Expanding The Mobile Banking Market

It has been quite a long time since mobile banking started in Ethiopia. However, its penetration is still very small considering the potential size of the market. With branch expansion taken as the primary goal of banks to expand their services to people in all corners of the country, mobile and agent banking seem to be in the back burner. However, poor banking infrastructure outside of the capital Addis Ababa seems to have raised the relevance of mobile banking in some regions of the country. EBR’s Kiya Ali looks into the expanding mobile banking market in the country.

Just like the overwhelming majority of Ethiopians, Ruhama Misikir usually pays for her bills in cash. Ruhama had her share of the embarrassing moments that happen when people rely on cash and find out belatedly that they are not carrying their wallets. There were also times when she postponed the payments to pay later or skipped the service when she knew about it earlier. “I will never forget the day I called a taxi hailing service to attend a meeting and found out when I reached my destination that I left my wallet at home. When I reached the destination, I looked for my wallet inside my bag but I couldn’t find it there. It suddenly dawned on me that I left it at home. I was so embarrassed. I couldn’t borrow money from participants of the meeting because I didn’t know any of them. I was there representing my company,” she recalled.

Ruhama was lucky though. The driver believed her and proved to be understanding as he told her such things happen at times; she also said that he told her to give him the money the next day. “But I told him that I would call after the meeting so he could take me back to my home and I settled the payments then,” she told her story.

Despite the lesson Ruhama learned from the incident about using mobile money, she was still reluctant to use the service. Since the Coronavirus pandemic hit Ethiopia, however, Ruhama has switched to mobile money to avert the risk of contracting the virus. “The virus has made it very important to use mobile banking to reduce transactions using paper money and reduce contamination,” Ruhama remarked.

In Ethiopia, E-payment started ten years ago. The progress has, however, been slow. Despite the slow pace of penetration, fundamental and concrete evolutions in the sector have been carried out during that time. M-birr was the first mobile money transfer platform in Ethiopia and it started operation in 2010. During the time when M-birr came to Ethiopia and started investment, the idea of mobile and agent banking were new to the majority of Ethiopians. There was also no legal framework to conduct the business and provide the service. M-birr service providers have paved the way by influencing the understanding of the regulatory body ever since they showed interest to invest in Ethiopia. Then the National Bank of Ethiopia formulated a directive in 2012 to make the working space smooth and expand digital financial services nationally. A new proclamation was also introduced in May, 2020. “This shows that the experiences of M-birr and other agent banking service providers were used as an input for the development of policy instruments since practical experiences are crucial to develop a policy.

Moreover, practical experience is important to evaluate the opportunities and bottlenecks of the new service provision. In this regard, M-birr played a critical role,” explained Desta Bayisa, Deputy CEO of MOSS ICT Consultancy which is a technology provider for M-birr. In addition, during the past ten years businesses have identified the places where the demand for mobile banking is high and they have acted accordingly. Finally, initiatives that target the expansion of financial inclusion also use mobile banking as a method of raising financial service provision in rural areas. “The sector has seen fundamental evolution,” noted Desta. Such changes have challenged approaches of branch expansion as the only means of financial inclusion.

Despite the improvements, the tendency of using mobile banking has not significantly changed in cities like Addis Ababa. Just like Ruhama, an overwhelming majority of the people in major Ethiopian cities still go to banks to withdraw or save money. “Regarding the habit of financial service usage, the behavior of most financial service consumers has not changed. In cities like Addis Ababa, most people still prefer branch based services to mobile banking. This could be considered as an area that needs improvement. A lot of work has to be done to influence the behavior of service consumers by encouraging them use alternative means to get similar services,” Desta remarked.

Some encouraging steps have, however, been seen in some regions. The Somali region is the most notable of such regions as mobile banking is relatively growing fast. The primary factor that contributes to the region’s success is related with heightened awareness about mobile banking. “Our neighbors across the border, Somaliland, do most of their transactions using mobile money. As residents of Somali region have a close interaction with people of Somaliland, they already had the awareness and easily adopted mobile banking when it became available to them,” stated Manager of Somali Microfinance Institute, Kedir Ahmed. He also noted that absence of enough financial institutional infrastructure is another factor for the quick adoption of mobile banking by residents of the region. Since there was high demand for financial services in the face of very few financial institutions in the region, agent and mobile banking services were considered as a remedy for residents.

Currently, as much as ETB100 million is transacted and 80,000 transactions are conducted every day via Somalia microfinance institution’s mobile banking. “This number is small compared to the demand. But as the directive by the National Bank of Ethiopia (NBE) limits the maximum amount of money transacted per day to ETB6,000, the aggregate amount of transactions per day is limited to 85,000 and 100,000,” Kedir noted.

However, there are still challenges. Infrastructure like mobile network, road and electricity remain major bottlenecks. These factors affect the liquidity management of Somali Microfinance agents as they find it hard to get cash and electronic fund easily. Digital literacy is another challenge. “For instance, with the help of Hello Cash technology and mobile banking, users can access diversified services such as buying telephone airtime, paying electricity bill, cash in and cash out, buying airplane tickets, purchasing goods and services, checking account balance, studying recent transactions and many more. Because of digital literacy problems though, most of the people use mobile banking for a few specific services only,” said kedir. The other problem related with digital literacy is the vulnerability of mobile banking users to fraud. “Sometimes users ask agents to enter the PIN code for them. But we are working to empower our customers and create awareness on digital security issues to protect the security of our clients,” Kedir elucidated.

