AGENT BANKING AND ITS EFFECT ON FINANCIAL

INCLUSION IN NEPAL

By:
Prajwol Shakya
Exam Roll No: 232/17
TU Registration No: 7-2-410-137-2012

A Graduate Research Report submitted in partial fulfillment of the requirement for

the degree of
MASTERS OF FINANCE AND CONTROL

at the
School of Management
Faculty of Management
Tribhuvan University

Kirtipur
June, 2022

i
RECOMMENDATION

ii
CERTIFICATION

iii
 DECLARATION OF AUTHENTICITY

I, Prajwol Shakya, declare that this Graduate Research Project is my own original work
and that it has fully acknowledged any information or documents endorsed from other
sources. I also agree that if at any time this work has been submitted for any other degree
or professional qualification except as specified, any credits awarded based on this material
can be revoked.

Signature

Prajwol Shakya

Date: …………………………

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 ACKNOWLEDGEMENT

This thesis report entitled “Agent Banking and its Effect on Financial Inclusion in Nepal,”
has been prepared in partial fulfillment of the requirements for the degree of Master of
Finance and Control (MFC) in the faculty of the School of Management, Tribhuvan
University. I would like to express my deepest gratitude to everyone who made it possible
for me to complete this GRP. It would not have been possible to write this scholarly thesis
without the assistance and support of many generous people, only some of whom it is
possible to give a particular mention here.

Foremost, I would like to express my sincere gratitude to my supervisor, Mr. Sanjay

Ghimire, for his unwavering support of my studies and research and for his patience and
immense knowledge. His advice was invaluable during the research and writing of this
thesis.

I owe my sincere thanks to all the commercial banks of Nepal and the authorities of banks
who gave me all the required information and motivation to complete my study.

Thanks to the internet, I was able to read a variety of publications, reference articles,
journals, study materials, and websites before writing the paper.

Besides this, I am very grateful to my friends, well-wishers, and everyone who directly or
indirectly helped me in conducting this study.

Finally, I must express my profound gratitude to the School of Management, Tribhuvan

University and all the faculty members for direct and indirect moral support.

Prajwol Shakya

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 TABLE OF CONTENTS

TITLE PAGE i
RECOMMENDATION ii
CERTIFICATION iii
DECLARATION OF AUTHENTICITY iv
ACKNOWLEDGEMENT v
TABLE OF CONTENTS vi
LIST OF TABLES viii
LIST OF FIGURES ix
LIST OF ABBREVIATIONS x
EXECUTIVE SUMMARY xi

CHAPTER I: INTRODUCTION
1.1 Background of the Study 1
1.2 Statement of the Problem 5
1.3 Research Objectives 6
1.4 Research Hypothesis 7
1.5 Significance of the Study 9
1.6 Limitation of the Study 10
1.7 Organization of the Study 11

CHAPTER II: RELATED LITERATURE AND THEORETICAL

FRAMEWORK

2.1 History of Banking in Nepal 12

2.2 Models of Agent Banking 15
2.3 Theoretical Review 17
2.3.1 Agency Theory 17
2.3.2 Diffusion of Innovation 19
2.3.3 Financial Intermediation Theory 20

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 2.3.4 DFS Ecosystem 20
2.4 Empirical Studies 22
2.5 Research Gap 31
2.6 Theoretical Framework 31
2.7 Operational Definition of Variables 32

CHAPTER III: RESEARCH METHODOLOGY

3.1 Research Design 35
3.2 Population and Sample 35
3.3 Data collection Method 36
3.4 Instrumentation 36
3.5 Reliability Analysis of Data 37
3.6 Methods of Analysis 38

CHAPTER IV: ANALYSIS AND FINDINGS

4.1 Descriptive Analysis 41
4.2 Relation Between Variables 50
4.3 Effect of Agent Banking in Financial Inclusion 52
4.4 Findings of the Study 55

CHAPTER V: DISCUSSIONS, CONCLUSIONS AND IMPLICATIONS

5.1 Discussion 58
5.2 Conclusions 60
5.3 Implications 62

REFERENCES 65

APPENDICES 1 74
APPENDICES 2 77

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 LIST OF TABLES

Table 2.1 Empirical Literature Review 28

Table 3.1 Reliability Analysis 38
Descriptive analysis of the level of agreement or disagreement in
Table 4.1 42
regards to geographical coverage
Descriptive analysis of the level of agreement or disagreement in
Table 4.2 44
regards to security
Descriptive analysis of the level of agreement or disagreement in
Table 4.3 46
regards to liquidity
Descriptive analysis of the level of agreement or disagreement in
Table 4.4 47
regards to cost
Descriptive analysis of the level of agreement or disagreement in
Table 4.5 49
regards to technology
Descriptive analysis of the level of agreement or disagreement in
Table 4.6 50
regards to financial inclusion
Table 4.7 Bivariate Pearson Correlation Matrix 51
Table 4.8 Model Summary 52
Table 4.9 Analysis of Variance (ANOVA) 52
Table 4.10 Regression Result of Financial Inclusion 53
Table 4.11 Summary of Hypothesis Test Result 54

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 LIST OF FIGURES

Figure 2.1 Conceptual Framework 32

Figure 4.1 Product and Services Offered 43
Figure 4.2 Technology Devices used in Agent Outlets 48

ix
 LIST OF ABBREVIATION

AML Anti-Money Laundering

ATM Automated Teller Machine
BAFIA Banks and Financial Institutions Act
BFIs Banking and Financial Institutions
BLB Branchless banking
CFT Counter Financing of Terrorism
DFS Digital Financial Services
DOI Diffusion of Innovation
DTH Direct to Home
FINGOs Financial Intermediary Non-Government Organizations
FSDS Financial Sector Development Strategy
GDP Gross Domestic Product
GPRS General Packet Radio Service
ISP Internet Service Provider
IVR Interactive Voice Response
MFC Master of Finance and Control
MFIs Micro Finance Institutions
MNO Mobile Network Operators
MoF Ministry of Finance
NCHL Nepal Clearing House Limited
NGO Non-Government Organizations
NRB Nepal Rastra Bank
NTA Nepal Telecommunications Authority
PIN Personal Identification Number
POS Point of Sale
PSP Payment Service Provider
RegTech Regulatory Technology
SMS Short Message Service
SPSS Statistical Package for Social Scientists
UNCDF UN Capital Development Fund

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 EXECUTIVE SUMMARY

Financial inclusion is an initiative that aims to provide financial access to a large portion
of the unbanked population at a low cost to support economic growth and reduce poverty
and social inequality. It will also develop the ability to manage and save money, as well as
the skills and knowledge to make sound financial decisions. Bank’s interaction with their
customers is shifting from operations-centric to customer-centric. Furthermore, the
delivery of banking services has been shifted from physical brick-and-mortar branches
toward branchless channels. Hence, agent banking has emerged as a popular modern
mechanism for providing branchless financial services.

Agent banking is a modern concept that aids the formal banking sector to increase the usage
of financial services among financially excluded people using information and
communication technologies such as mobiles, ATMs, and POS, where agents are usually
located in retail outlets such as pharmacies, grocery stores, retail outlets, and gas stations.
Traditional banking may struggle to reach customers in emerging economies and rural
areas. Thus, agent banking may be the most efficient option to extend financial inclusion.
However, there is a deficit of studies from the viewpoint of agent banking and financial
inclusion. Therefore, the purpose of this research is to assess the influence of agent banking
on financial inclusion in Nepal.

An analytical framework has been developed based on past studies and a literature review
to meet the objectives of the study where agent banking is determined by geographical
coverage, security, liquidity, cost, and technology of the agent banking. This research is
quantitative research which is achieved through primary data, collected from an online
survey with a structured questionnaire circulated to commercial banks and their branches
in Bagmati Pradesh which has successfully adopted and implemented the agency banking
model via e-mails. The convenience non-probability sampling technique was used for the
selection of the respondents totaling 86 respondents out of which 53 responses were
obtained.

The researcher used a quantitative approach with a survey method conducting descriptive
analysis, regression, and correlation analysis through SPSS. Questionnaires with Likert
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model scoring were used to collect the data. The result of the analysis shows that each
variable i.e., geographical coverage, security, liquidity, cost, and technology of agent
banking are effective variables for the study. However, geographical coverage is the only
variable that enhances financial inclusion and has a positive and significant effect on
financial inclusion.

The study concludes that geographical coverage of agent banking is the most important
indicator of financial inclusion since individuals can access financial services easily at
nearby local outlets. The researcher recommends the agents to install metal grills and
CCTV cameras as security measures. In addition, the findings imply that agent banking
technology should be updated to new technology for providing services which will improve
both safety and convenience.

Hence, the study concludes that the agent banking model is a game-changer in terms of
financial inclusion. Agent banking has the potential to increase the level of financial
inclusion, and all players, including agents, clients, banks, and regulators, should support
and encourage it. Moreover, commercial banks, agents, and regulators should provide
individuals with financial education in order to improve financial literacy, comprehend the
operations of the agents, and ensure the protection of money.

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 CHAPTER I

INTRODUCTION

1.1 Background of the Study

Financial inclusion is an initiative that aims to provide financial services to the low-level
population, particularly the least privileged and low-income members of community at a
reasonable cost (Munoru, 2016). Financial inclusion is a process that assure easy
availability, usage, and access to the formal financial system for all citizens of a nation
(Pant, 2016). Financial inclusion is defined as the capability of an individual, family, or
group to obtain a comprehensive variety of formal financial services that are convenient,
responsibly delivered, and competitively priced. People who do not have this ability are
generally referred to as financially excluded (Mbugua & Afande, 2015).

Financial inclusion is a critical component of poverty reduction and economic growth. The
World Bank (2018) articulates financial included individuals and businesses have access
to appropriate and affordable financial products and services that are provided responsibly
and sustainably. Financial inclusion is a critical global goal that governments, international
development agencies, academics, and the corporate sector have put at the top of their
agendas. The world bank hopes to make financial access universal to enable the less
fortunate and rural poor to rise out of poverty by assisting them in building dignified
lifestyles. Furthermore, a well-examined financial inclusion program can also assist the
rural poor to establish and develop businesses (Pant, 2016).

Financial inclusion allows the poorest and most vulnerable members of society to escape
poverty and eliminate social inequality. It will enable people to have the ability to manage
and save their money to make sound financial decisions. It will unlock potential and
empower men, women, and entire communities, promoting investment within the
community and re-energizing the economy as a whole (SEPA for Corporates, 2015).
Financial inclusion encourages people to save, which improves capital formation in the
country and boosts the economy (Khanvilkar, 2015).

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In Nepal, a variety of financial outreach projects are underway as a part of a long-term
development goal to improve from a least developed country to a middle-income country
by 2030, as well as to achieve the UN Sustainable Development Goals. After recognizing
the significance of the financial inclusion policy for the country, the Nepal Rastra Bank
(NRB), in collaboration with the government of Nepal, implemented a variety of policy
models aimed at improving financial inclusion. Among them were the Grameen Bank
Model, Wholesale Micro Finance Model, Directed Lending Model, Project-Based Micro
Credit Model, FINGOs Model, and Cooperative Model. Furthermore, the Banks and
Financial Institutions Act (BAFIA) is a central path toward greater financial inclusion.
NRB has made it mandatory for class A, B, and C financial institutions to provide low-cost
funds to Micro Finance Institutions (MFIs), thereby improving access to financial services
in underserved areas (Pant, 2016).

On April 25, 2015, a large earthquake struck central Nepal, injuring and killing thousands
of people as well as causing significant damage to property and physical infrastructures
such as roads, water supply, and electricity. The financial industry came to a halt which
had a significant impact on the quality and availability of financial services. For this, the
UK aid Sakchyam Access to Finance Programme teamed with seven significant
commercial banks to develop the 'Sakchyam Earthquake Response Programme’ to transmit
relief money in a timely and transparent manner (Sakchyam, n.d.). The introduction of
agent banking services at that time was very crucial in providing quick access to financial
services in remote areas (Khalti, 2019).

Financial access has been increasing with the expansion of financial institution branches.
Financial institutions, on the other hand, remain concentrated in urban or semi-urban areas,
where geographical access is simple and easy. It is difficult to provide essential services
such as electricity, telecommunications, and banking in these areas because many
communities are still unbanked. As a result, agent banking has been encouraged to meet
the payment requirements of those who do not have access to banking services (Pant,
2016).

Technology plays a critical role in the process of financial inclusion. It is the most
important driver of financial inclusion, ensuring that people have access to financial

2
services wherever they are and whenever they need them (Fanta & Makina, 2019).
Technological advancements, new products and services, and innovative business models
have accelerated the change in Asia’s financial inclusion ecosystem. The advancement in
technology and digital transformation has made financial inclusion viable (Pant, 2018).

New developments are constantly expanding the traditional boundaries of banking.

Similarly, the interface between banks and their customers is shifting from operations-
centric to customer-centric. In addition, the delivery of banking services has shifted from
brick-and-mortar branches to branchless channels such as Automated Teller Machines
(ATMs), internet banking, and mobile banking. Consumers and businesses expect quick
access and user-friendly services from their financial institutions. Hence, banks are
exploring new technologies for mobility and customer convenience as the key to their
success. Agent banking has emerged as a popular modern mechanism to facilitate financial
services in developing countries (Sakchyam, n.d.). Agent banking refers to the use of
technology to conduct financial transactions electronically and remotely. Customers can
access financial services without visiting bank branches since third-party resources act as
the financial services providers (Subramanian, 2013).

Mahmood and Sarkar (2015) defined agent banking as one of the tools for bringing an
enormous number of financially excluded people into the formal financial system. Agent
banking is gaining popularity in many developing nations because it is thought to increase
the usage of financial services among financially excluded people. Agent banking is a new
concept that can assist the banks in reaching out to the marginalized people through their
agents, who will provide a variety of financial services to local residents with logistical
support provided by the bank's nearest branch. Agents are appointed in areas where a full-
fledged branch of a bank is not feasible.

