MICROFINANCE PAPER WRAP-UP: “Bank Agents: Risk Management, Mitigation, and Supervision;” by Kate Lauer, Denise Dias, Michael Tarazi; Published by CGAP (Consultative Group to Assist the Poor)

By Kate Lauer, Denise Dias and Michael Tarazi; published by CGAP (Consultative Group to Assist the Poor); December 2011; 24 pages; available at: http://www.cgap.org/p/site/c/template.rc/1.9.55781/

The authors of this paper analyse the use of bank agents in an effort to guide supervisory entities in developing a regulatory approach suitable to their respective countries. The authors observe that in most countries, bank agents, which are defined as “any third party acting on behalf of a bank,” handle a very small percentage of the total assets in banking systems, minimizing the systemic risk they present. However, the authors stress that it is still important that bank supervision offices enforce the responsible use of agents.

Tasks performed by agents include the following: transmitting information, such as receiving loan applications or providing customers with account balances; processing information, such as conducting “know your customer” procedures or assessing loan applications; handling cash, including deposits or withdrawals; and electronic fund transfers, such as bill payments or disbursing government benefits. Banks may use agent network managers (ANMs) to manage agents. In such arrangements, banks may outsource the agent management functions to a specialized third-party operator, arrange for a large retailer to use its outlets as agents of the bank or enter into an agency agreement with a third party, which in turn subcontracts to multiple agents.

The authors point out that the extent to which a bank uses agents, the specific tasks assigned to agents and the bank’s management of this channel all affect the level and kind of risk to which a bank will be exposed. These risks include operational risks, such as agent fraud, data entry errors, poor cash management and abusive service; technological risks, such as utility disruption or software failure; legal and compliance risks, such as customers suing the bank as a result of an agent’s actions or agents demanding the same benefits as bank staff; credit risk, such as the bank not receiving money owed by the agent; and the resultant reputational risk. In order to mitigate these risks, banks may utilise policies covering areas such as agent selection and hiring, training, cash management and monitoring. Other risk management strategies include periodic reviews of agent networks, contingency planning, insurance coverage and risk-sharing with ANMs.

The authors studied the regulatory environments of seven countries, some of which require approval for banks to use agents in general, individual agent registration, regular information reporting and onsite inspections.

The authors also discuss corrective measures that supervisors can take in cases of bank or agent noncompliance. These include instructing the bank to develop a plan to address weaknesses, requiring additional capital, asking the bank to remedy agent misconduct, requiring the bank to terminate the agency agreement, imposing fines or even prohibiting the bank from the further use of agents.

The authors assert that while it is “too early to determine how specifically the different supervisory approaches impact bank use of agents,” there is some indication that cumbersome licensing requirements may dissuade banks from pursuing the model. The authors stress that supervisory entities should measure risks in comparison to the costs of supervision and bank compliance. In general they argue that given the relatively limited scope of bank use of agents, there is low systemic risk, so supervision should not be overly complex or burdensome.

Sources and Additional Resources:

CGAP (Consultative Group to Assist the Poor), December 2011, “Bank Agents: Risk Management, Mitigation, and Supervision,” available at http://www.cgap.org/p/site/c/template.rc/1.9.55781/

MicroCapital.org article, May 3, 2011, “MICROCAPITAL BRIEF: CGAP (Consultative Group to Assist the Poor) Technology Blog Reviews Lessons Learned from Branchless Banking in Brazil,” https://www.microcapital.org/microcapital-brief-cgap-consultative-group-to-assist-the-poor-technology-blog-reviews-lessons-learned-from-branchless-banking-in-brazil/

MicroCapital’s Microfinance Universe profile, CGAP, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=CGAP

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