16 private and 2 state owned banks are found in Ethiopia. In the 2018/19 fiscal year alone, these Commercial banks opened 807 new branches which increased the total number of branches to 5,564 from 4,757 a year ago and increased their deposit mobilization by 23.2Pct, according to an annual report by the NBE. This number is still not enough for a country of 110 million people. This could be one of the reasons for 75Pct of the Ethiopian population being unbanked. Moreover, nearly 40Pct of all bank branches are found in the capital city, Addis Ababa. As there are only a few financial institutions in the countryside, therefore, mobile and agent banking services are a real benefit for the rural population.

Mobile banking agents close the gap of limited available financial institutions in rural parts of the country by accepting cash deposits or paying out cash that the user has stored on their mobile phone. In this regard, M-birr and Hello Cash agents are cases in point. Somali Microfinance has 37 branches and 1,600 agents that provide mobile banking services using Hello Cash technology. The latest figures show that M-birr, a company that now has 76 permanent employees and 52 temporary workers plus 531 sales representatives on a commission basis, has around 1.2 million registered users. Up to ETB1.8 billion is transferred via the platform each month as of October 2018. This shows the importance of mobile and agent banking services to speed up the financial inclusion of the country. The main reason behind this reality is that unlike branch expansion, which requires huge sum of money, mobile banking is cost effective and financial institutions could offer the service at less cost to their customers.

In addition, one of the main benefits of mobile banking is the convenience of having banking services at hand. Users don’t have to go to a bank or ATM to access their money as they can access it using their mobile phones. With mobile banking, the user can transfer funds from their bank account to another bank account using a smartphone just with the help of the internet or USSD. As mobile banking is easy and readily available for 24 hours, it is a convenient mode for many mobile users in rural areas as well as in cities.

Despite its multidimensional benefits, mobile banking has not been as successful in Ethiopia as M-Pesa has been in Kenya. Abraham Tilahun, acting deputy President of retail banking at Lion Bank, argued M-Pesa being a telecom led mobile money platform contributes to its success. “Unlike M-Pesa, mobile banking technologies in Ethiopia have bank led mode,” Abraham argued. However, the rise of mobile phone subscriptions in the country to over 53 million shows that it has a potential that has not yet been exploited.

Other industry insiders consider absence of national ID as a bottleneck that hinders the development of the financial sector in Ethiopia. “Absence of national ID has played its own negative role in the advancement of financial services. However, there are many alternatives to perform something. Therefore, financial institutions as well as technology firms should come up with innovative solutions,” Desta argued.

On the other hand, digital and financial literacy, underperformance of financial institutions on expanding digital financial services and limited value propositions in the 2012 NBE mobile and agent banking directive contributed to the limited success of mobile banking services in Ethiopia, according to Abraham Tilahun, Lion bank’s Acting CEO of retail banking. “The revised directive released in May, 2020 allowed financial technology companies to be service providers for mobile and other digital financial services. This is a big step forward to advance the sector,” he revealed. “Furthermore, the possibility of using super-agents, the inclusion of microcredit and the permission of inward international remittance in the new directive is a new value proposition that has the potential to attract more customers” he added.

The new directive, Licensing and Authorization of Payment Instrument Issuers Directive No. ONPS/01/2020, states that based on written approval of the National Bank, a Iicensed payment instrument issuer under full responsibility of and written outsourcing agreement with a regulated financial institution and pension funds may be allowed to provide micro-saving, micro-insurance and pension products. It also states that based on requests made and written approval of the National Bank, a payment instrument issuer may be allowed to provide services such as cash-in and cash-out, local money transfers including domestic remittances, load to card or bank account, transfer to card or bank account, domestic payments including purchase from physical merchants, bill payments over-the-counter transactions and inward international remittances.

As per the new directive, one of the requirements for authorization and licensing for agent banking service provision is to have a minimum paid-up capital of ETB50 million. The money will be contributed in cash and the amount will be deposited in a blocked account with a bank in the name of the applicant payment instrument issuer. No person, other than the government, may hold more than 20Pct of the shares of a Iicensed payment instrument issuer. In addition, a company other than a government enterprise will have a minimum of 10 shareholders. “Compared to conventional banking, the amount required to get involved in agent banking service is less expensive. This will promote private sector investment and help create more job opportunities in the financial sector,” Abraham remarked. However, Abraham contends the fact that ethio telecom started to charge banks a higher price whenever their clients use USSD will affect the growth of banks.

The new directive has also introduced the tiered know your customer (KYC) concept. Accordingly, customers will have three types of account. Level 1 account holders are allowed to have a maximum account balance of ETB5,000, an aggregate daily transaction limit of ETB1,000 and an aggregate monthly transaction limit of ETB10,000. Level 2 account holders will be subjected to a maximum account balance of ETB20,000, an aggregate daily transaction limit of ETB5,000 and an aggregate monthly transaction limit of ETB40,000. Level 3 accounts holders, on the other hand, are able to hold up to ETB30,000, transact ETB8,000 daily and ETB60,000 monthly. Moreover, the new directive removes the past requirements of providing paper based receipts for cash in and cash out transactions and allows electronic receipts to confirm transactions.

Abraham considers the revised directive as a big step that will push financial institutions forward. He, however, sees a room for improvement. “Within the past seven years, the purchasing power of the birr has depreciated significantly. But the amount of daily transaction has been improved by only ETB2,000 from the previous amount of ETB6,000. Overall, the new directive is expected to be a game changer. Its success, however, depends on its proper implementation by all stockholders. If financial institutions and financial technology firms can take advantage of the new directive, they can benefit from the market of over 100 million customers,” Abraham concluded.EBR

9th Year • August 1 – 15 2020 • No. 89