Agent banking (also known as branchless banking or business correspondents) is a low-

cost way for a bank to expand its branch through the use of authorized agents. This enables
banks to provide low-risk services to customers in remote and rural areas where traditional
bank branches are difficult to operate (Novatti, 2019). It is commonly referred to as Branch
Less Banking (BLB) when banks use agents to deliver services. The model attempts to
reduce delivery costs and reach clients who are now outside of traditional banking. For

3
BLB, mobile phones and card networks are often used (Pickens, Porteous & Rotman,
2009). Agent banking refers to the delivery of financial services outside of traditional bank
branches through the use of information and communications technologies and non-bank
retail agents via mobile, ATMs, or Point-of-Sale (POS) where agents are usually found in
retail locations such as pharmacies, grocery stores, retail outlets, and gas stations (Peake,
2012).

Aggarwal and Klapper (2013) report that traditional bank branches are not a profitable and
viable solution to financial inclusion in rural regions as the volume and value of
transactions are too small. Thus, agent banking services provide low-cost financial services
to rural poor communities by leveraging mobile technology and an existing network of
local retailers. The agency banking model enables financial institutions to spread their
services to regions where large portions of the population are unbanked and branch
establishment takes significant capital. Agent banking has lately been acknowledged as a
feasible and beneficial approach for bringing formal financial services to rural regions in
numerous developing countries, particularly in Latin America, with varying degrees of
success. Many nations have used the agency banking model to extend financial services,
including Brazil, Pakistan, India, Philippines, Uganda, Kenya, Malaysia and South Africa
(Nisha, Nawrin & Bushra, 2020).

Agent banking is a mechanism for bringing banking to the customer’s doorstep rather than
the traditional method of the customer seeking out the bank (Subramanian, 2013). Agent
banking service is a concept introduced to provide easy and convenient financial access
apart from regular bank branches. Under this, local merchants or service recipients are
contracted as agents on behalf of the bank in areas where the bank’s services are
unavailable. The agent delivers services to the locals by using the bank's machine (POS,
magnetic card or smart card), which includes opening an account, depositing money,
withdrawing money, paying remittances, and providing small loans. Class A commercial
banks and Class B development banks have the permit to offer branchless banking services
under NRB guidelines. However, only commercial banks have provided such services
(Khabar, 2017).

4
In the context of Nepal, agent banking services are regarded to be less expensive and faster
than traditional banking services. Such financial services were widely used to transfer
funds in villages during the 2015 earthquake. Agent banking services provide banking
services to backward, remote, and inaccessible people. A bank must spend a significant
amount of money on construction to expand a branch; however, banks have deemed this
service effective because it saves them money on physical development while delivering
branchless banking services. In Nepal, agent banking services have played a significant
role in improving financial literacy (Khabar, 2020).

In Nepal, digital financial inclusion has the potential to be a game-changer for micro-and
small businesses, as well as unserved and underserved low-income households. As digital
channels cut travel costs, promote transparency, and increase access to formal financial
services that assist individuals break the cycle of poverty and create inclusive economic
growth. Agent banking could be an unexpected profit mechanism for the banking industry
(Pant, 2016). As a result, the impact of agent banking on financial inclusion in Nepal is
being highlighted. Agent banking is a new banking product that enables those who live in
remote areas and do not have access to bank branches.

1.2 Statement of the Problem

Agent banking can be more accessible and cost-effective than physical brick and mortar
bank branches as it reaches poor-earning and impoverished individuals to save, borrow,
and gain a financial return. It is important to the general population since it increases the
safety of their cash and is more beneficial than keeping money at home and travelling with
it. Access to digital technologies, particularly the internet, mobile devices, and biometric
authentication, allows the unbanked to take advantage of a variety of financial services like
online banking, mobile banking, and digital credit (Haider, 2018).

Financial inclusion is bridging the cash-to-digital payment gap. Clients are linked to a
digital payment system that allows them to send money to friends, family, and colleagues
quickly and affordably (Radcliffe & Voorhies, 2012). Digital business is all about the
creation of new business designs by merging the physical and digital worlds. Many low-
income and middle-income earners will be included in the financial inclusion domain as a

5
result of the expansion of digital business and the usage of digital technology applications
by all aspects of human society (The Economist Corporate Network, 2016)

In Nepal, the distribution of Digital Financial Services (DFS) is challenging due to

geographical diversity, low population, poor connectivity, and infrastructure-related
challenges. The vast majority of the people in a developing country are financially
disadvantaged. DFS has the potential to change this environment by providing specialized
and inexpensive services to Nepalese people who are economically disadvantaged
(UNDCF, 2015).

(Khalti, n.d.), states that with the increasing penetration of mobile internet, availability of
smartphones and rapid growth of social media, more people are preferring digital
technologies, switching from cash and checks to cards and mobile payments. People in
Nepal have also begun to use digital wallets and e-banking services to pay their electricity
bills. As a result of the mobile banking facility, the unbanked and underbanked can be
conveniently served. Traditional banks may struggle to reach customers in emerging
economies and rural areas; therefore, agent banking may be the most efficient option to
extend financial inclusion. However, there has been little research conducted in this field,
which can be ascribed that the model is new and the implications it may have on financial
inclusion and performance will take time to reflect. This study aims to add knowledge in
the area of agent banking and its effect on financial inclusion in Nepal.

Therefore, the research deals with the following issues:

i. Is there any effect of agent banking on financial inclusion in Nepal?

ii. To what extent do geographical coverage, security, liquidity, cost, and technology
of agent lead to financial inclusion?

1.3 Research Objectives

The general objective of this study is to examine the effect of agent banking on financial
inclusion in Nepal. The specific objectives of this study are:

i. To assess the effect of geographical coverage of agent banking on financial

inclusion.

6
 ii. To analyze the effect of security of agent banking on financial inclusion.
iii. To analyze the effect of liquidity of agent banking on financial inclusion.
iv. To analyze the effect of cost of agent banking on financial inclusion.
v. To assess the effect of technology of agent banking on financial inclusion.

1.4 Research Hypothesis

Hariharian and Marktanner (2015) defined financial inclusion as access to formal financial
services like credit, savings, and insurance opportunities. In their study, they found that
financial inclusion is a critical component of any country’s economic growth and
development, contributing significantly to GDP, capital formation, and intermediation, as
well as creating employment possibilities. Through its extensive geographical coverage,
Barasa (2013) determined that agent banking had played a crucial role in expanding the
penetration of financial services in unbanked regions. Moreover, Wainaina (2011) reports
that agent banking enhances access to a comprehensive variety of financial products in a
less formal environment. The survey also showed that the agency banking model had
assisted clients in becoming financially stable. The researcher also opines that, in order to
access financial services, one should travel a long distance which is one of the causes of
poor financial inclusion in rural regions.

Afande and Mbugua (2015) describe geographical coverage as the potential of bank agents
to deliver financial services locally to clients. They also argue that the greater geographical
coverage of agent banking is an important indicator of financial inclusion. Muasya and
Kerongo (2015) indicated that financial services have been unreachable to the rural
populace, due to distance and lack of awareness. However, Cheston (2016) found that
Indian banks provide location convenience, which increases usage and reduces the cost of
accessing and managing new clients. Thus, the following hypothesis is proposed:

H1: Geographical coverage of agent banking enhances financial inclusion.

Security is a major concern in agent banking, particularly when dealing with cash. When
agents collect large deposits late at night, they either hold the money in their residence or
a small vault in their outlet. This approach is likely to include robbery and other threats.
To address the issue of security, the bank may request the agents to appoint security

7
employees or select powerful agents with large vaults (Banerjee, Alam, Mehdee, Hossaina
& Khan, 2017).

Bill and Melinda Gates Foundation (2014) explains that one of the key issues for users is
the security and safety of mobile payment transactions. Moreover, Subbarao (2009) states
that payments such as wages and salaries, pensions, social security transfers, subsidies,
credit guarantee funds, and other allowances can now be transferred quickly and
conveniently using mobile and online transfers minimizing fraud, pilferage, leakages, and
most importantly, the cost-of-service delivery for both users and providers of financial
products and services. Thus, the following hypothesis is formulated:

H2: Security of agent banking enhances financial inclusion.

Agents are the touchpoints where clients can transfer funds into and out of the system.
Agents are sometimes referred to as cash-in and cash-out outlets. When a customer
approaches an agent with the desire to withdraw significant cash, it is common for the agent
to be unable to match the client’s demand. This causes dissatisfaction, which is one of the
reasons why the adoption of these frameworks is slower than usual (Central Bank of Brazil,
2007).

Lehman (2010) notes that agents will not deliver excellent services to clients unless they
are continuously monitored to ensure that they are liquid, consistently branded, and adhere
to the prescribed business standards. Ndegwa (2017) found that the liquidity of agent
banking was statistically significant since agents were found in retail locations, thereby
making financial liquidity shortage a non-issue. The availability of liquidity increases the
client’s confidence in the model. Thus, the following hypothesis is proposed:

H3: Liquidity of agent banking enhances financial inclusion.

A study by CGAP (2011) shows that one of the most significant impediments to financial
inclusion is cost: both the expenses to banks involved in servicing low-value accounts and
expanding physical infrastructure to remote rural regions, as well as the cost to clients in
remote regions in terms of money and time. Targeting impoverished clients in provincial
regions is frequently too expensive for budgetary reasons since numbers and volumes do
not cover the expenses of a branch (Kitaka, 2001).

8
Tarazi and Breloff (2011) states that clients benefit from cheaper transaction costs,
extended opening hours, and shorter queues than in branches. In addition, access to bank
services through agents in retail outlets provides clients with a one-stop-shop for banking
and retail purchases (Ignacio, 2009). Furthermore, agent banking services are more usable
to illiterates and underprivileged, who may be intimidated by bank branches (Beck,
Demirgüç-Kunt & Levine, 2007). Thus, the following hypothesis is formulated:

H4: Cost of agent banking enhances financial inclusion.

Technology drives all aspects of agent banking. The transactions can be executed by
mobile phone, POS system, or online banking, which must be reflected immediately on the
bank’s side in the core banking system (Keeler, 2011). Individuals, companies
(organizations), as well as government agencies can use electronic transfer channels to send
direct payments into beneficiary’s accounts without passing through a conventional bank
(Subbarao, 2009).

The lack of technological equipment will result in poor service delivery. Molla (2013)
notes that the success of agent banking is determined on the agents ease of banking. Khalti
(2018) states that technology plays a critical role in removing geographical barriers and
boosting financial inclusion. Consequently, the following hypothesis is formulated:

H5: Technology of agent banking enhances financial inclusion.

1.5 Significance of the Study

This study helps to find out the effect of agent banking on financial inclusion. This study
also focuses on the importance of agent banking in remote areas for accessibility and
adaptability to formal financial services. This study serves as a future reference for
researchers, scholars, and students who may aspire to conduct research in the same or
similar field. This study aims to inform the public and all the players (agents, customers,
banks, and regulators) about the impact of agent banking on reaching the unreached
segments of society. Since agent banking is relatively new concept in Nepal, this research
will assist to identify issues that may arise during and after implementation. This will assist
commercial banks in developing policies and procedures to address such issues to fully
maximize the potential of this innovation. Moreover, the government and other commercial

9
banks also stand to benefit from this study as they would be able to understand the
accessibility and adaptability of formal financial services. This would indeed help to come
up with marketing strategies on how to improve or promote more financial inclusion. In
addition, the research findings will contribute to the body of knowledge since agent
banking is a relatively new concept, which is constantly growing, and the empirical
literature is also limited. This study aims to address the gap in the banking literature by
adding actual data to the existing body of knowledge in agent banking in Nepal.

1.6 Limitation of the Study

The study is very important as much study have not been made in the past in case of agent
banking. None of the study can go beyond the boundary of some limitations; even though
utmost care is exercised in all aspects of this study certain limitations have been perceived
and are acknowledged herewith. However, the study may not cover entire aspects.

The following are the major limitations of the study:

• Due to lack of information, knowledge and awareness regarding agent banking, it

was difficult to communicate between the bank personnel.
• There is no any article, policies and guidelines published by NRB regarding agent
banking, hence the truth of research is based upon the available data from the BLB
department.
• Only 15 out of 27 commercial banks in the country actively operate agent banking
services, so it is not significant enough to give a conclusive result.
• Lack of relevant literature particularly in Nepalese perspective is another limitation
of this research.
• The generalizations yielded from the study area may not be equally valid every time
for the agent banking in Nepal.
• The model used in this is limited to regression. Simple statistical tools are used in
order to avoid complexity.
• Although there are various methods of financial inclusion, this study is mainly
concerned with the agent banking.

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1.7 Organization of the Study

The study consists of five chapters. They are as follows:

i. The first chapter includes the introduction and consists of the background of the
study, statement of problem, research objectives, research hypothesis, significance,
limitation, and the organization of the study.
ii. The second chapter deals with the review of past studies and literatures for current
study. Different research works related to agent banking (branchless banking) and
its impact on financial inclusion are discussed in order to prepare a base for the
study. Further, the chapter consists of research gap and theoretical framework
defining each dependent and independent variables based on previous literatures.
iii. The third chapter discusses research methods used for the study. It comprises of
research design, population and sample, data collection method, instrumentation,
reliability analysis of the data and methods of analysis.
iv. The fourth chapter deals with the analysis and the results of the study. It comprises
of various tables and figures intended to answer the objective and research question
of the research.
v. The fifth chapter is the last chapter, which draws conclusion derived from the entire
study, and it will present the discussions and the implications of the study.

11
 CHAPTER II

RELARTED LITERATURE AND THEORITICAL FRAMEWORK

The second chapter reviews related literature and establishes the theoretical basis for the
study. The theoretical literature section looks at the evolution of the Nepalese banking
industry including the notions of agent banking and financial inclusion. This study is based
on the hypothesis that agent banking has an impact on financial inclusion. To accomplish
the study's goal, the empirical literature on the independent and dependent variables is
examined through a rigorous examination of previous studies, highlighting findings,
conclusions, and suggestions from previous research and studies on agent banking and
financial inclusion. This chapter concludes with the development of a conceptual
framework and discussions of variables.

2.1 History of Banking in Nepal

Banking history in Nepal can be defined as a part of the country's progressive and
systematic growth in the financial and commercial spheres (Sahayogee, n.d.). It all began
with the founding of Nepal Bank Limited, the first commercial semi-government bank
using metallic currency, in 1937 AD. Later in the year 1955, Nepal Bank Act was
formulated for a better banking system and in 1956, NRB was established as the Central
Bank of Nepal (Khalti, 2018). As per the list of banks and financial institutions published
by NRB in Mid-Oct 2021, there are a total of 27 commercial banks, 18 development banks,
17 finance companies, and 69 MFIs (NRB, 2021). People's payment habits have been
drastically altered as a result of the rise of the banking sector, as they now prefer to carry
plastic money in their wallets rather than hard currency and queueing in banks to withdraw
money (Khalti, 2018).

