest innovation is by the World Bank, which introduced a financial reporting system through the Consultative Group to Assist the Poor (CGAP). The software, called The MicroFin Mix, enables many smaller banks to present their financial reports and make up to 10 year growth projections.


One advantage of this software is its ease of use since it is Excel-based. The only limiting factor, though, is that it cannot be relied on independently since the statutory requirements also demand another differently presented report.  In addition, it may end up not being comprehensive, as banks that were previously group lenders have switched to individual borrowers in order to remain competitive.


This system is mostly popular in South America and Asia, but it is slowly picking up in Africa. This year, it awarded 40 banks for good financial reporting standards. Out of the 40 banks and Micro-Finance Institutions (MFIs) globally, four are in Africa, with three being from Kenya (K-rep Bank), Uganda (Pride Kenya) and Zambia.


With all the innovations, the regulation mechanism has failed many because unlike the industry’s innovation, the Central Bank still relies on old reporting system that has been in use since 2000. The Software Bank Returns forces many banks to go through long exercises as they re-present what has already been presented to a Central Bank friendly system. This may not be so much in bad taste but some innovation and change is vital.


The argument that the skilled don’t come easily in Africa doesn’t carry water at all. Skilled people are already there, only that they are slow to change or are averse to risk.  This is slowly changing as we witness the likes of new entrants like the PayNet and PesaPoint. Just like KenSwitch, PesaPoint is an inter-bank ATM service that plans to roll out operations to all - from the cattle herders in Isiolo to the Miraa (khat) growers in Nyambene, from the fishermen in Lake Victoria to the sisal farmers of Voi.


The National Bank of Kenya has also become the first to introduce SMS banking in the country and more are set to follow. As trends clearly show, Internet banking may not stay for long since, just like the Internet, speed is required. Banks need to adopt best practices from other global leaders.  In addition, more and more players will be vital to fasten service delivery. The speedy recovery in India of course happened because there were people who were ready to burn the midnight oil thinking. Is Africa ready for this?


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