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EFFECT OF AGENCY BANKING ON THE FINANCIAL PERFORMANCE OFCOMMERCIAL BANKS IN KENYA
CHAPTER ONE: INTRODUCTION1.1 Background of the StudyThe agent banking model is one in which banks provide financial services throughnonbank agents, such as grocery stores, retail outlets, post offices, pharmacies, or lotteryoutlets (Alliance for Financial Inclusion, 2012). This model allows banks to expandservices into areas where they do not have sufficient incentive or capacity to establish aformal branch, which is particularly true in rural and poor areas where as a result a highpercentage of people are unbanked. Agent banking is quickly becoming recognized as aviable strategy in many countries for extending formal financial services into poor andrural areas. In recent years, agent banking has been adopted and implemented withvarying degrees of success by a number of developing countries, particularly in LatinAmerica (World Bank, 2010). Brazil is often recognized as a global pioneer in this areasince it was an early adopter of the model and over the years has developed a maturenetwork of agent banks covering more than 99% of the country’s municipalities. Othercountries in Latin America have followed suit, including Mexico (2009), Peru (2005),Colombia (2006), Ecuador (2008), Venezuela (2009), Argentina (2010), and Bolivia(2006). Other countries around the world have also utilized the agent banking model toexpand financial services, including Pakistan, Philippines, Kenya, South Africa, Uganda,and IndiaAccording to the Oxford Policy Management Ltd (2011), many Sub-Saharan Africancountries still face a severe financial development gap relative to not only the advancedeconomies but other peer developing economies. A key obstacle to financial developmentis the lack of financial access among the financially disadvantaged. Financial accesswould certainly promote economic growth at the broadest scale. Kenya is a developingcountry with a total population of 43 million people and has a slightly lower than averageincome inequality amongst developing countries (Adera, 1995).Guideline on Agent Banking in Kenya are issued under Section 33(4) of the Banking Act,which empowers the Central Bank of Kenya (CBK) to issue guidelines to be adhered toby institutions in order to maintain a stable and efficient banking and financial system in1
Kenya (CBK, 2010b). According to the provisions of these guidelines, an agent means anentity that has been contracted by an institution and approved by the Central Bank toprovide the services of the institution on behalf of the institution in the manner specifiedin the Guideline. Agent banking business means the business carried out by an agent onbehalf of an institution with the aim of providing a delivery channel for offering bankingservices in a cost effective manner. The bank enters into an agreement with the agentwhere the agent distributes the services of the bank at an agreed terms and conditions.