The first federal budget for the fiscal year 2018-19 promises to digitize government
payments and tax collection, as well as kick off an overly ambitious effort to register bank
accounts for every Nepali citizen within a year. The overarching goal of this strategy is to
increase financial inclusion (people having access to financial services through formal

12
financial institutions such as savings, payments, and transfers, as well as credit and
insurance). In particular, moving away from cash and digitizing government payments and
revenue collection allows the government to not only decrease costs and boost efficiency
but also reduce the number of unbanked people, thereby increasing the level of financial
inclusion (Shrestha, Joshi & Dongol, 2018).

Since the early 2000s, governments, international development agencies, academics, and
the private sector have prioritized financial inclusion to provide the unbanked population
with basic economic self-determination tools such as savings, credit, insurance, payments,
money transfer, and financial education. As a result, underprivileged and rural poor people
can start their businesses through micro-financing. In the context of Nepal, the NRB has
made financial inclusion a strategic goal by focusing on financial literacy and providing
access to financing through banks and financial institutions. To promote financial
inclusion, the NRB established policy models such as the grameen bank model, directed
lending model, wholesale micro-finance model, financial NGOs model, project-based
micro-credit model, and cooperative model in collaboration with the Nepalese government
(Khalti, n.d.).

In Nepal, with the advent of mobile and online banking, the banking industry took a swift
leap. Due to the evolution of high-tech and easy accessibility of the internet, people are
best utilizing the banking services which had greatly fostered e-banking. Moreover,
credit/debit cards, e-banking, mobile banking, and digital wallets have all emerged
gradually eliminating the inconvenience of carrying cash and checks. Furthermore,
financial technology has developed digital wallets, which are gaining popularity for online
payments of utility (such as electricity, water, Direct to Home (DTH), ISP bills, booking
movie tickets, hotels and flights), insurance, education fees, health services, top-up, online
shopping, money transfer, and many more (Khalti, 2018). In addition to this, Nepal
Clearing House Limited (NCHL) launched connect IPS, an e-payment system that
facilitates online fund transfer, government revenue payment, credit payment, and payment
processing all of which are conducted directly from or to bank accounts (NCHL, n.d.)

As per the World Bank Global Findex Database 2017, the sole reason for 20 percent of
Nepalese (adults) for not opening a bank account is that the banks are too far away. In

13
Nepal, it is neither feasible nor profitable to open a bank branch in each village. So, to
access financial services to rural people, agent banking is gaining popularity. Agent
banking is a relatively new electronic banking product where customers can open bank
accounts, deposit, transfer, withdraw, and pay for goods and services through a POS
machine managed by a bank or its banking agent. Agent banking is a quick and cost-
effective way to supply banking services to people in rural places, which helps to alleviate
poverty and improve people's lives (Khalti, 2019).

The NRB licenses four classes of financial institutions in the financial sector: commercial
banks (A class), development banks (B class), finance companies (C class), and MFIs (D
class). To promote and accomplish greater financial inclusion, the NRB has allowed Class
A, B, and C financial institutions to use digital banking services and designate agents to
reach out to financially excluded sections of the population (Micro Save, 2014). NRB
guidelines allow Class A commercial banks and Class B development banks to offer
branchless banking services. However, only commercial banks have offered such services
thus far (Khabar, 2017).

Financial access has increased with the expansion of financial institutions and their
branches. Regardless of the increase in the number of BFIs and their branches, financial
institutions remain concentrated in urban or semi-urban with easy geographical access.
Agent banking has been encouraged in Nepal to meet the payment demands of those who
are unable to access the financial system. Similarly, to facilitate payments at a retail
location, mobile phone-based payment methods have been encouraged (Pant, 2016).

However, Sakcham (n.d.) mentions that most of the banks in Nepal use BLB points with
the primary motive of opening accounts, and collecting deposits and withdrawals. In
addition, to attain profitability and self-sustainability BLB points should offer additional
revenue-generating services like loans and remittances. To increase the revenue stream,
several banks have begun to cross-sell additional financial services such as loans,
remittances and utility bill payments through agents. Agents have been offering loan
facilities by referring to bank branches as they do not have the required credit analysis
skills.

14
Digital technology had been recognized as a turning point in many industries. The financial
sector can assist in achieving financial inclusion with the emergence and adaptation of
digital financial technology as innovative tools and technologies are being developed while
enhancing speed, reliability, and efficiency. People in rural areas now have easier access
to financial services with digital financial services, thereby eliminating the need for
physical bank branches (Khalti, 2018).

2.2 Models of Agent Banking

Banks in collaboration with telecom firms, internet service providers, and a huge network
of bank-hired agents, have developed several agent banking distribution channels around
the world (Nisha, Nawrin & Bushra, 2020). For example, Brazil, Colombia, Kenya, Peru,
and India have previously implemented agent banking as a means of financial inclusion.
Brazil follows a bank-based agent banking model however, the non-bank-based agent
banking model has just started to emerge. Colombia only allows bank-based agents to
conduct business, and non-bank-based agents are not permitted under existing legislation.
Peru uses an agent banking model that is based on banks. Kenya follows mainly the non-
bank-based agent banking model. India follows both the bank-based agent banking model
and the non-bank-based agent banking model (EFInA, 2011).

Veniard (2010) found four different types of acknowledged agent banking models:

i. POS-enabled bank agent (a bank-managed agent who adopt a payment card to

determine clients);
ii. Mobile phone-enabled agent (a bank-managed agent who uses a cell phone to
identify clients);
iii. Mobile wallet (a telecom-managed agent that uses a cell phone to identify clients
and offers mobile wallets that are backed by bank deposits); and,
iv. Bank provided account linked to a mobile wallet (this is a bank account connected
to a mobile wallet. The bank does not manage the agent and the telecom receives a
fee for deposits and withdrawals)

15
(Njunji, 2013) justified agent banking by three theories.

i. Bank-Focused Theory
The bank-focused theory emerges when a traditional bank employs non-traditional
low-cost delivery channels to provide financial services to its existing customers.
Examples range from use of ATMs to online banking or mobile phone banking to
offer users with minimal financial services. This method is additive in nature and
can be viewed as a small expansion of traditional branch banking.
ii. Bank-Led Theory
The bank-led approach differs from traditional branch-based banking as customers
execute financial transactions through retail agents rather than through bank
branches or bank personnel. In the most basic version of the bank-led theory of
agent banking, a licensed financial institution (typically a bank) delivers financial
services through a retail agent. That is, the bank develops financial products and
services but is distributed through retail agents who handle all or most of the
customer interaction.
iii. Non-Bank-Led Theory
The non-bank-led model involves a bank playing a minor role in the day-to-day
account management. In this model, the bank’s role is often limited to the protection
of funds. Account management is managed by a non-bank that interacts directly
with customers. Customers under this theory do not deal with a bank, nor do they
maintain a bank account. Instead, customers deal with a non-bank firm such as a
mobile network operator or prepaid card issuer and retail agents serve as the point
of customer contact.

In addition, Achugamonu (2017) clarifies two major models of agent bankng in Nigeria:

i. Bank-led model (This is generally agency arrangement where bank act as a

principal in forming agent banking relationships)
ii. Non- bank led model (This is generally agency arrangement in which parties other
than banks may serve as principal in forming agent banking relationships)

16
2.3 Theoretical Review

The agent banking concept is a relatively new innovation that was first introduced in Brazil
in the first decade of the 21st century. Thus, the amount of study done in this field is limited.
The theories that underpin research in the field of agent banking differ from those produced
in the fields of finance and accounting. However, it is assumed that when deciding on the
adoption of the agency banking model, commercial banks must have considered issues
relating to groundwork in building clients, satisfying the clients, minimizing operating
charges, and maintaining a competitive advantage over their competitors. Therefore, the
theoretical review in this research will focus on three theories: agency theory, the diffusion
of innovation theory, and financial intermediation theory.

2.3.1 Agency Theory

Commercial banks have realized that bringing financial services to the rural community
through their traditional branches is not feasible. Therefore, they've enlisted third parties
(retail outlets) to act on their behalf and provide fundamental banking services like opening
accounts, deposits, and withdrawals. The agreement between banks and local outlets forms
an agent-principal relationship where the banks act as principals and the local outlets serve
as agents (Munoru, 2016).

Since, Jensen and Meckling (1976) introduced agency theory in its contemporary form, as
it had been the topic of substantial investigation. They defined an agency relationship in
their research of agency theory as an agreement in which one or more people (principals)
employ a different person (agent) to execute services on their behalf and delegate some
authority to the agent. If both the agent and principal goals are to increase profits, the agent
may not always act in the best interests of the principal. By giving proper incentives to the
agent, the principal may regulate divergences from his interests. The principal-agent
relationship is formed when commercial banks adopt the agency banking model and hire
numerous agents. The commercial banks must sufficiently reward the agents through
different commission plans. Due to the fair salary and commissions, more individuals will
want to work as commercial bank agents.

17
Nurcan (2005) states that an agency relationship arises when at least one principal enlists
the help of another person to carry out an administration task on their behalf. The meetings
anticipate that the relationship will lead to an efficient work division in the hopes of gaining
a net benefit. Agency theory is applicable to this research as it recognizes the importance
of the agent in pursuing financial inclusion. According to the notion, the delegation of
responsibility by the principal aids in the promotion of a productive and efficient economy.
Agency theory discusses the principal-agent conflict that emerges in the interaction
between a principal and an agent in a business or economic activity due to the unaligned
goals of the principal and agent (Eisenhardt, 1989). The underlying premise of this theory
is that the interests of the principles may differ from those of the agents, resulting in a
conflict that must be resolved. The owners are referred to as principals, and the managers
are referred to as agents (Mulili & Wong, 2010).

Bizah, Gumbo and Magweva (2017) found that moral hazard and the adverse selection
problem are two major issues that arise when agents undertake tasks on behalf of their
principals.

Moral hazards can be faced by the principal when agency theory is in practice because of
differences in the interests and the cost which principals have to pay to align the interest of
managers with them (Waller, 2004). In this case, the agents may not put their best effort
into the task assigned by the principle. For instance, the agent may become careless by
failing to inspect the money they collect for deposits and, as a result, may accept counterfeit
notes. Hence, the majority of agent contracts attempt to induce optimal behavior from
agents by holding them accountable for all losses caused by their negligence.

However, agents might be discouraged when they are paid a fixed commission. In order to
minimize losses, the financial institution must urge the retailer to work in its best interests.
In this instance, the principal often gives remuneration based upon the number and value
of transactions (pro-rated commissions) that the agents have carried out. This will
encourage agents to put extra effort into their duties so as to earn higher commissions.

The adverse selection problem arises when there is information asymmetry between the
principal and the agent. In this case, the agent will have access to more information than

18
the principal and will choose not to share it with the principal. In rare situations, the
principal may make an incorrect decision based on the information provided by the agent.

Agency theory analyzes and solves problems between principals and their agents. Problems
arise in corporations when agents fail to accept responsibility for their decision unless they
own stocks in the organization (Wheelen & Hunger, 2002).

2.3.2 Diffusion of Innovation (DOI)

The DOI theory was proposed to describe how a concept or product obtains momentum
and spreads or diffuses within a certain community or social system (Rogers, 2003). The
DOI theory investigates how creative ideas are passed down from generation to generation.
According to the DOI theory, an invention is continuously transmitted through numerous
channels among people who have the same social beliefs (Echchab & Hassanuddeen,
2013). The dispersion of innovation theory examines the rate at which new advancements
spread and how and why they spread, intending to determine the factors that influence the
selection of new data innovation advancements (Monyoncho, 2015). The DOI theory aims
to explain and illustrate the methods through which digital financial services innovations
are adopted and implemented.

There are five key elements that drive innovation adoption and each of these factors is
present in the five adopter categories to varying degrees (Rogers, 2003):

i. Relative advantage: The degree to which a new concept, program, or product is

regarded to be superior to the one it is intended.
ii. Compatibility: How effectively the modification aligns to the beliefs, standards,
and demands of the potential users.
iii. Complexity - How complex it is to grasp and or apply the innovation.
iv. Trial- The ability to test or experiment with an innovation before adopting.
v. Observability - The degree to which the modification produces tangible outcomes.

Rogers' diffusion of innovations theory is useful for investigating the efficiency of agent
banking as a financial inclusion technique because agent banking can be considered an
innovation in itself. Additionally, Sohail and Al-Jabri (2012) indicate that the DOI theory
is a most familiar approach that has investigated factors influencing an individual’s

19
decision to accept new technology or innovation. DOI is an approach that attempts to
explain why and how quickly new concepts and technologies circulate across civilization.

2.3.3 Financial Intermediation Theory

The agency banking models also borrow the distribution channels from marketing theory.
A distribution channel is a means by which a company can distribute its products to
consumers. The agency banking model is a means of providing banking services to clients.
As a result, it functions as a delivery channel. Agent banking services are provided by an
intermediary (the retailer) who undertakes duties in support of the financial institution in
order to overcome the challenges associated with serving low-income clients with low
transaction volume and value (Bizah et al., 2017).

Financial intermediation is the process of connecting lenders (individuals and corporations

with extra funds looking to invest) and borrowers (those with a deficit looking for finance).
Due to information asymmetry and significant transaction expenses, it is practically absurd
for lenders and borrowers to meet face-to-face. As a result, financial intermediaries such
as banks, insurance firms, mutual funds, and pension funds serve as a vital link between
lenders and borrowers. Agent banking is thus driven to connect lenders and borrowers to
reach the objective of financial intermediation (Munoru, 2016).

Allen and Santomero (1996) suggest that when markets are perfect, resource allocation is
efficient, and intermediaries have no role to play in boosting welfare. However, financial
intermediation will always be required since markets have flaws and information
asymmetry.

2.3.4 DFS Ecosystem

The DFS ecosystem mostly includes:

i. Clients that use the services,

ii. Service providers who supply and support the infrastructure required to deliver
services, and
iii. Policymakers who create laws and regulations.

