Low-income households are active financial managers, constantly trading-off the need for short-term liquidity and making long-term investments in the future.
To achieve their money management goals, households use a wide variety of complementary tools, constantly shuffling money into and out of financial devices.
From an FSD Kenya report in 2014 titled, Kenya Financial Diaries: Shilingi kwa shilingi-the financial lives of the poor, poor households make many small value transactions making dealing with cash well suited and less problematic than a conventional bank account.
This effectively makes a bank account unattractive to households with limited cash flows and locks out many from operating one.
The Cost of banking
According to FSD Kenya’s, Cost of banking, 2018, many of the familiar benefits put forward for adopting formal financial services (banks included) for day-to-day money management are only persuasive in different contexts.
For poor households, the cost of running an account makes it a luxury locking many out of the bank as a formal financial system.
All too often, the use of a bank account is for a single specific function such as building a lump sum for home improvement.
For such households, it is infeasible to use a conventional bank account to manage day-to-day liquidity when a withdrawal over the counter averages KShs 314 per transaction and the average income per capita is KShs 346 per day.
As such, the proportion of poor households’ income that would be absorbed by the transaction cost can be too high.
According to the report, the annual average cost of running a bank account in Kenya is KShs 4,419 (US$45) which includes the cost of running an account, including making withdrawals, deposits, transfers and paying for account maintenance (ledger fees, balance enquiries, etc.).
While the charges are diverse across different banks, this is the average amount ranging but the costs vary from KShs 845 to KShs 17,750 annually.
The report notes that accounts charging monthly ledger fees have higher annual costs.
On average, bank customers spend KShs 3,944 on withdrawal charges, KShs 4,485 on bank transfers and KShs 1,007 on account maintenance fees annually.
Over the last decade, Kenya has witnessed a remarkable expansion in access to financial services. Overall access to formal financial services now stands at 83%, up from 67% in 2016.
‘However, a more mixed picture emerges when we look at the actual usage of the new financial access. Usage provides a valuable inference on the value that financial services and products contribute to the economic lives of users. For banks, aggregate data suggests that the average number of transactions per customer is still relatively low,” notes the report.
It adds, “Usage of traditional bank accounts has dropped from 32% in 2016 to 30% in 2019. Cost is often the most visible constraint to access and usage, but it is not the only one.”
The 2018 cost of banking study focused on deposit accounts offered by 11 banks that cumulatively controlled 97% of the total number of deposit accounts in Kenya as at December 2017.
All 11 banks have different market and customer segments, targeting either the mass market or niche segments.