Banking on Wheels in Ethiopia: Mobile Branches Parked Awaiting Regulatory Catch-up

Banking on wheels has been developing for decades worldwide, while Ethiopian financial institutions are just coming to terms with the need for it. Yet, the National Bank of Ethiopia says it's not ready to regulate such services.

Banking on Wheels is an innovative concept that involves the use of mobile bank branches that can move from one location to another, typically providing banking services to groups that wouldn’t have access to brick-and-mortar branches. 

This model has developed over the years and has proven to be an effective way of expanding financial services to the unbanked and underbanked population. Even in developed markets such as the US, traditional banks use movable branches to reach out to underserved communities.

Origin and Development

The earliest example of banking on wheels can be traced back to the 19th century when traveling banks or “banking wagons” were used in rural areas in different parts of the world to provide banking services to farmers and other rural residents. These wagons were equipped with safety deposit boxes, teller windows, and cash drawers, and they traveled to various rural areas to offer banking services.

In the early 20th century, banking on wheels became more common, with many banks and credit unions using mobile branches to reach customers in remote areas. These mobile branches were typically trucks or trailers with teller windows, ATMs, and other banking equipment.

For instance, in the 1940s, BNZ, a commercial bank based in New Zealand, launched the country’s first mobile bank in a caravan to meet the needs of servicemen during the second world war.

From the 1950s to the 1980s, it became increasingly popular and more advanced with the introduction of ATMs and other self-service banking equipment.

In the early 2000s, many banks in Asia and Africa began to invest in movable banking services. It was a realization of the need for the banks to be innovative to address the needs of unbanked people. OIBM, a commercial bank in Malawi, launched mobile branch services in 2007. Similarly, South Canara District Central Cooperative Bank introduced banking on wheels in 2007 in India.

Today, Banking on Wheels is still used by many financial institutions to reach customers in remote areas or provide services during events or emergencies. Some banks also use mobile branches as a way to test new markets or to expand their customer base.

 Benefits

Banking on wheels is a preferred model to expand banking services as it offers accessibility, cost-effectiveness, and convenience. By bringing traditional bank branches to underserved communities, this approach can reach people who otherwise wouldn’t have access to banking services while also allowing the service provider to leverage its access to new customers.

Unlike traditional branches, it is cost-effective since it uses mobile units that can move from one location to another. However, efficiency can vary greatly depending on factors like the type of vehicle used, the locations of operation, and the tools employed. Additionally, mobile branches are convenient since they bring banking services closer to customers, reducing the time and resources required to travel to conventional branches.

Cost-benefit Analysis

Office rent, employee compensation, equipment, and IT infrastructure are the primary expenses in establishing a conventional bank branch. Vehicle purchase, setting up information technology infrastructure, employee salaries, and fuel are the major costs associated with the banking on wheel service. Mobile branches can be run with just two clerical staff, while a traditional branch would need at least five. The type of equipment and infrastructure needs also varies greatly, affecting cost.

Various methodologies can be employed to assess the cost-effectiveness of mobile branches. An accurate estimation would necessitate implementers to define the branch’s goal and specific services. In general, the initial cost of establishing banking on wheels would require a significant investment, the majority of which would go towards purchasing the vehicle. Financial institutions can also consider using alternative vehicles, such as trailers, to lower initial costs.

However, the ongoing costs of these operations will decrease over time. On the other hand, the cost of a branch operation will remain constant due to rental fees, salary payments, and other miscellaneous expenses. Implementers can account for return per customer, considering the size of customers that would access a conventional bank versus a mobile branch. 

Challenges

Challenges associated with mobile branch operations include: 

  • Security issues related to the safety and security of cash and records.
  • Maintaining online communication with the base office will be difficult when traveling to rural areas with poor or limited connectivity.

Proven outcomes across the world

  • Results in more competition which results in an aggressive rural outreach program.
  • Reduces the time spent by customers to access financial institutions.
  • The availability of mobile branches attracts new customers.

Lessons from Malawi: The experience of OIBM.

The Ethiopian Context

Although there are no formally introduced mobile branch services in Ethiopia, banks frequently set up temporary branches on the street, at exhibitions, and at other event venues. These temporary branches offer regular banking services to customers and are also used to expand a bank’s customer base.