20
The primary regulators for DFS in Nepal are the NRB, Nepal Telecommunications
Authority (NTA), Consumer Protection Council, and Competition Protection and Market
Protection Board (Wechsler, Gurung & Perlman, 2018).

2.3.4.1 NRB

The NRB regulates banks and other financial institutions such as non-governmental
organizations, licensed cooperatives, citizen investment trusts, insurance companies,
employee provident funds, and securities markets. It has launched a Regulatory
Technology (RegTech) to offer information and statistics on financial access and usage in
order to aid regulatory authorities, infrastructure providers, and financial service providers
in developing data-driven programs and policies to bring financial access to rural regions.
The Nepalese government has also committed to actively promote DFS and other
electronic payment systems, particularly in the aftermath of the 2015 earthquake (Perlman
& Gurung, 2018a).

2.3.4.2 Ministry of Finance (MoF)

The MoF developed the Financial Sector Development Strategy (FSDS) 2015-2020 to
increase access to finance, thus leading to increased financial inclusion. It promotes the
establishment of financial institutions in underprivileged communities, boosting agent
banking and mobile banking, as well as the implementation of microcredit and financial
literacy programs (Pant, 2016).

2.3.4.3 Nepal Telecommunications Authority (NTA)

NTA is the country's regulatory body for telecommunications. It grants operator licenses,
establishes equipment and service standards, assures the quality of services offered, and
resolves disputes between providers and customers. It also provides policy advice to the
government on telecommunications issues (NTA, 2021).

It has no authority over non-bank Payment Service Providers (PSPs) that are not Mobile
Network Operators (MNOs) but provide financial services through mobile networks.
Mobile phone handset registration using IMEI numbers became necessary in April 2016,
allowing handsets and transactions to be linked to an identity. This can potentially

21
compliment the Anti-Money Laundering (AML) and Counter Financing of Terrorism
(CFT) goals of the NRB (Perlman, 2018c).

2.3.4.4 Consumer Protection Council

The Consumer Protection Council was created by the Consumer Protection Act to develop
policies and make recommendations to the government in order to protect and promote
consumers' rights and interests. The council is in charge of informing customers dealing
with their rights, cost, and the quality and quantity of goods and services available. The
council also provides compensation for harm and injury that is likely to be caused to
consumers (Ministry of Law & Justice, 2018).

2.3.4.5 Competition Promotion and Market Protection Board

The Competition Promotion and Market Protection Board promotes healthy market
competition. It advises the government on competition policies and develops public
awareness about the benefits of fair competition in the economy (Government of Nepal,
2007).

2.4 Empirical Studies

Hossain, Al-Amin and Toha (2021) investigated the impact of agent banking provided by
commercial banks on financial inclusion based on agency theory considering the purposive
sampling method. The researcher conducted a quantitative study on 19 commercial banks
that are providing agent banking services in Bangladesh. The study found that using agent
banking for account opening, deposit, credit, and inward remittance by customers has a
significant and positive relationship with financial inclusion. Hence, the study concludes
that financial inclusion and agent banking have a strong positive relationship.

Pervin and Sarker (2021) studied the evolution and prospects of agent banking in
Bangladesh based on a descriptive analysis concentrated on the improvement of agent
banking in Bangladesh and the future of agent banking. The researcher used the SWOT
analysis approach to analyze the strengths, weaknesses, opportunities, and threats of the
agent banking business. The researcher focused on the operation of agent banking,
particularly on how and what kinds of services are provided by the agents, how they

22
mobilize funds by offering different kinds of services, and how the economy gets better
from this service. Ebong and George (2021) note that banks must innovate in order to make
a greater contribution toward financial inclusion. According to them, leveraging digital
innovations in services such as payments and digitizing alternative channels like agent
banking are likely to increase efficiencies in physical channels and the provision of banking
services, thereby increasing the overall reach and penetration of banking.

Rahman (2019) conducted a study on the prospects and challenges of agent banking on
financial inclusion in Bangladesh to explore how far banks have progressed in achieving
financial inclusion through agent banking, as well as the challenges encountered. For this,
quantitative research methods were employed that focused on commercial banks providing
agent banking services. A self-administered questionnaire was distributed to agents, bank
employees, and customers to collect data. There have also been certain problems, such as
rapidly processing credit files, gaining consumer trust, and maintaining an internal
relationship between the agent and the branch. The study's findings revealed that liquidity,
geographic coverage, prices, and security of agent banking services all had a significant
and positive relationship with financial inclusion. The study also concluded that broad
geographical coverage by agent banking is the best way to increase financial inclusion.

Ozili (2018) states that digital finance through fin-tech providers has a positive impact on
financial inclusion in emerging and advanced economies. Also, the ease that digital
banking gives individuals with little and fluctuating income is often more beneficial to
them than the greater cost of obtaining such services from traditional regulated banks. Lotto
(2016) discovered that agent banking had simplified banking services by reducing the
distance that customers must travel to access a service point, and that the liquidity crunch
is not a major issue because the agent’s operations are constantly evaluated and monitored
to avoid cash shortages and minimize security risks by the parent banks. The study also
discovered that agent banking had lower expenses than traditional banking services.
However, Micro Save (2014) found that cash and e-money requirements are higher in the
morning, and cash liquidity is handled by reaching out to friends, family, or neighbors to
meet immediate financial needs. In addition, the survey discovered that there is a minimal

23
investment in agent training and marketing. Furthermore, there is a lack of assistance for
agents when they encounter a technical issue, as server downtime is a common issue.

Haider (2018) looked at how people's livelihoods are supported by modern financial
technologies. Accessibility to digital technologies, particularly smartphones, internet
access, and biometric authentication, enables a broader area of financial services for the
unbanked, including online banking, mobile phone banking, and digital credit. Individuals
in developing nations who are poor or impoverished can save and lend through formal
financial institutions, receive capital appreciation, and smooth their consumption with
digital financial services that are easier and more affordable than traditional banking
services.

In order to analyze the significance of agent banking services in fostering financial

inclusion in Kenya, Ndegwa (2017) studied the potential of agent banking as a financial
inclusion approach in commercial banks by examining how geographical coverage and
liquidity affect agent banking. The study adopted a cross-sectional survey design with a
self-administered questionnaire to collect data from 38 administration managers and
supervisors of the commercial banks in Kiambu which had embraced the agency banking
model. Data were analyzed using descriptive (frequency distribution and percentages) and
inferential statistics (regression). At a 95 percent confidence level, geographic coverage
was the most essential benefit and thus the most important driver of financial inclusion.
The research suggested that banks should attempt to provide additional services through
agent banking in order to enhance financial inclusion, particularly in rural regions.

Bizah et al. (2017) state that agent banking is a driver of financial inclusion in Zimbabwe
because financial institutions use agent banking services to increase the country’s level of
financial inclusion. Moreover, the study provides insight into the agent banking model and
also highlights its advantages and disadvantages. As a result of its ease and cost-
effectiveness, agent banking can be used to push financial inclusion in Zimbabwe.

Agufa (2016) examined the effect of digital finance on financial inclusion in the banking
industry in Kenya and noted that digital finance has no impact on financial inclusion in
Kenya's banking sector because banks use digital financial services to reduce operating
costs associated with opening and operating branches to improve their profitability and

24
financial performance, and not to foster financial inclusion. On the other hand, Munoru
(2016) indicated that financial inclusion and agent banking had a strong positive
association.

Sakchyam (n.d.) access to finance Nepal, conducted a study on a brief on branchless

banking initiative and found that BLB points are the only outlets providing financial
services in many of the locations as bank branches in rural areas are often located in town
centers. Thus, BLB points in remote local markets play an important role in serving an
unserved and underserved population in many parts of the country. The study was carried
out in collaboration with 14 commercial banks undertaking BLB initiatives in Nepal. In
order to get an overall view of the banks’ BLB activities, the study included objective
(quantitative) as well as subjective (qualitative) questions. According to the study, BLB
points are an important component of bank branches that can help them expand their reach
and sustain themselves, as well as highlight some issues and challenges. such as:

• As BLB points operate heavily through internet connectivity, which is particularly

poor in the hilly and mountainous regions, which leads to higher rates of transaction
failures, resulting in poor services and poorer client satisfaction.
• As BLB points involve cash transactions, there are certain security issues. There is
a risk of theft or robbery of cash either at the BLB point itself or while traveling to
the nearest branch.
• As BLB points are located far from the monitoring branches, BLB agents have to
travel to the nearest branch to manage and maintain an adequate level of liquidity
to continuously serve the local customers.

Afande and Mbugua (2015) conclude that geographic coverage of agent banking is the best
predictor of financial inclusion and insufficient liquidity was not a deterrent because agents
were inspected and supervised to ensure that cash shortages were unusual. Moreover,
security concerns were minimal as physical security features such as metal grills and CCTV
had been implemented by agents. Furthermore, Ndegwa (2017) also found that
geographical coverage has the greatest important advantage and is thus the most essential
driver of financial inclusion, while liquidity availability is another benefit of agent banking.
Ferdous, Mosharrafa and Farzana (2016) explored agent banking in Bangladesh - a new

25
era in financial institutions that increases client’s easy access to finance and banks
profitability. This service opens a new era for financial organizations, which in turn has a
huge influence on the country’s economy.

Lotto (2016) researched to examine the determinants of bank agent that promotes financial
inclusion in Tanzania. The study is quantitative in nature and the data were collected
through administered questionnaires and interviews. In this study, only bank agents who
are engaged in agent banking for the period of at least two years were considered and hence
the study was conducted among three banks in Tanzanian. As a result of this research, it is
concluded that the wide geographic coverage of agent banking is a better promoter of
financial inclusion as it decreases travel expenses and other inconveniences such as time
wasted in long queues at bank branches. As a result, the agency banking model is a success
in terms of accelerating financial inclusion.

Hedge and Kotian (2016) studied agent banking for the poor as a part of financial inclusion.
A semi-structured questionnaire was used to collect primary data, which was then given to
300 respondents in South Canara and Udupi districts. Books, journals, dissertations,
periodicals, and the internet were used to gather secondary data. Data collected were
analyzed through descriptive statistics. According to the findings, savings, consumption,
and standard of life have all increased, resulting in a rise in the use of financial goods.
According to the report, customers lack of trust and confidence is also a barrier to adopting
BLB alternatives. However, the study shows that BLB has a favorable impact on financial
inclusion.

In Nigeria, Achugamonu (2017) investigated agent banking and financial inclusion. The
study used a random sample method to distribute 275 questionnaires to bank employees
and managers, as well as agent bank owners and authorities, and the data were analyzed
using a multivariate regression approach. Furthermore, an ANOVA test was used to
determine the model's significance, and it was discovered that there is a substantial link
between agent banking services and financial inclusion. Furthermore, there is a significant
relation between agent banking's financial development operations and financial inclusion.
Furthermore, the geographical coverage and services of agent banking have the strongest
relationship to financial inclusion.

26
Munoru (2016) studied the effect of agent banking on financial inclusion in Kenya to
analyze and evaluate whether financial services provided by agents had an impact on
financial inclusion in Kenya. The researcher analyzed the variables using secondary data
in a time series format without modifying or tampering the data in order to better explain
the impact of agent banking on financial inclusion in commercial banks. Between 2010
and 2014, 13 commercial banks that had used the agent banking services for at least one to
five years were reviewed and a financial inclusion report was obtained. The results of
inferential analysis, correlation, and regression analysis show that there is a strong positive
association between agent banking and financial inclusion.

Mahmood and Sarker (2015) published an article titled inclusive growth through
branchless banking: a review of agent banking and its impact to understand the role of
branchless banking in inclusive growth in many nations as well as prospects for using
branchless banking to address financial access barriers in Bangladesh. The researcher
gathered data from secondary sources (various publications) and found that agent banking
is an important instrument for a country's inclusive growth.

Afande and Mbugua (2015) examined the role of agent banking services in promotion of
financial inclusion in Nyeri town, Kenya to evaluate how geographical coverage, security
and availability of liquidity of agent banking have promoted financial inclusion. The
researcher used a descriptive research design to collect data from branch managers and
appointed agents of Equity Bank, Kenya Commercial Bank, and Co-operative Bank. The
researcher analyzed the data using descriptive and inferential statistics. The study's findings
showed that geographic coverage, security, liquidity, and costs of agent banking services
all had a significant and positive relationship with financial inclusion. The study concluded
that the wider geographical coverage of agent banking is the best indicator of financial
inclusion. Furthermore, the study suggested that agent outlets should be increased in order
to provide more services and expand geographical coverage, as well as those agents should
be thoroughly verified and regulated to minimize liquidity shortages and security issues.

27
Table 2.1

Empirical Literature Review

Author (Year) Methodology Findings

Afande and Both primary and secondary The findings of the study indicated
Mbugua (2015) data were used and then that, geographical coverage, security,
analyzed using descriptive liquidity, and costs of agent banking
and inferential statistics. have a positive and significant
relationship to financial inclusion.
Mahmood and The study used secondary The research concludes agent banking
Sarkar (2015) data such as journals and case as an important tool for a country’s
studies. inclusive growth.
Lotto (2016) The study was descriptive in This result resulted that agent banking
nature based on primary had reduced overcrowding in banking
source collected through 150 halls and appraised geographical
administered questionnaires coverage positively. According to this
and interviews from 3 banks. study, agent banking's increased
geographic penetration is a stronger
booster of financial inclusion.
Munoru (2016) Secondary data in a time From the findings, it is evident that
series approach (2010-2014) agent banking has a strong positive
Inferential, correlation and relationship with financial inclusion.
regression analysis were
analyzed.

Agufa (2016) Secondary data collected Negative correlation with financial

(2011-2015) from 12 inclusion. Insignificant negative
commercial banks which relationship between agent banking
were fully functioning and and financial inclusion. No significant
used. ANOVA, regression, relationship between financial
and correlation for analysis. services and financial inclusion.

28
 Hedge and Primary data and Secondary The study concluded that savings,
Kotian (2016) data. Data collected were consumption and standard of living
analyzed through descriptive has increased leading to increase the
statistics. use of financial products. The study
clearly indicates that BLB has positive
impact on financial inclusion.

Achugamonu Primary data collected The study concludes that there is a

(2017) through 275 questionnaires significant relationship between agent
and analyzed using banking services and financial
multivariate regression, inclusion. Geographical coverage of
ANOVA test, reliability test. agent banking have the most
significant relationship with financial
inclusive growth.

