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1.1 Background of the Study
The National Financial Access Survey of 2009 shows that 32% of Kenya's bankable
population remains totally outside the orbit of financial services and many more being served
by the informal financial system (CBK, 2009).

The Finance Bill, 2009 sought to introduce agent banking in which institutions would be
allowed to conduct banking business through third party agents duly approved by the Central
Bank. The Central Bank would be required to prescribe the manner of carrying out agent
banking business. In p r e p a r a t i o n for the new model of conducting banking business, Bank
Supervision Department carried out preparatory work with regard to the formulation of
guidelines to guide agent banking. This entailed review of the knowledge base on agent
banking, commissioning of a preliminary study in conjunction with the Financial Sector
Deepening Trust (FSD) to provide broad policy guidance on implementation of agent
banking in Kenya and undertaking a knowledge exchange tour of Brazil and Columbia in
October 2009 facilitated by the Alliance for Financial Inclusion to get practical insights
on agent banking (CBK, 2009).

Agent-banking is an arrangement by which licensed institutions engage third parties to offer

certain banking services on their behalf. In Kenya, agency banking is governed by the Prudential
Guideline on Agent Banking issued by the Central Bank of Kenya (CBK) and which became
operational on 1st May 2010. In February 2011, the Central Bank of Kenya released regulations

allowing banks to offer services through third party agents approved by the CBK. The use of the
agency banking model by banks has continued to improve access of banking services since its
launch in 2010. As at 30th June 2013, CBK had authorized 13 commercial banks to offer
banking services through third parties (agents). Since 2010, a total of 19,649 agents had been
contracted facilitating over 58.6 million transactions valued at Kes. 310.5 billion. The increased
number and value of transactions demonstrate the increased role of agent banking in promoting
financial initiatives being championed by the Central Bank. (CBK, 2013) The agency banking
model is still in its infancy, having started in February, 2011. Comparing the 2011 and 2012
performances, tremendous growth has been evidenced in agency banking conducted by
Commercial Banks. Agency banking largely offers a variant of M-Pesa with the main exception
being that agency services are supported by bank accounts. For example, the Co-op Kwa Jirani
agency platform by Cooperative Bank offers cash deposits and withdrawals, money transfers,
fees and utility payments, balance inquiries and mini statements. More banks now also offer a
direct connection from bank accounts to M-PESA, allowing customers to transfer funds between
both. According to a survey on agency banking carried out by Kenya Bankers Association
(KBA, 2012) for its Center for Research on Financial Markets and Policy, 40.9% of agents
operations are cash deposits while 36% are withdrawals. The survey also revealed that
customers are asking for additional services not on offer, including ATM cards,
recommendations for loans and advice on various bank products on offer. While these would
offer a distinction from services offered by telcos mobile money services, they require more
expertise than agents have, and closer supervision than they can be given. The survey also found
that 91% of respondents will use an agency outlet because they trust the bank compared rather
than the agent. Banks with positive images and long, stable operations are favored. Agents use

point-of-sale (POS) devices and/or mobile phones and must have access to the banks core
banking system so that the clients transactions are reflected in real time. In the same report cited
above, CBK notes that various banks have already invested in new core banking systems. The
new systems are expected to facilitate centralization of operations, staff rationalization and
support new technological products such as internet and mobile banking.

1.2 Statement of the Problem

Agency banking has made an important contribution to enhancing financial inclusion by
reaching people that traditional, branch-based structures would have been unable to reach.
However there still exist some factors that have constrained the widespread adoption and success
of agency banking. It is in the light of this prospect that the researcher sought to investigate the
specific factors that affect agency banking in Kenya.
1.3 Purpose of The Study
The purpose of this study is to investigate the factors that affect agency banking which is
expected to play a pivotal role in mobilizing

the substantial resources required to f i n a n c e

the e n v i s a g e d flagship p r oj e c t s for Vision 2030.

1.4 Research objectives.
The study addressed itself to the following objectives;

General Objective

To establish the factors that affect agency banking


Specific objectives

1. To establish the effects of system availability on the operations of agent banking agents.
2. To assess how agenc y float affects the operations of agent banking agents.

3. To establish the extent to which agents core business affects operations of agent banking
4. To establish the extent to user perception affects the operations of agent banking
1.5 Research Questions
1. How does system availability affect the operations of agent banking agents?
2. How does agency float affect the operations of agent banking agents?
3. To what extent does agents core business affect the operations of agent banking
4. How does user perception affect the operations of agent banking agents?
1.6 Significance of the Study
The study will be useful to the policy makers and government
rules and regulation

to design proper

to govern the service to avoid abuse and exploitation of the end

users of the service. Understanding

the factors that affect the operations

of agent

banking agents who are special category of the users who will be crucial in setting
up policy framework for the agent banking service regulation.
1.7 Limitations of the study
The study will be constrained by use of questionnaire which do not offer the researchers the
opportunity to follow up ideas used to clarify issues. Also fixed choice questionnaires generally
assume an unstated general knowledge of the topic being investigated, and force the respondent
to answer questions that he/she might be ignorant of, have a different understanding based on
personal perception or which are influenced by exogenous features such as education, culture or
societal status. However the researcher will simplify the questions to the best of his ability. Also

there exists a dearth of literature review in studies on agency banking since it is a fairly recent
groups. All these developments have led to an increased focus of banks on selling products, with
possible consequences on banks traditional information-intensive intermediation activity.

