News Column

Between Bank Customers and the Three-Tiered KYC

June 26, 2014

Obinna Chima examines the importance of the recently introduced three-tiered Know-Your-Customer policy

One thing that is common in most developing countries is that a large population of their low income earners have little or no access to financial services.

As a result of this, many of them have to always depend either on their own or informal sources of finance and generally at an unreasonably high cost.

In Nigeria, a recent report showed that more than 50 million people do not have access to financial services, meaning they are the financially excluded.

Most of them according to a study by EFInA are women, rural dwellers, farmers and illiterates. They do not use any financial service or product to manage their finances. They transact businesses using cash. This is because most times, they do not have one of the critical requirements to access financial services, which is ownership of a bank account.

Therefore, in furtherance of its objective of enhancing financial inclusion and access to finance, the CBN developed the tiered Know-Your-Customer (KYC) requirements for compliance by banks and other financial institutions under its regulatory purview.

Just like the bank verification number which has commenced in the country, the three-tiered KYC was conceived in line with the CBN's efforts to achieve financial inclusion as well as to reduce the incidence of identity fraud in the system.

The tiered KYC requirements regime ensures application of flexible account opening requirement for low-value and medium value accounts and these are subjects to caps and restrictions as the amount of transactions increases.

This means that account opening requirements will increase progressively with less restrictions on operations.

"The main objective of the approach is to promote and deepen financial inclusion, by making account opening and operation more attractive and appealing to the masses," a Deputy Director at the CBN, Obot Udofia, had explained.

The system is structured into low value account, medium value account, and the high value account.

Account opening structure The Low Value Account (LVA) is a savings account, targeted at those who do not have valid means of identification. The requirement for opening this account is very simple and thus accessible to anybody irrespective of level of literacy and socio-economic status.

This account can be opened at branches of financial institutions (banks, microfinance banks, mortgage bank) by the prospective customer or through banking agents. This means, the prospective customer does not need to visit the bank to open the account.

The account can be opened by providing a passport photograph; name, place and date of birth; gender, address, and telephone number, etc. The customer however, does not need to provide documentary evidence of the information and the bank does not need to verify the information.

Furthermore no amount is required to open this type of account. But the customer cannot deposit more than N20,000 at a time, and the balance in the account must not be more than N200,000 at anytime.

However, where the account is linked to mobile phone, and thus used for mobile money purposes, the maximum transaction limit allowed is N3, 000 with a daily limit of N30,000

On the other hand, like the LVA, the Medium Value Account (MVA) is a strictly savings account. Also the physical presence of the prospective customer is not compulsory for account opening. The major difference is that, the information supplied by the prospective customer must be supported with valid means of identification and must be verified by the CBN.

According to the central bank, "the MVA accounts can be opened at any branch of a bank by agents on behalf of enterprises for mass payroll purposes or by the account holder. It can be contracted by phone or at the banking institution website. Account opening can be conducted face-to-face (directly) at bank branches and by banking agents; No amount is required for opening of the accounts.

"Basic customer information required are, passport photograph, name, place and date of birth, gender, address, etc. These may be uploaded offsite or submitted on-site in banks' branches or agents' offices.

"Customer information obtained (name, place and date of birth, gender, address) are to be verified against similar information contained in the official data-bases such as the National Identity Management Commission (NIMC), Independent National Electoral Commission (INEC) Voters Register, Federal Road Safety Commission (FSRC)]. It is subject to further ID verification and monitoring by financial institutions."

However, the High Value Account (HVA) is for people who can meet all the documentation required to open a normal bank account. Unlike the LVA and MVA, this form of account cannot be opened at a bank agent or by a bank agent on behalf of the customer.

The account can only be opened by the prospective customer, and he must be physically present to do so. These accounts could be both savings and current. No amount is required for opening of accounts. No limit is placed on cumulative balance.

Also, it can be used for full mobile-banking services with maximum transaction limit of N100, 000 per time and a daily limit of N1, 000,000.

Financial inclusion The CBN acting Director, Financial Policy and Regulation Department, Mr. I.T. Nwaoha had explained that the success of the tiered KYC regime would not only promote financial inclusion, but increase the effectiveness of KYC requirements and improve the quality of KYC information obtained by financial institutions from their customers.

He added: "We have, however, observed that the laudable policy would produce lasting result if it is properly implemented and monitored timely from its inception. It is on this note that the implementation strategy was developed by the CBN, in order to ensure its success."

But a bank customer, Mr. Justus Aderibigbe stressed the need for the central bank and banks to raise the level of awareness on the policy, saying that a lot of bank customers do not understand the various structures.

To a former Deputy Governor of the CBN, Mr. Tunde Lemo, the tiered KYC is all about financial inclusion. He explained that the KYC requirements were made in such a way to reduce the incidence of identity fraud.

According to him, "the requirements are such that if you don't cascade it down and simplify it as the financial requirements becomes less, you will automatically rule out a large segment of Nigerians from the system.

"I want to give you an example. If as a customer of bank X, transacts business in hundreds of thousands and millions of naira, of course you will want to make sure that you have my international passport, you want to make sure that the identification that I have are robust enough to ensure that somebody doesn't show up tomorrow and grab a cheque issued in the name of Tunde Lemo, goes and open an account and present himself as Tunde Lemo.

"But the requirements need not be as rigorous for transactions that are just N500, N1, 000 and N2, 000. So as you go down the prosperity ladder, you simplify it such that at every point in time, you will have sufficient information required by every segment of customers, depending on where they are on the transaction ladder."

So, he explained further that the tiered KYC requirements were fashioned out to ensure that those who otherwise would not be qualified for an account relationship on account of the rigor associated with the detailed KYC requirements of the past are also given opportunity to open account and transact business to the extent of the amount of business that they do.

He had pointed out that the central bank made it as low as N20, 000, so as to ensure that virtually everybody, whether in the city or wherever have the opportunity to be integrated into the financial system.

Nevertheless, in order to ensure that the policy is fully embraced and successfully implemented, there is need to ensure that the regulator intensifies awareness on the various account opening types and also ensures that financial institutions comply with the various provisions of the guidelines while they put in place the required infrastructure.

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Source: AllAfrica

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