Ndegwa Cross sectional survey data Geographical coverage of agents

(2017) collected through 38 influences financial inclusion and
administration managers and ensures sufficient liquidity among
commercial bank which have outlets.Costs of agent banking,
adopted agency banking security concerns, geographical
model. The data were coverage and liquidity have
analyzed through descriptive significant impact on financial
methods and regression. inclusion in commercial banks.

Rahman Both quantitative and Liquidity, geographic coverage, costs,

(2019) qualitative (mixed methods) and security have a positive and
approach. Descriptive analysis significant impact on financial
was used to explore the extent inclusion. The study found that
to which banks have been able expanding geographical coverage
to explore financial inclusion through agent banking is the most
through agent banking and its effective strategy to increase financial
challenges. inclusion.

29
 Hossain et al. Secondary data collected from There is no relationship between cash
(2021) 19 commercial banks (2016- deposit, loan disbursement made by
2019) with at least 5 years of agent banking and financial inclusion.
adoption of agent banking
There is significant relationship
services in Bangladesh.
between account opening, number of
Descriptive, regression,
agents participating, inward
correlation, heteroscedasticity
remittance made by agents and
were analyzed by Gretl 2019.
financial inclusion.

Chiteli (2013) studied agent banking operations as a competitive strategy of commercial

banks in Kisumu city and found that commercial banks incur risks such as reputational
risk, consumer protection, anti-money laundering, and legal risk when operating agent
banking operations. The agents, on the other hand, face challenges such as operational risk,
liquidity risk, and credit risk. Siddiquie (2014) did research on agent banking, a revolution
in Bangladesh's financial services market, and notes that more and more individuals will
use this service because the services provided by agents will bring convenience to their
daily lives.

Jayanty (2012) points out that, agent banking has empowered commercial banks to expand
their reach to low branch penetration areas but also to the doorsteps of people who are
reluctant or unable to travel to a branch. Agent banking derives its concept as an expansion
strategy from the agency banking model, which is used to provide financial services
without the usage of bank branches, as represented by (Ivatury & Pickens, 2006).
According to the authors, agent banking is a less expensive alternative to traditional
banking since it uses common delivery channels like retail locations, mobile phones, the
internet, and ATMs. The authors further show that agent banking is profitable to the
customers since it lowers transaction costs by bringing services closer to their homes and
reducing the expense of transportation to bank offices. Moreover, banking agencies provide
clients with extended operating hours because they operate for longer hours than banks and
thus avoid long queues.

30
In a similar context of the discussion, Wainaina (2011) considers long distances between
bank branches and rural residences as one of the primary causes of inadequate (poor)
financial inclusion in remote and rural locations. In addition, clients may find it inefficient
to drive to a faraway bank branch simply to do bank transactions, which may be more
expensive than the cost of transportation. For these customers, agent banking becomes of
paramount importance.

Collins, Morduch, Rutherford and Ruthven (2010) showed that, in Colombia, the majority
of payments such as official government payments, loan repayment, and utility bill
payments were completed through agent banking. The study recommends introducing and
implementing the agent banking model gradually. These findings are similar to Celina
(2012) who did a trend study for Brazil, Peru, Mexico, and Colombia.

2.5 Research Gap

The agency banking model is a relatively modern approach that banks have adopted as part
of their financial inclusion and growth, notably to reach out to the unbanked. The research
had been conducted on financial inclusion, as well as on an assessment of the adaptation
levels of the agency banking model. However, a minimal study has been done to determine
the model’s impact on financial inclusion. The model is still relatively new, hence there is
a lack of study in this field and the effects it may have will take time to reflect on the
financial performance. This study adds to the body of information on agent banking and its
impact on financial inclusion in Nepal.

2.6 Theoretical Framework

In this paper, the researcher intends to identify how agent banking will enhance financial
inclusion in Nepal. The dependent variable for the study is financial inclusion whereas the
independent variable for the study is agent banking which is determined by geographical
coverage, security, liquidity, cost and technology of agent banking.

The following conceptual model is formulated through the reviewed literature.

31
Figure 2.1

Conceptual Framework

Independent Variable Dependent Variable

Agent Banking

Geographical coverage (G)

Security (S)

Liquidity (L) Financial Inclusion (FI)

Cost (C)

Technology (T)

Figure 2.1 shows the link between agents banking and its implications towards financial
inclusion which is the main purpose of this study. Specifically, the researcher tries to find
out the influence of geographical coverage, security, liquidity, cost, and technology of
agent banking to financial inclusion.

2.7 Operational Definition of Variables

Independent Variables

The independent variables for the study are the agent banking which is determined by the
geographical coverage, security, liquidity, cost, and technology of agent banking.

1. Geographical Coverage

Geographical coverage refers to the area covered by the agents outside conventional bank
branches. It refers to the ability of agents to bring financial services closer to customers.
BLB points are primarily launched in areas where brick-and-mortar outlets are difficult to
build due to tough topography or inadequate market potential to justify the development of

32
a full-fledged physical branch. Because of the unique geographical diversity and rural
communities lack of access to financial services, there is a potential for agent banking to
outreach in many difficult and untested regions.

2. Security

It refers to the agent’s ability to implement physical security and confidentiality to ensure
the protection of customers liquid cash at their disposal. BLB points utilize security as a
safety measure to safeguard the safety of both agents and customers. To avoid tampering
and manipulation by agents, as well as to secure the medium of transaction, the safety,
security, efficiency, and operation of agents are frequently monitored.

3. Liquidity

It refers to the availability of access to cash as well as convertibility. The management of

liquidity is important for the success of agent banking. As a result, it is necessary to
consider the peak liquidity requirements. A shortage of physical cash and e-money at BLB
points might result in denial of the service, thereby lowering customers confidence.

4. Cost

The cost of banking with agents is described as the cost of fundamental financial products
and services such as account opening, deposits, withdrawals, remittances, top-ups, balance
inquiries, statements, bill payments, and utility payments, among others.

5. Technology

It is defined as usability and effectiveness of the technology utilized by agents to transact.

The agents generally use POS devices, that are connected to the internet via General Packet
Radio Service (GPRS) connections. Besides POS, some use Short Message Service (SMS)
and Interactive Voice Response (IVR) for transactions. It also reflects the problems
encountered when the technology platform is inaccessible for transactions due to server
downtime or technological glitches.

33
Dependent Variables

The Group of Twenty (G20) recognizes the importance of financial inclusion in economic
development. Financial inclusion policies and initiatives are receiving more attention as a
critical enabler in the battle against poverty and the pursuit of inclusive development.
Financial inclusion is a process that ensures easy availability, usage and access of the
formal financial system to all members of an economy. Individuals and businesses who are
financially included have access to relevant and affordable financial products and services
that are supplied responsibly and sustainably. Financial inclusion is measured in three
dimensions:

(i) Access to financial services,

(ii) Usage of financial services, and
(iii) The quality of the products and the service delivered.

34
 CHAPTER III

RESEARCH METHODOLOGY

This chapter primarily focuses on the methods and procedures that were used in this
research study. The chapter serves as a blueprint for data collection, measurement, and
analysis. This section describes the research design, population and sample, data collection
methods and the analysis procedure.

3.1 Research Design

This study adopts a descriptive and causal research design to describe the characteristics
of the variables used in this study with a clearly phrased structured questionnaire to
communicate with participants and avoid misunderstandings. This research is quantitative
research which is achieved through primary data collected from Bagmati Pradesh, Nepal.
The study attempts to examine the effects of agent banking on financial inclusion in Nepal.
The study used descriptive, correlation, regression, and other statistical approaches to
achieve the objectives.

3.2 Population and Sample

The study targets the BLB department, head office of the commercial banks, and managers
and operations in-charge of branches of commercial banks in Nepal which have
successfully implemented the agent banking services. This is due to the fact that such
individuals are in control of the banks operations and are resourceful in different areas and
activities of the bank, such as agent banking. Out of 27 commercial banks, 15 commercial
banks and their branches are actively providing agent banking services in Nepal. However,
the study limits to head offices and their branches that have adopted the agency banking
model in Bagmati provinces. Among 15 commercial banks, 9 head office banks were
considered for the pilot study. There were a total of 86 branches that have successfully
adopted and implemented the agency banking model from 9 commercial banks in Bagmati
Pradesh, Nepal. The convenience sampling method has been used to determine the
samples. Google Forms were circulated via email to 86 bank branches that are actively

35
providing agent banking services. Out of 86 respondents, 53 were recorded. Thus,
considering the time limit and reliability of data submitted by the respondents, the
researcher concluded the survey by analyzing the responses of 53 respondents. A list of
commercial banks and their branches providing agent banking services in Bagmati
Pradesh, Nepal has been included in appendices 2.

3.3 Data Collection Method

The primary data for this study were collected through the distribution of structured
questionnaires to the BLB department, branch managers and operations in charge of the
commercial banks and their branches in Nepal that have used the agency banking model.
The researcher opted for the questionnaire because the responses are acquired
systematically, making questionnaires more objective than other tools of data collection. It
solely comprises closed-ended questions to reduce the amount of time spent filling in the
answers. A Likert scale is the most widely used scale in survey research, where respondents
specify their level of agreement with a statement when responding to a Likert questionnaire
item.

3.4 Instrumentation

The data for this study was gathered using a questionnaire created by the researcher. The
draft of the questionnaire was drawn out based on the researcher’s readings, past studies,
and relevant literature to the study. In the preparation of the instrument, multiple-choice
and Likert scale questions were framed to study the effect of agent banking on financial
inclusion in Nepal. The researcher used five-point Likert type scales ranging from
“Strongly Agree” with a score of 5 to “Strongly Disagree” with a score of 1. The research
instrument has two sections. The first section deals with the general information of the
respondent and the adaptation of the agency banking model. The second section was further
divided into two parts to examine the independent and dependent variables. The
independent variable for the study is agent banking which is determined by the
geographical coverage, security, liquidity, cost, and technology of agent banking. The
dependent variable is financial inclusion. After the questionnaire was completed, each item

36
was analyzed separately, or in some cases, item responses were summed up to create a
score for a group of items. Hence, Likert scales are also known as summative scales.

3.5 Reliability Analysis of Data

Pilot Study

The purpose of the pilot test is to determine the accuracy and consistency of the model and
measurement of scale. The internal consistency of the Cronbach's alpha is used to
determine the instrument's reliability. The pilot survey of the study was conducted in
Kathmandu. This area was selected because most of the head office of the commercial
banks and their branches are located in this area while providing both financial and non-
financial services to their customers.

A total of nine BLB department, head office were interviewed in the pilot phase. Selection
procedures were based on convenience; however, it was required that the commercial
banks must have adopted agency banking model in order to evaluate the accuracy and the
consistency of the questionnaire design.

Reliability

The Statistical Package for Social Scientists (SPSS) statistical tool was used to check the
reliability of the data. The reliability of the study has been measured by using the
consistency and stability of the respondent’s responses in primary data. The major use of
reliability coefficients is to convey the repeatability of results. Cronbach’s alpha is a
statistical reliability coefficient for internal consistency. Cronbach's alpha is a coefficient
of reliability or consistency and not a statistical test.

Cronbach’s alpha is the most common measure of internal consistency and reliability
which is most used when the questionnaire used for the research study have multiple Likert
questions that form a scale and to determine if the scale is reliable enough to obtain reliable
findings for the study.

In this study, all the respondents have responded to on a Likert scale of 1 to 5. The
coefficient of Cronbach's alpha varies from 0 to 1, and a value of 0.60 or less generally

37
indicates unsatisfactory internal consistency reliability and a value of Cronbach's alpha in
the range of .90 to .99 is considered excellent internal consistency reliability.

Table 3.1

Reliability Analysis

Variables Cronbach's Alpha No. of Statements No. of selected statements

G 0.667 3 2
S 0.428 4 4
L 0.663 6 6
C 0.645 3 3
T 0.463 3 3
FI 0.515 4 4
Total 0.56 23 22

Table 3.1 shows the Cronbach’s alpha value for the test of reliability of six variables. There
were a total of twenty-three statements from both dependent and explanatory variables and
item total statistics revealed that removing one statement will increase the alpha, ensuring
higher reliability of the questionnaire. Therefore, one statement has been removed from the
questionnaire used for the study

Cronbach’s alpha 0.56 implies that the data are reliable which is greater than 0.50 (0.56 ≥
0.50) as the benchmark of this test is 0.50 due to less than 10 items. Hence, the
questionnaire used in this study is reliable.

3.6 Methods of Analysis

Primary data has been collected and evaluated from several perspectives to ascertain the
influence of agent banking on financial inclusion. Data were analyzed using SPSS. Simple
descriptive analysis was used to evaluate the data acquired throughout the study using the
SPSS and Microsoft Excel software. This program was chosen because it is the most
suitable for a research project and contains all of the necessary features.

38
By using SPSS, descriptive statistics i.e., percentage, mean and standard deviation is
calculated. The correlations and regression of variables were also analyzed using SPSS (V
22). For the support of data collection Google Forms was used and Excel 2019 was also
used for the data management.

Descriptive Statistics

The study employed a summary of descriptive statistics associated with the dependent and
explanatory variables of the sample to explain the variables. Descriptive analytical tools
like mean, median, standard deviation, minimum and maximum values, of different
variables such as geographical coverage, security, liquidity, cost, technology, and financial
inclusion have been used to identify the impact of agent banking on financial inclusion in
Nepal.

Correlation Analysis

This study has also applied correlation analysis in causal-comparative research design. In
this study, correlation analysis has been adopted to identify the direction and magnitude of
the relationship between different pairs of dependent variables and explanatory variables.
It shows the movements of two variables and their association. The relationship has been
explained by using the bivariate Pearson correlation coefficient. The correlation coefficient
value ranges from – 1 to +1. If the correlation coefficient is exactly -1, two variables are
said to have a perfect negative correlation since they move in opposite directions. On the
other hand, if the correlation coefficient is +1, the variables are considered to be perfectly
positively correlated.

Regression Analysis

Regression is used to represent (model) the relationship between a response variable and
one or more predictor variables. The purpose of this analysis is to determine the
relationship between a dependent variable and one or more independent variables. To
construct an estimated regression equation, a model of the relationship is hypothesized,
and parameter values are inferred. Several tests are used to determine if the model is
significant. If the model is a significant fit, the estimated regression equation can be used
to predict the value of a dependent variable, given the values of the independent variables.