At the beginning of 2023, the Bank of Abyssinia introduced its mobile branch service. The Makeshift truck is designed to serve as a mobile branch, with a teller providing regular branch services and an ATM withdrawal alternative.

Other banks, including the Commercial Bank of Ethiopia, Cooperative Bank of Oromia and Amhara Bank, are also eying to adopt a similar product.  Aware of the current trend, the National Bank of Ethiopia (NBE) wrote a letter to banks banning banking on wheel operations. The letter states that the central bank does not have a regulatory framework that would allow it to oversee these operations and banks must halt such services until it does so. However, the central bank officials instructed that banks can continue providing mobile ATM services.

“Until the National Bank of Ethiopia fully assesses the risk involved in such services and puts in place a legal framework that allows for the same, please be informed that providing banking services on wheels is strictly prohibited,” reads the letter.

This begs the question: what sort of regulation is needed to oversee banking on wheels operations?

Regulations

For Banking on Wheels to be successfully implemented, there is a need for regulations to ensure the safety of customers’ funds. Banks must adhere to rules set by the central bank regarding the operation of mobile bank branches. These regulations should include guidelines on the type of services offered through such branches, security measures to protect customers’ data, and procedures for handling customer complaints.

For instance, a regulation issued by the Reserve Bank of India in 2010 guiding branch operation outlines specific requirements for the operation of mobile branches.  The regulation states a mobile branch is a banking facility that operates through a van with bank officials and cash, serving specific locations on designated days and hours. It is not intended for areas already served by regular bank branches. The mobile branch is required to be stationed in each location for a reasonable time to ensure customers can utilize its services. All transactions will be recorded in the base branch’s books or data center. The banks must also publicize the mobile branch’s schedule and any changes to it, displaying the information in the areas it serves.

Lessons from other markets show there is a need to provide guidelines to banks. These include:

Jurisdiction: Can mobile branches operate anywhere they want? Can they operate in highly urban areas where traditional branches exist in abundance? 

Much like the provision provided by the central bank of India, there may be the need to define jurisdiction where banks can station their mobile branches and for how long.

Standard of vehicle: What standards does the vehicle have to fulfill? What equipment does it have to be equipped with?

Banks opening regular branches must fulfill several requirements. These include setting up a branch with proper ventilation, sanitary services, lighting, fire extinguishers, and a strong room (vault) with a minimum carrying capacity of 8 cubic meters.

The bank also needs to have an insurance policy that would cover certain damages. Similar requirements can be put in place depending on the risks and needs identified by the central bank.  

Operational procedures: How much cash can the vehicle handle? What kind of services can it provide? Will there be a transaction limit set to it? At what time can it operate? Can it operate at night? What kind of safety measures need to be implemented?

Expansion: How many mobile branches can one bank set up? How can duplication of effort or overcrowding be avoided?

To maintain the quality of services provided, the central bank can limit the number of mobile branches that a bank operates. One way of doing this could be requiring mobile branch expansion to be proportional to their regular bank branch network size.

Regulating innovation

Although it is clear that there are risks associated with unregulated products, it is also possible that prohibiting operations and failing to keep up with innovation could stifle advancement in the financial sector.

In the past year, several products have been banned by the NBE due to regulatory concerns. Last year, international remittance applications, Cashgo, and MamaPay were forced to cease operation, which was lifted after three months in June of 2022. Recently, Apollo, a digital banking platform offered by the Bank of Abyssinian, was banned from providing certain services due to “the lack of a regulatory framework to govern digital onboarding,”.

These incidents highlight the crucial need for regulators to keep up with innovation in the financial sector.

While regulation may often be seen as restrictive, it is crucial to recognize that its roles should span to fostering innovation by providing a safe and stable environment for businesses to operate. The latest bans by the regulator serve as a reminder that regulation and innovation are interconnected. Finding the right balance between the two is critical to ensure financial institutions operate in an enabling environment.

This issue is further exacerbated by the fact that bank on wheels service nor digital onboarding is not a new concept and has been implemented worldwide for decades.

In the absence of regulation, the central bank can also adopt regulatory sandboxes allowing financial institutions to test out products and services on a small-scale while also understanding scenarios that need regulatory oversight.

For Ethiopia to fully realize the potential of financial technology in expanding access to financial services, it is essential for regulators to continue to update their regulatory frameworks and capacity.

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