2.1 Introduction
This chapter will provide the reader with important facts, theories and models in order to
increase the understanding of the area under investigation. The chapter will also identify what
other authors have found out in the area of agency banking.
2.2 History of Agency Banking
Pioneering banks, microfinance institutions, and mobile operators started to experiment with
banking agent networks in various countries around the world such as Brazil, Peru, Colombia,
Kenya, Mexico, Pakistan, the Philippines, and South Africa (AFI, 2010).
Brazil is probably the most developed market where banking agents have significantly








managing around 105,000 points of sale in Brazil that reach all 5,561 municipalities. Within
only 5 years, the banking agent network facilitated 12.4 million new bank accounts and today
the network comprises 56 percent of all points of sale in the Brazilian financial system.
Financial institutions in other Latin-American markets such as Peru, Colombia, and Mexico
have started to learn from the Brazilian experience, adjusted their regulation, and established
their own banking agent networks.
The Kenya Banking sector has demonstrated a solid growth over the past few years. The industry
continues to offer significant profit opportunities for the major participants. Kenya has attracted
worldwide acclaim by expanding financial services to millions of poor households via mobile
phones (Standage, 2009). Other channel of marketing and distribution that the banks are utilizing

is the agent banking. Agent means an entity that has been contracted by an institution and
approved by the Central Bank to provide the services of the institution on behalf of the institution
(Central Bank of Kenya, 2012). Agent banking business means the business carried out by an
agent on behalf of an institution.
The expansion of a new branch network abroad remains unattractive for financial reasons
(fixed costs), because of existing overcapacities as well as due to new sale technologies (The
Economist, 1998; Ackermann, 1998 and Haberer, 1993). The Kenya Banking sector has
experienced three main developments in the distribution strategies of banks favoured by the
adoption of the new technologies. First, branches are being redesigned in terms of location and
services offered to clients in order to make them more cost-efficient and to integrate them with
the new distribution channels used by banks. Second, electronic channels are growing rapidly,
and these channels are used not only for providing information and transaction services, but
also for the promotion and sale of banking products. Third, banks are gradually increasing their
cooperation with third parties, such as retailers, financial companies and financial
2.2 Theories
2.2.1 Diffusion of Innovations Theory
Diffusion of Innovation (DOI) Theory, developed by E.M. Rogers in 1962, is one of the oldest
social science theories. It originated in communication to explain how, over time, an idea or
product gains momentum and diffuses (or spreads) through a specific population or social
system. Researchers have found that people who adopt an innovation early have different
characteristics than people who adopt an innovation later. When promoting an innovation to a
target population, it is important to understand the characteristics of the target population that

will help or hinder adoption of the innovation. There are five established categories of adopters,
and while the majority of the general population tends to fall in the middle categories, it is still
necessary to understand the characteristics of the target population. When promoting an
innovation, there are different strategies used to appeal to the different adopter categories.
Innovators - These are people who want to be the first to try the innovation. They are
venturesome and interested in new ideas. These people are very willing to take risks, and are
often the first to develop new ideas. Very little, if anything, needs to be done to appeal to this
population. Early Adopters - These are people who represent opinion leaders. They enjoy
leadership roles, and embrace change opportunities. They are already aware of the need to
change and so are very comfortable adopting new ideas. Strategies to appeal to this population
include how-to manuals and information sheets on implementation. They do not need
information to convince them to change. Early Majority - These people are rarely leaders, but
they do adopt new ideas before the average person. That said, they typically need to see evidence
that the innovation works before they are willing to adopt it. Strategies to appeal to this
population include success stories and evidence of the innovation's effectiveness. Late Majority These people are skeptical of change, and will only adopt an innovation after it has been tried by
the majority. Strategies to appeal to this population include information on how many other
people have tried the innovation and have adopted it successfully. Laggards - These people are
bound by tradition and very conservative. They are very skeptical of change and are the hardest
group to bring on board. Strategies to appeal to this population include statistics, fear appeals,
and pressure from people in the other adopter groups.