39
Linear regression is a technique for stimulating the connection between two variables.
Linear regression was used to evaluate whether or not there is a significant relationship
between agent banking and financial inclusion, as well as to determine the relative strength
of different independent variables. The regression models algebraic formulation, which
includes the constant term coefficient and the error term, is as follows:

𝑌 = 𝑋 + 𝑋1 𝐺𝐶 + 𝑋2 𝑆 + 𝑋3 𝐿 + 𝑋4 𝑇 + 𝑒

Where, Y = Financial Inclusion

X = Constant

𝑋1 , 𝑋2 , 𝑋3 , 𝑋4 = Co- efficient

GC = Geographical coverage

S = Security

L = Liquidity

T = Technology

e = Residual error

40
 CHAPTER IV

ANALYSIS AND FINDINGS

This chapter deals with presentation and analysis of primary data collected through
questionnaire survey. The aim of this chapter is to analyze and examine the influence of
agent banking on financial inclusion in Nepal, as well as to interpret the findings. Here the
collected data are summarized and presented in tabulated form for the understanding and
analysis purpose. This chapter also discusses the hypothesis tests that were established in
the previous chapter. Each hypothesis is tested and examined to draw the conclusion.
Statistical techniques such as descriptive analysis, structure of variables, regression
analysis, statistical analysis and inferential analysis were used to analyze the data. The
findings from data analysis have been discussed in depth in the relevant sections.

4.1 Descriptive Analysis

Agent banking which is determined by their geographical coverage, security, liquidity, cost,
and technology is considered as the independent variables of the study and financial
inclusion which is determined by the access to financial services, usage of financial
services, and the quality of the products and the service delivery is considered as the
dependent variable.

Descriptive analysis is used to describe the fundamental characteristics of the data in the
research. They provide simple summary about the different variables that were studied to
examine the financial inclusion. The descriptive analysis includes the total number of
respondents, minimum value, and maximum value, the mean and standard deviation of
variables taken for the study.

Geographical coverage

Coverage refers to the area covered by the agent banking outside conventional bank
branches. It refers to the ability of agents to bring financial services closer to the customers.
BLB points are usually located in areas where brick-and-mortar outlets are difficult to build

41
due to tough topography or inadequate market potential to justify the development of a full-
fledged physical branch. The unique geographical diversity and rural communities lack of
access to formal financial services suggest that there is a potential for agent banking to
outreach in many difficult and untested regions. This section presents findings relevant to
the first objective of the study sought to find out the extent to which geographical coverage
of agency banking has influence on financial inclusion.

The dimensions of geographical coverage of the agents is analyzed under these sub sections;
a) customers prefer agents as they feel closer to the agent than the bank, b) agent banking
has reduced the overcrowding in the bank.

Table 4.1

Descriptive analysis of the level of agreement or disagreement in regards to geographical

coverage

Std.
Particulars N Min Max Mean
Deviation
Customers prefer agents as they feel
53 2 5 3.57 .971
closer to the agent than the bank
Agent banking has reduced the
53 2 5 3.89 .610
overcrowding in the bank

Table 4.1 exhibits the mean score of the respondent on each of the Likert scale questions of
the study. The mean scale for the question ‘Customers prefer agents as they feel closer to
the agent than the bank’ is 3.57, which means that a majority of the respondents agree that
agents provide only basic financial products and services. Moreover, the respondents also
agree that agent banking has reduced the overcrowding in the bank, and thus, customers
prefer agents as they feel closer to the agent than to the bank.

This suggests that, despite the availability of basic financial products and services, the
majority of the study's respondents agree that agency bankers have brought financial
services closer to customers and that agency banking's geographic coverage has an impact
on financial inclusion.

42
Product and Services

Products and services are the foundation for the success of any agent banking service.
Customers are more inclined to use financial-needs-satisfying products and services than
products and services provided in the absence of better alternatives.

Figure 4.1

Products and Services Offered

P R O D U C T S / S E RV I C E S
60

50

40

30

20

10

Account Money Utility Fixed

Deposit Withdrawal Remittance Insurance Loan
opening Transfer Payment Deposit
Yes 49 53 53 43 29 40 1 25 11
No 4 0 0 10 24 13 52 28 42

Figure 4.1 shows that most service providers only offer basic financial products and services
through their agent networks. Most providers already offer account opening, cash deposit
and withdrawal, remittance, and utility payment services through their agent networks.
Moreover, some of the providers also offer money transfer, fixed deposit, insurance, and
loan services. Among these products and services, cash deposit and withdrawal are the most
used, followed by account opening and remittance. Insurance and loan services are not yet
widely available due to limited agent networks.

Security

It refers to the agent’s ability to implement physical security and confidentiality to ensure
the protection of customers liquid cash at their disposal. BLB points utilize security as a
safety measure to safeguard the safety of both agents and customers. To avoid tampering
43
and manipulation by agents, as well as to secure the medium of transaction, the safety,
security, efficiency, and operation of agents are frequently monitored. This section presents
findings related to the second objective of the study sought to analyze the effect of security
of agent banking on financial inclusion.

For this, the dimension of security is analyzed under these sub section; a) customers fail to
bank with agents because of lack of security and trust, b) operation of the agency is
monitored often to ensure the security and safety of the customers, c) safety, security and
efficiency of the equipment used by the agents is monitored often to prevent tampering and
manipulation by the agent, d) agents are trained frequently to ensure that they comply with
the security standards.

Table 4.2

Descriptive analysis of the level of agreement or disagreement in regards to security

Std.
Particulars N Min Max Mean
Deviation
Customers fail to bank with agents
53 1 5 2.60 .968
because of lack of security and trust
Operation of the agent is monitored often
to ensure the security and safety of the 53 3 5 4.32 .581
customers
Safety, security and efficiency of the
equipment used by the agents is
53 2 5 4.23 .800
monitored often to prevent tampering and
manipulation by the agent
Agents are trained frequently to ensure
that they comply with the security 53 2 5 4.38 .686
standards

Table 4.2 represents the descriptive statistics of the study. The mean scale for the question
‘Agents are trained frequently to ensure that they comply with the security standards’ is
4.38, which means that a majority of the respondents strongly agree that agents are trained

44
to ensure that they comply with the security standards. They also strongly agree that the
agents are monitored during operations of the service as well as regarding the safety,
security and efficiency of the equipment. Moreover, the average respondents disagree with
the statement “the customers fail to bank with agents because of lack of security and trust”.

This indicates that the respondents of the study mostly agree with the fact that agents are
frequently monitored to ensure the safety of both agents and consumers, as well as to secure
the medium of transaction, security, efficiency, and operation of agents. In addition, the
study shows that a lack of security and trust is not a barrier to financial inclusion.

Liquidity

It refers to the availability of access to cash as well as convertibility. The management of

liquidity is important for the success of agent banking. As a result, it is necessary to
consider the peak liquidity requirements. A shortage of physical cash and e-money at BLB
points might result in denial of the service, thereby lowering customers confidence. This
section presents findings related to the third objective of the study sought to analyze the
effect of liquidity on financial inclusion.

Table 4.3 exhibits the mean score for each of the Likert scale questions regarding liquidity
and the level of agreement or disagreement. The mean scale for the question ‘Agent banking
outlets have a daily limit of cash deposit and withdrawal’ is 4.42, which means on average
the respondents strongly agree that agents have a daily limit of cash deposit and withdrawal.
The average respondents also agree that agent outlets are closely monitored to maintain
adequate liquidity and that liquidity availability affects customer retention. The average
respondents agree that the customers decline because of the agents lack of liquidity.
Similarly, the average respondents disagree that the customers avoid agents because of
perennial cash shortages, which lead to frustration.

This indicates that the respondents of the study agree that the agents are monitored to ensure
sufficient liquidity and that customers do not avoid agents due to perennial cash shortages.
However, shortages of physical cash and e-money can lead to service denial.

45
Table 4.3

Descriptive analysis of the level of agreement or disagreement in regards to liquidity

Std.
Particulars N Min Max Mean
Deviation
Agent banking outlets are monitored to
53 2 4 3.68 .581
ensure sufficient liquidity
Agent banking outlets have daily limit of
53 2 5 4.42 .633
cash deposit and withdrawal
Lack of liquid cash at agent outlets leads
53 1 5 3.21 1.044
to frustration
Lack of liquidity by agent bankers leads
53 1 5 3.36 1.058
to loss of customers
Customers avoid agents because of
53 1 5 2.81 1.194
perennial cash shortages
Liquidity availability in agent outlets
53 1 5 3.58 .969
affect customer retention

Cost

The cost of banking with agents is described as the cost of fundamental financial products
and services such as account opening, deposits, withdrawals, remittances, top-ups, balance
inquiries, statements, bill payments, and utility payments, among others. The cost of
administering low-value accounts and expanding physical infrastructure to remote rural
areas, as well as the cost in terms of money and time required by customers in remote
locations to reach bank branches, are the main hurdles to financial inclusion. This section
presents findings related to the fourth objective of the study sought to analyze the effect of
cost of agent banking on financial inclusion.

The dimensions of cost is analyzed under the sub section; a) customers perceive the cost of
banking with agents to be low, b) customers prefer agents regardless of costs, c) operational
cost of agency banking affects the transaction cost of financial services.

46
Table 4.4

Descriptive analysis of the level of agreement or disagreement in regards to cost

Std.
Particulars N Min Max Mean
Deviation
Customers perceive the cost of banking
53 1 5 3.40 1.062
with agents to be low

Customers prefer agents regardless of cost 53 1 5 3.42 .865

Operational cost of agent banking

affects the transaction cost of financial 53 1 5 3.15 .988
services

The table 4.4 exhibits the mean given by the respondents to each of the Likert scale
questions regarding the cost of financial products and services and the level of agreement
or disagreement. The mean scale for the question ‘customers perceive the cost of banking
with agents to be low’ is 3.40, which means on average the respondents agree that cost of
banking with agents is lower than traveling to the nearest traditional bank branches. The
average respondents also agree that customers prefer agents regardless of the cost of agent
banking. Likewise, we can also infer the result that the operational cost of agent banking
affects the transaction cost of financial services and the customers prefer agents regardless
of cost.

This indicates that the respondents of the study agree that customers get advantage from
banking with agents since transaction costs are lower, longer opening hours and shorter
queues than in branches.

Technology

It is defined as usability and effectiveness of the technology utilized by agents to transact.

The agents generally use POS devices, that are connected to the internet via General Packet
Radio Service (GPRS) connections. Besides POS, some use Short Message Service (SMS)
and Interactive Voice Response (IVR) for transactions. It also reflects the problems
encountered when the technology platform is inaccessible for transactions due to server

47
downtime or technological glitches. This section presents findings related to the fifth
objective of the study sought to assess the effect of technology of agent banking on
financial inclusion.

Figure 4.2

Technology Devices used in Agent Outlets

TECHNOLOGY DEVICES
120%

100%

80%

60%

40%

20%

0%
Mobile Phone POS Device Computer CCTV
Yes 34% 93% 28.30% 3.80%
No 66% 8% 71.70% 96.20%

Findings in figure 4.2 indicate that all of the agent outlets employ a POS device which
includes fingerprint reader, card machine, and a receipt printer. In addition. Mobile phones
and computer devices are also used but from small agent networks. However, fewer agents
have installed CCTV device in their service.

The table 4.5 exhibits the mean score for the statement ‘technology malfunction and server
down lead to frustration and loss of customer’ is 3.72, which means average respondents
agree that malfunction and server down leads to frustration and loss of the customer.
Moreover, on average the respondents strongly agree that the agent user interface is
accessible and simple and technology influences financial inclusion.

This indicates that the study's respondents agree that financial products and services are
more accessible as a result of technology and that the technology is simple and easy to use.
The majority of the equipment utilized by agents to transact is a POS device, a mobile
phone, and a fingerprint reader.

48
Table 4.5

Descriptive analysis of the level of agreement or disagreement in regards to technology

Std.
Particulars N Min Max Mean
Deviation
Technology malfunction and server down
53 2 5 3.72 .841
leads to frustration and loss of customer
Agent user interface are accessible and
53 3 5 4.25 .648
simple
Technology of agent banking influence
53 3 5 4.19 .681
financial inclusion

Financial Inclusion

Financial inclusion is a process that assure easy availability, usage and access of the formal
financial system to all members of an economy. Individuals and businesses who are
financially included have access to relevant and affordable financial products and services
that are supplied responsibly and sustainably.

This section presents findings related to the general objective of the study sought to examine
the effect of agent banking on financial inclusion in Nepal. The dimensions of financial
inclusion is analyzed under the sub section; a) the number of accounts opened has increased
in our bank through agent, b) the number of cash deposit and withdrawal has increased in
our bank through agent, c) payment of utilities through banking system has increased, d)
inflow and outflow of remittance through banking system has increased.

Table 4.6 exhibits the mean score by the assistant and officers of the bank and their branches
on each of the Likert scale questions of the study. The mean scale for the question ‘the
number of accounts opened has increased in our bank through agent’ is 4.42, which means
that on average the respondents of the study strongly agree that the number of accounts
opened has increased due to agent banking. Similarly, we can also infer the result that the
increase in the number of cash deposits and withdrawals, payment of utilities, and
inflow/outflow of remittance is due to agent banking.

49
Table 4.6

Descriptive analysis of the level of agreement or disagreement in regards to financial

inclusion

Std.
Particulars N Min Max Mean
Deviation
The number of accounts opened has
53 3 5 4.42 0.535
increased in our bank through agent
The number of cash deposit and
withdrawal has increased in our bank 53 3 5 4.26 0.593
through agent
Payment of utilities through banking
53 2 5 3.98 0.604
system has increased
Inflow and outflow of remittance through
53 2 5 3.83 0.826
banking system has increased

This indicates that the respondents agree that they have access and easy availability of
formal financial services through agent banking. In addition, majority of the respondent
agree that the agent banking has increased the usage of formal financial services, resulting
in financial inclusion.

