Difficult economic situation leads to a decline in correspondent banking transactions dominated by SMEs

Transaction volumes at bank agents fell and cash deposits dropped by almost 10 per cent, a new report shows, in a sign of the tough economic times that have loomed over much of the year.

Latest Banking Regulatory Annual Report Central Government Report 2023 The Bank of Kenya (CBK) has shown a decline in cash deposits, withdrawals and funds transfer transactions through correspondent banks.

The only transaction to achieve positive growth was payments of pensions and social benefits, which increased by 42.1%.

Although the number of agent banking outlets increased by 5.7% in 2023 compared to 2022, transaction volume and amount still declined.

While CBK noted in its report that the drop in transactions was partly due to an increase in mobile transactions, it also cited the difficult economic situation.

Agent banking is the practice whereby micro, small and medium enterprises (MSMEs) such as hardware stores, grocery stores, drug stores or petrol stations obtain authorisation from commercial banks or microfinance banks (MFBs) to carry out specific banking activities on their behalf.

These MSMEs, which earn commissions based on the transactions they process, are key to increasing financial inclusion, especially in areas without a physical bank presence, while also reducing foot traffic at bank branches.

The report showed that the number of transactions fell from 158.4 million to 145.3 million. In percentage terms, the biggest decline was in mini statement requests, which fell by 35%, followed by bill payments, which fell by 25%, and transfers, which fell by 19.8%.

The number of cash withdrawal transactions fell from 43.7 million to 39.1 million, while the number of cash deposits decreased from 74.5 million in 2022 to 69.4 million in 2023.

“The decline in total transaction volume is mainly due to Decreased trading volume “Fees associated with cash deposits, cash withdrawals and bill payments declined. The decline was due to increased use of mobile money and internet banking,” the report read.

According to the report, cash deposits fell by 9.6% to Sh1.4 trillion in 2023 from Sh1.5 trillion in 2022. Cash withdrawals also decreased by 11.4% from Sh295.4 billion to Sh261.8 billion.

Bill payments also fell. This shows that Kenyans face challenges in paying their utility bills due to lower revenues, partly due to higher taxes, with the amount falling by Sh5.4 billion. This is a decrease of 16.9%.

Social Benefits

Fund transfers also decreased during the period, falling by 14.2 per cent from Sh804 million to Sh690 million.

However, pension and social welfare expenditure increased from Sh7.9 billion to Sh11.3 billion. “The unfavourable business and economic environment was affected by factors such as high operating costs, rising interest rates and the depreciation of the shilling,” the report said. “Other factors included the adverse impact of climate change and geopolitical tensions.”

President William Ruto’s first finance bill came into effect in July 2023, which saw the value-added tax (VAT) on fuel increase from 8% to the current 16%, which actually rippled through other sectors, causing the cost of doing business and the cost of goods to soar.

The bill also provides for an affordable housing tax of 1.5% of gross income. This, coupled with the coming into force of the National Social Security Fund Act 2013, which increased contributions from Sh200 to Sh1,080, has significantly reduced the disposable income of most Kenyans.

While inflation has fallen from a high of 9.1% in December 2022, the Kenyan shilling was also volatile at the time, trading near 170 shillings to the dollar.

The central bank’s Monetary Policy Committee (MPC) raised interest rates for 2023 from 8.75% in January 2023, with the rate set to end the year at 12.5%, due to runaway inflation.

The current interest rate is 13%. As credit costs rise, cash flow for businesses and individuals decreases, and profits shrink as a result.

The report said the value of banking transactions conducted through correspondents fell to Sh1.7 trillion in December 2023 from Sh1.8 trillion in December 2023.

“this The decline is attributed to “This decrease was mainly due to the increased use of mobile money and internet banking,” the report added.

Although the number of agents involved in transactions increased by 4,811, reaching a total of 87,531 by 2023, the number of transactions and transaction values ​​still declined.

As of December 2023, the CBK report showed that commercial banks recorded 82,780 banking agents, while there were 921 MFB agents.

“Commercial banking agents increased by 4,409 (5.6 per cent), while MFB agents decreased by 277 (25.1 per cent),” the report said.

It added that more than 90 percent of approved banking agents are concentrated in three banks with the largest physical branches, namely: Equity Bank with 40,211 agents, KCB Bank Kenya with 24,055 agents and Cooperative Bank of Kenya with 15,519 agents.

“For microfinance banks, on the other hand, more than 90 percent of the agents are contracted by the two largest microfinance banks – Kenya Women Microfinance Bank Limited (127 agents) and Faulu Microfinance Bank Limited (409 agents),” the report said.