2.2.2 Agency theory

Explains the relationship between principal and agent in business. Agency theory is concerned
with resolving problems that can exist in agency relationships; that is, between principals and
agents of the principals. The two problems that agency theory addresses are: (1) The problems
that arise when the desires or goals of the principal and agent are in conflict, and the principal is
unable to verify what the agent is actually doing; and (2) The problems that arise when the
principal and agent have different attitudes towards risk. Because of different risk tolerances, the
principal and agent may each be inclined to take different actions. The first scholars to propose,
explicitly, that a theory of agency be created, and to actually begin its creation, were Stephen
Ross and Barry Mitnick in the early, 1970s. Research on agency theory has had several findings.
Most notably, an agent is more likely to adopt the goals of the principal, and therefore behave in
the interest of the principal, when the contract is outcome-based. Also, when the agent is aware
of a mechanism in place that allows the principal to verify the behavior of the agent, he is more
likely to comply with the goals of the principal.
2.3 Empirical Review
Bank agents help financial institutions to divert existing customer from crowded branches
providing a complementary often more convenient channel of accessing bank services.
Financial institutions in developing markets reach an additional client segment or geography.
Reaching poor clients in rural areas is often prohibitively expensive for financial institutions
since transaction numbers and volumes do not cover the cost of a branch. In such environments
banking agents that piggy bank on existing retail infrastructure and lower set up and running cost
can play a vital role in offering many low income people their first time access to a range of

financial services. Also low income clients often feel more comfortable banking at their local
store than walking into a mobile branch (Adiera, 1995).
(Mass and Siedek, 2009) argue that depending on regulations, agents can be used to open new
accounts (Sign up customers and conducting customer due diligence), or to conduct customers
cash transactions (to deposit into and withdraw from an account or to make or receive
payments).Given the findings that most branchless banking customers do not build sizable
deposit balances, most customer transactions do not in fact entail a cash transaction. Many banks
that want to enter into branchless banking have partnered with businesses that have many local
outlets so that they can jump-start the agency networks, including mobile operators, post office,
and major retail chains.
2.4.1 System Availability
Agency banking success will largely depend on reliability. One of the major measurements of
reliability is the system availability. By its very nature the ICT phenomenon is relatively new in
the developing world. Available data, suggest that the majority of developing countries such as
Kenya in sub-Saharan Africa are lagging behind in the information revolution (Zhao and Frank,
2003). The system being the only connectivity between the customer and the bank will determine
whether a customer request is frustrated or satisfied at the agent location. System safety and
malfunction can frustrate the agent reconciliation or even facilitate fraud against the bank,
customer or the agent.
2.4.2 Agent Float
This is the cash at hand and bank balances set aside by the agent for agent banking operations.
According to CGAP. (2011). The top concerns among agents are low remuneration, liquidity
management and network availability. The operation of the agency is such that a customer


deposit at the agent means customer giving cash to the agent and is accounted by the bank by
debiting the agent account at bank and crediting the customers account at the bank . It is
therefore not possible for an agent to receive a deposit unless the agent has sufficient credit in the
bank. A customer withdrawal at the agent means the agent gives cash to the customer and the
bank accounts by debiting the customers bank account and crediting the agents account at the
bank. An agent then can only pay out a withdrawal if they have cash in their till at the shop. This
means the agent has to have both cash in the bank and cash in till. This is a key challenge to
banks as most agents are not able to balance the cash holding or have inadequate capital. For
some reason banks have not been able to convince some businesses like large retail chains which
could be ideal for agency banking. Some of the reasons given are the inability of the banks to
provide reconciliation mechanism which has led to the chains loosing cash. The situation of float
is even worse for remote agents who have to travel to the banks to replenish their deposits when
balances run low. Erratic nature of finance services daily cash limits are also to be considered as
part of anti- money laundering initiative by CBK, agents cannot transact above certain limit.
Hitting this limit means the agent can only close for the day unless they have applied for higher
limits. In Brazil many agents complain about downtime POS frozen by bank once cash limit
reached, pending deposit of cash at branch, but often with a lag until POS is unfrozen
2.4.3 Agents Type of Core Business
The type of agent business is critical in number of ways. First the nature of business determines
the hours of business. For example retail shops, supermarkets and hotels are known to open 365
day a year, they open early and close late. Chemists are known to open late in the day but extend
late in the night. Majority of other businesses like the hard-ware shops open between 08.00hrs


and 18.00 hrs. The more formal businesses like the SACCOs and microfinance have similar
hours of business to those of banks and remain closed for businesses on weekends and public
2.4.4 User Perception Factors
These refer to social issues, such as acceptance of mobile devices and cultural fit with wireless
applications, as primary considerations for the wireless market. Perceived risk, cost,
compatibility (degree to which the innovation is consistent with users' existing values,
previous experiences and needs) and perceived usefulness of a wireless application all
affecting behavior intention (Mberia, 2009).


2.5. Conceptualization



Operations of





Dependent variable

Independent variable
Fig I Conceptual Framework
Source: Author (2014).