4.2 Relation Between Variables

Correlation analysis has been basically adopted to identify the direction and magnitude of
relationship between different pairs of dependent variables and explanatory variables. It
shows the movements of two variables and their association. The relationship has been
explained by using bivariate Pearson correlation coefficient. The larger the correlation
coefficient the stronger is the association which is either positive or negative depending on
the direction of the relationship between variables.

Table 4.7 shows the correlation matrix of dependent and independent variables, which
shows the relationship between dependent and independent variables. In addition, the
correlation between independent and dependent also indicates whether or not there is a

50
strong relationship between independent variables. From the correlation coefficient matrix
table, financial inclusion has a moderate and positive association with geographical
coverage. The relation between financial inclusion and geographical coverage is positive
and the degree of correlation is 0.362, which is statistically significant at a 1 percent level
of significance. Financial inclusion has a weak and negative insignificant relationship
between security, liquidity and cost. Also, financial inclusion has a weak and positive
insignificant relationship with technology.

Table 4.7

Bivariate Pearson Correlation Matrix

FI G S L C T
FI 1 .362** -.040 -.214 -.052 .036
G 1 .161 .139 .119 .298*
S 1 .132 -.116 .177
L 1 .151 .609**
C 1 .192
T 1
*. Correlation is significant at the 0.05 level (2-tailed)
**. Correlation is significant at the 0.01 level (2-tailed)

Similarly, geographical coverage has a weak, positive and insignificant association with
security, liquidity and cost. Geographical coverage and technology are also positively
correlated and the correlation coefficient is 0.298, which is also statistically significant at a
5 percent level of significance. Likewise, security has a weak and positive insignificant
association with liquidity and technology. The correlation coefficient between security and
cost is -.116, which is weak, negative and insignificant. The liquidity has a weak and
positive insignificant relationship between cost and has a moderate and positive significant
relationship with technology at a 1 percent level of significance. Moreover, the cost has a
weak and positive insignificant relationship with technology.

51
4.3 Effect of Agent Banking in Financial Inclusion

Regression is used to represent (model) the relationship between a response variable and
one or more predictor variables. To construct an estimated regression equation, a model of
the relationship is hypothesized, and parameter values are inferred. Several tests are used
to determine if the model is significant.

Table 4.8

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1 .477a .228 .146 1.677
a. Predictors: (Constant), G, S, L, C, T
b. Dependent variable: FI

Table 4.8 represents the model summary of regression analysis between agent banking and
financial inclusion. R is the correlation coefficient between variables. The R of the
regression model is 0.447, which represents that 44.7 percent of the variation in financial
inclusion can be interpreted by geographical coverage, security, liquidity, cost and
technology of agent banking services.

Table 4.9

Analysis of Variance (ANOVA)

Model Sum of Squares df Mean Square F Sig.

Regression 39.014 5 7.803 2.773 .028b
1 Residual 132.232 47 2.813
Total 171.245 52
a. Dependent Variable: FI
b. Predictors: (Constant), T, S, GC, C, L

R square is the coefficient of determination of the dependent variable that can be explained
by variation in the independent variables. The R-square of the regression model is 0.228,
which represents that the model explains the dependent variable by 22.8 percent i.e., 22.8
52
percent variation in financial inclusion is explained by the regression equation involving
five explanatory variables; geographical coverage, security, liquidity, cost and technology.
This shows that the study’s regression model is good at predicting financial inclusion.

Table 4.9 shows the overall significance level of the regression model. It shows the
goodness of fit of the regression equation. The above ANOVA test shows that there is an
overall significance of the regression model. Here, the sig. (p-value) is 0.028, which is less
than 0.05 i.e., 0.028 < 0.05 implies that our model is significant and the variables are good
predictors of financial inclusion. The total sum of square deviation of the observations is
171.245, in which the explained sum of square is 39.014 and the residual sum of square is
132.232. The total degree of freedom in ANOVA test is 52.

Table 4.10

Regression Result of Financial Inclusion

Unstandardized Standardized
Model Coefficients Coefficients t Sig.
B Std. Error Beta
(Constant) 16.227 2.820 5.755 .000
G .520 .182 .388 2.851 .006
S -.098 .135 -.096 -.725 .472
1
L -.175 .083 -.341 -2.104 .041
C -.080 .119 -.089 -.671 .505
T .197 .206 -.162 .957 .344
a. Dependent Variable: FI
b. Predictors: (Constant), T, S, GC, C, L

Table 4.10 represent the regression result of financial inclusion where the geographical
coverage, security, liquidity, cost, and technology were tested as the independent variables
and financial inclusion was tested as the dependent variable. Table 4.10 shows the
contribution of each variable in explaining financial inclusion as shown by unstandardized
beta values which assess the contribution of each variable towards the prediction of the
dependent variable.

53
The beta coefficient of geographical coverage is 0.520, which is positive indicating that an
increment in geographical coverage by 1 unit increases the financial inclusion by 0.520 unit
and such a relationship is statistically significant at a 1 percent level of significance (i.e.,
0.006 < 0.01). Similarly, the liquidity has a negative coefficient of 0.175, which means if
the liquidity is increased by 1 unit, financial inclusion will decrease by 0.175 unit. However,
this inverse relationship is statistically significant at a 5 percent level of significance (i.e.;
0.041 < 0.05), liquidity does not enhance financial inclusion as beta is negative. Moreover,
the security, cost and technology have an insignificant relationship with financial inclusion.

The model also indicates that a change in 1 unit of geographical coverage leads to 52 percent
change in financial inclusion, which is a strong indicator of financial inclusion because of
lower travel expenses and other inconveniences like time lost in lengthy lines at bank
branches.

Table 4.11

Summary of Hypothesis Test Result

Accept/
S. No. Alternative Hypothesis P-Value Beta
Reject

Geographical coverage of agent 0.006

H1 .520 Accept
banking enhances financial inclusion (P < 0.01)
Security of agent banking enhances 0.472
H2 -.098 Reject
financial inclusion (P > 0.05)
Liquidity of agent banking enhances 0.041
H3 -.175 Reject
financial inclusion (P < 0.05)
Cost of agent banking enhances 0.505
H4 -.080 Reject
financial inclusion (P > 0.05)
Technology of agent banking enhances 0.344
H5 .197 Reject
financial inclusion (P > 0.05)

54
4.4 Findings of the Study
This study was conducted with the main objective to examine the effect of agent banking
on financial inclusion in Nepal. The collected data were analyzed and interpreted through
simple ways like tables and charts by using SPSS to meet the research objectives.
Therefore, the major findings of this study are as followings:

• The majority of the banks and their branches have been offering agent banking
services for the period of below 5 years.
• The mean value of the statements of geographical coverage of agent banking shows
that the majority of the respondent agree that geographical coverage of agent
banking is an effective variable of the study.
• The majority of the respondents agree that the agents are frequently monitored to
safeguard both the parties and disagree the fact that customer doesn’t transact with
agents due to lack of security and trust.
• The majority of the respondents agree that the agents are frequently monitored to
ensure sufficient liquidity and disagree the fact that customers avoid agents because
of perennial cash shortages.
• The majority of the respondents agree that cost of agents are low as operational cost
of agents are low. Moreover, the respondents prefer agents regardless of the cost.
• The majority of the agree that technology of agent banking has an impact on
financial inclusion.
• Mean value of geographical coverage, security, liquidity, cost, technology and
financial inclusion shows that all the variables are effective variables for the study.
• Standard deviation of the variables shows that they have a high degree of variation
between agreement and disagreement of the respondent.
• Only basic financial products and services are offered through agent networks such
as: account opening, deposits and withdrawals, remittance and utility payment
services.
• More complex products and services such as insurance and loan were not very
popular because of sparse agent networks.

55
• All agent outlets employ a POS device, 34 percent of agents use mobile phones and
28.30 percent use computer devices and only 3.80 percent have a CCTV device
installed.
• Financial inclusion has a moderate and positive association with geographical
coverage which is statistically significant at a 1 percent level of significance.
• The financial inclusion has a weak and negative insignificant relationship between
security, liquidity, and cost.
• The financial inclusion has a weak and positive insignificant relationship with
technology.
• The geographical coverage has a weak, positive and insignificant association with
security, liquidity and cost.
• The geographical coverage and technology are positively correlated which is
statistically significant at a 5 percent level of significance.
• The liquidity has a moderate and positive significant relationship with technology
at a 1 percent level of significance.
• The R-square of the regression model is 0.228, which represents that the model
explain the dependent variable by 22.8 percent.
• The probability of F-stat is 0.028, which is the result of ANOVA and represents a
good model fit in this case, where the five independent variables best describe
financial inclusion.
• The beta coefficient of geographical coverage of agent is 0.520, which is positive
and significant at a 5 percent level of significance.
• There is a significant change in financial inclusion due to geographical coverage of
agent banking.
• The security of the agent has the beta coefficient of -0.098, which is negative and
insignificant and shows there is no significant change in financial inclusion due to
the security of agent banking.
• The liquidity has a negative coefficient of 0.175, which is statistically significant at
a 5 percent level of significance which shows there is a significant change in
financial inclusion due to the liquidity of agent banking.

56
• The cost has a coefficient of -0.080, which is negative and insignificant and shows
there is no significant change in financial inclusion due to the cost of agent banking.
• The technology has a coefficient of 0.197, which is a positive but insignificant
relationship which shows there is no significant change in financial inclusion due
to the technology of agent banking.

57
 CHAPTER V

DISCUSSION, CONCLUSIONS AND IMPLICATIONS

This chapter presents the discussion of the results and findings that have been obtained
from data analysis, as well as the conclusions and implications that could be drawn from
the study. The chapter has been divided into three segments. The first segment is driven
towards discussion, which involves a comparison of the findings of this study and
answering the research questions to meet the objective of the research. Likewise, the
conclusion is drawn in the second segment from the result obtained from the data analysis
inferred in the study, whereas an implication of the study is in the third segment, which
may be useful for future research related to agent banking and financial inclusion in Nepal.

5.1 Discussion

The general objective of the study is to examine the effect of agent banking on financial
inclusion in Nepal. This paper assesses how geographical coverage of agent banking,
security issues associated with agent banking, agent liquidity, the cost of financial services,
and agent banking technologies affect financial inclusion. The regression model was used
to estimate the dimensions of the effect of agent banking on financial inclusion in Nepal,
where the geographical coverage, security, liquidity, cost, and technology were analyzed.

The study found that geographical coverage of agent banking has a positive and significant
impact on financial inclusion i.e., the geographical coverage of agent banking enhances
financial inclusion. The result was calculated using regression analysis and the study
concludes that for better financial inclusion, bank agents should bring financial services
closer to customers, as the most significant driver of financial inclusion is geographical
coverage. The findings are consistent with Afande and Mbugua (2015), Lotto (2016),
Ndegwa (2017), Rahman (2019) and Barasa (2013) who stated that agent banking services
have played an important role in the adoption of financial services in underbanked areas,
because of its greater geographical coverage.

58
This study found that the operations of the agents are often monitored to ensure the safety
and security of the customers, and customers do not avoid banking with agents because of
security and trust issues. The study shows that security of agent banking is statistically
insignificant and that there is no significant change in financial inclusion due to the security
of agent banking. In addition, the study also found that there is no security measures in
agent outlets. However, Peake (2012) notes that security concerns are minimal because
agents are typically located in retail locations such as pharmacies, grocery stores, retail
outlets, gas stations. Afande and Mbugua (2015) concluded that security concerns were
minimal as agents were equipped with physical security features such as metal grills and
CCTV. Banerjee et al. (2017) stated that security measure should be adopted particularly
when dealing with cash as agents either hold the money in their residence or in a small
vault in their outlet which is likely to include robbery and other threats. To address the
issue of security, the bank may request that agents appoint security employees or select
powerful agents with large vaults. Bill and Melinda Gates Foundation (2014), explains that
one of the key issues for users is the security and safety of mobile payment transactions.

The liquidity of agent banking has a negative but significant impact on financial inclusion.
This study found that agents are monitored to ensure sufficient liquidity and that customers
do not avoid agents due to perennial cash shortages. In addition, the result also found that
most of the respondents agree that lack of liquidity by agents leads to service denial and
eventually loss of customers. When a customer approaches an agent with the desire to
withdraw a large sum of money, it is common for the agent to be unable to meet the
customer’s demand. Micro Save (2014) states that cash liquidity is handled by reaching
out to friends, family, or neighbors to meet immediate financial needs. Ndegwa (2017)
found that liquidity of agent banking was statistically significant as agents were located in
established businesses thereby making liquidity shortage a non-issue. The study also
discovered that the activities of the agents are thoroughly reviewed and controlled by the
parent bank in order to avoid cash shortages and reduce security issues.

The cost of agent banking has a negative and insignificant impact on financial inclusion.
This study shows that customers prefer agents regardless of costs. However, customers get
the advantage in the form of cheaper transaction costs, extended operating hours, and

59
shorter queues than in branches. Beck et al. (2007) state that agent banking services are
more usable to illiterates and underprivileged, who may be intimidated by bank branches.
Lotto (2016) concluded that the wide geographic coverage of agent banking is a best
promoter of financial inclusion as it lowers travel expenses and other inconveniences such
as time lost in lengthy lines at bank branches. The findings indicate that the cost of agent
banking has no significant impact on financial inclusion but has aid to simplify banking
services by reducing the distance between customers and service points.

The technology of agent banking has a positive but insignificant impact on financial
inclusion. The study found that financial products and services are more accessible as a
result of technology and that technology is simple and easy to use. Molla (2013) notes that
the success of agent banking is determined on the agents ease of banking. Khalti (2018)
states technology has a critical role in reducing geographical barriers and boosting financial
inclusion. Agent banking is all driven by technology and transactions can be made via POS
system, mobile phones, and online banking, which must be reflected immediately in the
core banking system (Keeler, 2011). The findings imply that agent banking technology
should be updated to new technology for providing services which will improve both safety
and convenience.

5.2 Conclusions

The study investigates the effect of agent banking on financial inclusion, where the
geographical coverage, security, liquidity, cost and technology of agent banking were used
as the independent variables and financial inclusion was used as the dependent variable.
For the analysis, descriptive statistics, correlation and regression were conducted.

The study concludes that greater geographical coverage of agent banking is the only
variable that enhances financial inclusion as services are brought closer to the individuals,
thus saving time that might otherwise be spent queuing in banking halls. Likewise, security
concerns were minimal as agents are typically located in retail locations such as
pharmacies, grocery stores, retail outlets, and gas stations. However, the agents should
adopt physical security features like metal grills and CCTV. Nonetheless, the study
concludes that the security of agent banking doesn’t enhance financial inclusion.

