Definition:

An agent bank is a bank that acts on behalf of another bank (the principal bank) to provide financial services to customers. The agent bank is not the owner of the funds deposited by customers but acts as their agent and depository.

Key Features:

• Agency relationship: Agent banks act as intermediaries between the principal bank and the customers.
• Limited liability: Agent banks have limited liability for the actions of their customers as they are not the owners of the funds.
• Delegated powers: The principal bank delegates certain powers to the agent bank, such as the ability to receive deposits and make loans.
• Pass-through accounting: Agent banks maintain separate accounts for each customer and pass through all financial transactions to the principal bank.
• Fee sharing: Agent banks typically share a portion of the fees charged to customers with the principal bank.

Types of Agent Banks:

• Traditional agent banks: Provide a full range of banking services, such as deposits, loans, and payments.
• Specialized agent banks: Focus on specific services, such as foreign exchange or trade finance.
• Branchless banks: Operate solely through online channels and use agent banks to provide services.

Examples:

• A bank with a branch in a remote town may use an agent bank in the town to provide local services.
• A company that needs foreign exchange services may use an agent bank that specializes in foreign exchange.
• A branchless bank may use an agent bank to provide its customers with access to financial services.

Advantages:

• Convenience: Agent banks can provide services to customers in remote areas.
• Access to a wider range of services: Customers can access a wider range of services through an agent bank.
• Cost savings: Agent banks can reduce costs for the principal bank.

Disadvantages:

• Limited liability: Agent banks have limited liability for the actions of their customers.
• Potential for conflict: There can be potential conflicts of interest between the agent bank and the principal bank.
• Less competition: Agent banks may have less competition than principal banks.