3.0 Introduction










measurement and analysis, target population, sampling techniques and data analysis methods
3.1 Research design
This study will adopted a descriptive research design which will be conducted in Kerugoya
town. Mugenda and Mugenda (2003) suggest that a descriptive study can be used to explain or
explore status of two or more variables at a given point in time. The major purpose of
descriptive design is a description of the state of affairs as it exists at present.
3.2 Target population
The target population will be all agents of Equity bank of Kenya, Kenya Commercial Bank
and Co-operative Bank of Kenya operating in Kerugoya town.
3.3 Data Collection
Since the target population is small, the researcher will study the entire population. The study
will administer questionnaires to capture the required data. The choice of questionnaire was
arrived at because of questions are standardized; anonymity is possible and ease of
administration. The drop and pick method will be used to provide adequate time to respondents.
The researcher will take appropriate measures to ensure content validity of the questionnaire.
Essentially, validity should be concerned with establishing whether the questionnaire content is
measuring what it is supported to measure.


3.4 Data Collection T e c h n i q u e s

The researcher will collect primary data through field research. An introductory letter from
Kenya Methodist University will be obtained to enable researcher to administer questionnaires
to the target respondents who are agency banking agents, located in the Kerugoya town.
3.5 Data Analysis
The data from the field will be analyzed using both qualitative and quantitative techniques.
Before the actual data analysis, the gathered data will be validated, edited and then coded.
The coded data was entered into the computer software; statistical package for social sciences.
Descriptive statistics such as percentages, frequencies and standard deviations will used to
analyze data. The research findings will be presented using frequency tables, percentages,
cross tabulation, pie charts and bar graphs.


Ackermann, J (1998). Intense competition for customers and capital, in: Neue Zricher Zeitung,
Alliance Finance Institute. (2010). Date retrieved 20th Oct 2010, Agents Banking
Basics.Available on Group press release by
Alliance Finance Institute.


%2BANKING CBK%20PG%2015.pdf

CBK (2011), Annual report. Retrieved on 17th February, 2012 from Central bank aspx.
CBK. (2013) Developments in the kenyan banking sector for the quarters ended 31st Mar, 30th
and 30th Sep 2013[Online] from; banking-sector-reports [ 10th Nov 2014]

.(2010). Focus Note: Regulating Branchless Banking agents.[Online]

/agentnetworksinbrazilcgapfgv1_7.pdf 1934[ 15th Sep 2014]

CGAP. (2011), Agent management toolkit:Building a Viable Network of Branchless Banking

Agents. [Online] Accessed from; Management-Toolkit-Building-a-Viable-Network-of-BranchlessBanking-Agents-Feb-2011.pdf [ 23rd Oct 2014]
Mas I and Siedek. H. (2009) Banking Through Networks of Agencys.Focus Note47.
Washington, D.C: CGAP.
Mberia, P M. (2009). Factors affecting the operations of m-payment agents in Kenya.
Unpublished master's thesis Kenyatta University, Nairobi Kenya.
Mugenda, A. G. and Mugenda, o. M.(2003). Research Methods, Quantitative andm
Qualitative Approaches. African Centre for Technology Studies, Nairobi.
Zhao, Y. Frank, K. (2003) Factors affecting technology use in schools: An ecological perspective.
American Educational Research
[Accessed 3rd Nov 2014]


Dear respondent
This questionnaire is designed to gather information on the factors affecting the operations of
agency banking. You are requested to participate in this study by filling in this questionnaire. You
are advised that the information you give will be used for the purpose of this study and will be
treated with utmost confidentiality. Respond to all items according to the instructions provided.
Section A: Personal data
1. What is your age?
21 25 years

26 30 years

31 35 years

36 40 years

41 45 years

46 50 years

50 and above

2. What is your academic qualifications?

Primary education

Secondary education [


University education [

Others (specify) ________________________________

1. Name the connectivity technology used

Point of Sale machines (POS)

Mobile phone

How often do you experience system down time?






2. To what extent does system down time affect commissions earned?

Very high




3. Which is your core-business?

4. Indicate hours of business on various days;

Weekdays: .
Saturdays: ..
Holidays: ...
5. Are you convinced that the daily transaction limits are adequate for your current levels of
Highly convinced

Moderately convinced

Not convinced

6. Do the deposits and withdrawals match?


7. How is the pattern of nature of transactions on a day to day basis?



8. Rate the level of acceptance of mobile devices by your customers

Very high





9. To what extent do they perceive agency banking riskiness

Very high




10. How do the customers perceive the cost of agency banking?

Very high




11. How do the customers rate the security of agency banking

Very high




12. Apart from the factors discussed a b o v e , what other factors affect your operation as
banking agent?


13. What recommendations would you make to aid in addressing t h e various barriers and
challenges facing the agent banking in this country?