60
The study also found that a liquidity shortage was not a barrier because the agents were
thoroughly reviewed and monitored to guarantee that cash shortages were infrequent.
Despite this, the results suggest that the liquidity of agent banking should be increased and
supervised by the parent bank to maintain liquidity. Nonetheless, the study concludes that
the liquidity of agent banking doesn’t enhance financial inclusion. Likewise, the results
show that the cost of agent banking is low and the majority of respondents prefer agents
regardless of the cost. However, the study concludes that the cost of agent banking doesn’t
enhance financial inclusion.

In addition, the findings imply that agent banking technology should be updated to new
technology for providing services which will improve both safety and convenience.
However, this study concludes that the technology of agent banking doesn’t enhance
financial inclusion.

In the light of the above discussions, agent banking can be used to enhance financial
inclusion in Nepal. As a precursor intended to increase access to financial services that will
enhance the opening of accounts for the unbanked and give rise to financial literacy by
assisting people to have a better appreciation and consumption of financial services.
However, because the notion of agent banking is now gaining popularity around the world,
as depicted by Afande and Mbugua (2015), banks risk management processes should be
highlighted in order to avoid entering into agency contracts with bank agents whose
credentials are doubtful. The parent bank should keep a record of proper identification of
agents in order to hold them accountable in case of any fraud or misconduct.

As a part of financial inclusion, the agency banking model has been described as an
effective tool to provide basic banking services to the underprivileged economy, as well as
a cost and time-effective approach that saves a lot of money and time for both the customers
and the banks. The services provided by the agents are crucial since they are the sole
individuals through whom the bank can provide services to the rural community. Agents
must be able to provide a positive and consistent service to their customers. For this, agents
require ongoing bank assistance to serve customers, manage cash flow, and give technical
support for any devices or equipment they use.

61
Hence, the study concludes that the agent banking concept is a success in terms of financial
inclusion. As agent banking services are new phenomena in Nepal, the low number of
accounts opened or transactions should not be seen as a failure of the business. The agent
banking model is constantly growing and expanding, and as it grows, so will the level of
financial inclusion. As a result, agent banking has the impact of promoting financial
inclusion and should be supported and promoted by all participants, including banks,
governments, and licensing organizations, in order to reduce high gap among the unbanked.
Finally, banks, governments and licensing bodies should provide individuals with financial
education in order to improve financial literacy, comprehend the operations of the agents,
and ensure the protection of their funds.

5.3 Implications

The study results may provide a useful reference document for commercial banks, agent
bankers, policymakers, and scholars. The findings of the study might be helpful to
commercial banks in promoting agent baking services through conducting a regular
awareness campaign and attracting new users through banners, radios, TV etc. Also,
existing customers can be informed through posters in agent shops, advertising, and text
messages regarding the know-how of agent banking services, such as the transaction
process with agents, how and why a user should keep their PIN safe, charges and
commissions of agents, and benefits of the agent banking services. More agent banking
outlets should be opened to expand the geographical coverage, thus enhancing financial
inclusion.

As the agent banking model becomes popular, banks have to be extra careful about the
agents they hire and ensure that the agents uphold the required standards for the delivery
of products and services. Agents must receive training and retraining to ensure that they
comply with their agreement, minimum standards, customer handling and customer
satisfaction. Agents may be further incentivized by setting up an annual prize for the best
customer service to boost their morale. Security should be emphasized in all agent banking
outlets and should adopt strict procedures when an agency contract expires to ensure that
the agent does not take advantage of the situation and fraud the customers.

62
Furthermore, the system used should be stable and robust with minimal failures and a good
network connection. Also, with time the agent banking services should provide more
complex products and services allowing the agent outlet to be a one-stop-shop. However,
an appropriate analysis should be done before a product or service is introduced to
determine its potential impact. There should be a regular follow up to the agent’s outlet to
make sure they are handling the service as expected.

Agents must ensure that the client’s personal information is kept confidential and secure.
To decrease the risk of theft-related losses, agents should adopt security measures such as
metal grills, CCTV and also hire security agencies if required. Agents must carefully
manage their financial liquidity to ensure the availability of the float to offer financial
services. Agent banking services should keep operational expenditures low so as to keep
customer service costs low.

Further researchers and scholars can also use this study to add to the existing literature on
financial inclusion through agent banking. The findings of this study can be used as a
source of reference and as a basis for future research for those interested in this area or
other related topics. The study will provide background information to other researchers or
scholars who would like to investigate more on agent banking and its effect on financial
inclusion.

There have been several studies about financial inclusion through agent banking in the case
of other countries but very few in the context of Nepal. Hence, this research gives insight
into agent banking and its effect on financial inclusion in the context of Nepal. The study
also gives valuable suggestions to the researchers to think about the variables that are to be
taken for the study as some variables used for the study may not have any implication. The
research provides supporting roles for the future studies that can be carried out by selecting
other commercial banks and their branches from other provinces of Nepal to grab more
evidence about financial inclusion in Nepal.

Finally, the present study is conducted in Bagmati province and most of the respondents
are from Kathmandu valley. There is a need for future research to replicate and extend the
existing study to additional scenarios. The current study is concentrated on commercial
banks BLB department, branch managers and operations in charge of branches providing

63
agent banking services in Bagmati province. Therefore, future studies should include
agents and their clients to gather their perspectives. In addition, future studies should
analyze the effect of agent and principal relationships on financial inclusion. Moreover,
moral hazards and the adverse selection problem may have a significant impact on financial
inclusion.

In the future, further research should be carried out on financial inclusion using more
relevant, consistent, and balanced measures such as the core set of indicators such as access
to financial services, the quality of products and services delivered, and usage of financial
services. More study should be conducted on the quality of service offered by agents to
their client, as well as the security measures employed by banks to protect the security of
both customers and the agents.

Future studies should also examine the cost-benefit analysis of implementing agent
banking since this will assist financial institutions to find areas where they can save costs,
and enhance the agency banking process. Replication and extension of the existing study
to investigate respondents in various areas and countries with different cultures are required
for the results to be generalized across different places.

The study recommends that banks should raise awareness of agent banking services and
also provide them at a cheaper cost to encourage their usage and adaptation of agent
banking services. This study suggests that the governments and banks should come up with
a policy structure that will enhance financial inclusion since financial inclusion promotes
financial intermediation and economic growth. The study recommends that regulations
should be made more efficient in order to enable more banks to embrace agent banking
services. The report also suggests that all commercial banks should embrace agent banking
services by adopting improved technology and security to make the services more reliable.
This will boost customers confidence in the agents and hence lead to an increase in the
volume of transactions which will eventually lead to greater financial inclusion.

64
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 APPENDICES 1

QUESTIONNAIRE

AGENT BANKING AND ITS EFFECT ON FINANCIAL INCLUSION

Hello! I am Prajwol Shakya, student of Master of Finance and Control (MFC) at School of Management,
Tribhuvan University. I am conducting this research as a Graduate Research Project. This survey aims to
determine the impact of agent banking on financial inclusion in Nepal. Therefore, this survey questionnaire
is primarily designed for commercial banks and their branches providing agent banking services. The results
of this survey will be used only for academic purpose. The information provided in this research will be kept
confidential. The research will take roughly 10 minutes to complete. Thank you for your time and
cooperation.

1. GENERAL INFORMATION

Name …………………… Mobile number ……………………

Bank Name …………………… Branch ……………………

How long has the agent banking service been available at your bank branch? Put 🗹 in the relevant option.

Below 5 Years [27] 6 to 10 Years [15] 11 to 15 Years [11] Above 16 Years [00]

2. COVERAGE

2.1 Give your opinion on the level of agreement or disagreement with the following statements. Put 🗹 in
the relevant cage. (1 = Strongly Disagree; 2 = Disagree; 3 = Neutral; 4 = Agree; 5 = Strongly Agree)

Q. No Statements 1 2 3 4 5

Customers prefer agents as they feel closer to the agent rather than
1 0 8 17 18 10
the bank
2 Agent banking has reduced the overcrowding in the bank 0 2 7 39 5

2.2 Product and services offered by the agents? (You can choose more than one option)

Account opening [49] Deposit [53] Withdrawal [53]

Remittance [43] Money Transfer [29] Utility Payment [40]
Insurance [1] Fixed Deposit [25] Loan [11]

3. SECURITY

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3.1 What kind of security concern have you witnessed? Put 🗹 in the relevant cage.
(1 = Never; 2 = Rarely; 3 = Sometimes; 4 = Often; 5 = Always)
Q. No Particulars 1 2 3 4 5

1 System failure 3 10 38 2 0

2 Poor network connection 0 13 23 17 0

3 Wrong identification by customers 23 18 10 2 0

4 Fake currencies 42 8 3 0 0

3.2 Give your opinion on the level of agreement or disagreement with the following statements. Put 🗹 in
the relevant cage. (1 = Strongly Disagree; 2 = Disagree; 3 = Neutral; 4 = Agree; 5 = Strongly Agree)

Q. No Statements 1 2 3 4 5

Customers fail to transact with agents because of lack of security

1 6 20 17 9 1
and trust
Operation of the agent is monitored often to ensure the security
2 0 0 3 30 20
and safety of the customers
Safety, security, and efficiency of the equipment used by the
3 agents is monitored often to prevent tampering and manipulation 0 2 6 23 22
by the agent.
Agents are trained frequently to ensure that they comply with the
4 0 1 3 24 25
security standards

4. LIQUIDITY

Give your opinion on the level of agreement or disagreement with the following statements. Put 🗹 in the
relevant cage. (1 Strongly Disagree; 2 Disagree; 3 Neutral; 4 Agree; 5 Strongly Agree)

Q. No Statements 1 2 3 4 5

1 Agent banking outlets are monitored to ensure sufficient liquidity 0 3 11 39 0

Agent banking outlets have daily limit of cash deposit and

2 0 1 1 26 25
withdrawal
3 Lack of liquid cash at agent outlets leads to frustration 2 10 24 9 8

4 Lack of liquidity by agent bankers leads to loss of customers 2 10 15 19 7

5 Customers avoid agents because of perennial cash shortages. 8 15 13 13 4

6 Liquidity availability in agent outlets affect customer retention 2 7 7 32 5

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5. COST

Give your opinion on the level of agreement or disagreement with the following statements. Put 🗹 in the
relevant cage. (1 Strongly Disagree; 2 Disagree; 3 Neutral; 4 Agree; 5 Strongly Agree)

Q. No Statements 1 2 3 4 5

1 Customers perceive the cost of banking with agents to be low 3 9 10 26 5

2 Customers prefer agents regardless of costs 1 8 14 28 2

Operational cost of agent banking affects the transaction cost of
3 1 17 10 23 2
financial services

6. TECHNOLOGY

6.1 Technology used for providing financial services? (You can choose more than one option)

Mobile phone [18] POS device [49] CCTV [2] Computer/ Laptop [15]

6.2 Give your opinion on the level of agreement or disagreement with the following statements. Put 🗹 in
the relevant cage. (1 Strongly Disagree; 2 Disagree; 3 Neutral; 4 Agree; 5 Strongly Agree)

Q. No Statements 1 2 3 4 5

Technology malfunction and server down leads to frustration and

1 0 6 10 30 7
loss of customer

2 Agent user interface are accessible and simple 0 0 6 28 19

3 Technology of agent banking influence financial inclusion 0 0 8 27 18

7. FINANCIAL INCUSION

Give your opinion on the level of agreement or disagreement with the following statements. Put 🗹 in the
relevant cage. (1 Strongly Disagree; 2 Disagree; 3 Neutral; 4 Agree; 5 Strongly Agree)
Q. No Statements 1 2 3 4 5

The number of accounts opened has increased in our bank through

1 0 0 1 29 23
agent
The number of cash deposit and withdrawal has increased in our
2 0 0 4 31 18
bank through agent
3 Payment of utilities through banking system has increased 0 1 7 37 8

Inflow and outflow of remittance through banking system has

4 0 5 8 31 9
increased

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 APPENDICES 2

List of commercial banks and their branches providing agent banking services in Bagmati
Pradesh, Nepal.

Commercial Branch Commercial Branch

S. N S. N
Banks Location Banks Location
1 Bhaktapur 43 Boudha
2 Bhaisepati 44 Chapagaun
3 Banepa 45 Gajuri
4 Charikot 46 Kalanki
5 Kalanki 47 Kalika
Citizen Bank
6 Kupondole 48 Machhapuchhre Kirtipur
7 Kirtipur 49 Bank Narayantar
8 Nayabazar 50 Parsa
9 Samakhusi 51 Pepsicola
10 Tokha 52 Sanothimi
11 Banepa 53 Tandi
12 Dolakha 54 Trishuli
13 Gongabu 55 Banepa
14 Nepal Hetauda 56 Charikot
15 Investment Nuwakot 57 Golanjar
16 Bank Limited Ramechhap 58 Siddhartha Bank Hetauda
17 Sindhuli 59 Kalanki
18 Sindhupalchowk 60 Nepaltar
19 Tripureshor 61 Roshi

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20 Baneshwor 62 Baireni
21 Battar 63 Banepa
22 Bhaktapur 64 Barhabise
23 Chabahil 65 Bhakudobesi
24 Dhading 66 Chabahil
25 Gongabu 67 Dhapasi
26 Gwarko 68 Doramba
27 Everest Bank Hakimchowk 69 Global IME Hetauda
28 Hetauda 70 Bank Kholesimal
29 Jorpati 71 Manthali
30 Kirtipur 72 Narayanghar
31 Lagankhel 73 Suryabinayak
32 Lazimpat 74 Tandi
33 Newroad 75 Thankot
34 Baireni 76 Timpure
35 Battar 77 Trishuli
36 Bhaisepati 78 Bagmati
37 Bharatpur 79 Jalbire
38 Gotikhel 80 Kholesimal
Sunrise Bank
39 Manthali 81 Kumari Bank Melamchi
40 Pharping 82 Sanobharyang
41 Priti Gaupalika 83 Siddhalek
42 Tandi Branch 84 Tandi
85 Kirtipur
NIC Asia Bank
86 Tokha

78