In search of digital financial inclusion in Bangladesh
Bangladesh has been experiencing rapid financial inclusion in sync with faster adoption of digital technology. The central bank of Bangladesh is statutorily mandated to support attainment of the country's developmental aspirations along with maintaining price and financial stability. It made an honest effort to respond to this call by strategizing financial inclusion to uphold the domestic demand, particularly following global financial crisis during 2007-08.
In fact, the focus on financial inclusion by Bangladesh Bank (BB) has further increased recently as a part of its pro-active response to Covid-19. Despite many challenges, the pandemic has also accelerated the digital transformation of the businesses, including MSMEs benefiting widely from the pioneering moves of BB for multifaceted financial inclusion.
For all latest news, follow The Daily Star's Google News channel. Financial inclusion remains a policy priority in Bangladesh, as reflected in its National Financial Inclusion Strategy 2020-2024, which was launched in 2019 to further strengthen the regulatory moves of BB.
The goals of this strategy are to:
1. Increase financial deepening
2. Strengthen payment systems and service delivery
3. Establish a robust data and measurement framework
4. Promote financial literacy and consumer empowerment
5. Broaden and deepen financial inclusion for women, people affected by climate change, and other underserved segments of the population
6. Upscale digital financial services and fintech
7. Strengthen the policy and regulatory environment
8. Fortify the risk management of financial inclusion initiatives
9. Strengthen insurance services
10. Reinforce capital market services
11. Strengthen microfinance
12. Strengthen quasi-regulated financial service providers including PKSF
As indicated above, this is a holistic and well-coordinated policy move to align all the relevant stakeholders, including ministries and financial authorities. However, BB remains the key anchor here. It has been further demonstrating its prowess in pushing the financial inclusion agenda during the pandemic.
It has been working very closely with the government and other regulatory authorities in designing and implementing several stimulus packages to ease the impact of the pandemic with special focus on reaching the badly hurt micro, small and medium enterprises. Apparently, this inclusive financing support has been very helpful in initiating a robust recovery process out of the woods of the pandemic, even though the larger entrepreneurs have been better placed to take advantage of these financial facilities. The implementation of the stimulus packages for the MSMEs has been picking up in recent days, however, as BB remains focused on it.
It may be noted that BB has been promoting inclusive financing with particular attention to the underserved segments of agriculture and SMEs for many years, particularly in the wake of the global financial crisis. Environmentally benign "green" output processes were also adopted by the central bank to promote inclusive sustainable development. Priority to women entrepreneurs in financing access figured importantly in policy initiatives of BB. In fact, it has been trying to touch the ground to change the real economy for people living at the bottom of the societal pyramid.
The massive countrywide thrust in promoting inclusive, green financing began with sustained ongoing sensitization and motivation campaigns to take onboard all banks, financial institutions, and clientele group stakeholders. The motivational campaigns, paying off richly in forging enthusiastic engagement of all banks and financial institutions – state-owned and private sector, local and foreign – continues as a full-blown initiative for firmly ingraining socially and environmentally responsible financing in the institutional ethos of our financial sector.
BB's policy supports for inclusive and sustainable financing included: (i) consultatively setting priorities and targets of inclusive and green financing, aimed at attaining and maintaining adequacy of financing in the underserved areas; (ii) massive up-gradation of the payment system and the financial sector IT infrastructure enabling the advent and rapid growth of cost-efficient off-branch online/mobile phone/smart card-based financial service delivery; (iii) consultatively drawn-up regulatory frameworks and guidelines for mobile phone/smart card-based and other off-branch service delivery modes, green banking, environmental risk assessment, and so forth; (iv) making sure that enough rural branches and, of late, sub-branches/booth-branches are established to reach the unbanked in a cost-effective way using latest digital technology; (v) macro prudential regulations favouring lending for green alternative of traditional options; (vi) modest extents of low-cost refinance lines against SME and green financing, funded jointly by BB and external development partners.
BB's success in developmental central banking has become even more relevant in the present context of the post-pandemic economic recovery. As was the case during the last global economic slowdown (in 2008-09), the world as a whole and countries like Bangladesh began to face a massive socio-economic slowdown originating from supply-chain dislocations and fall in domestic demand. Of course, after about two years since the onset of Covid-19, the global economy was poised to stage its most robust post-recession recovery in 80 years. But the fast-expanding Omicron variant of the virus may create some obstacles to the global recovery process which was well on its way forward. And experts are rightly fearing that the recovery will be uneven, particularly in the new context.
Bangladesh, however, appears to be an exception in still cruising at an accelerated six plus percentage point of growth rate while there is a deceleration in global growth rate, as recently predicted by the World Bank. Given its demonstrated ability of achieving highest rate of nominal GDP per capita in the emerging Asia for almost a decade, this is not surprising. Notably, more than 60 percent of this growth has been originating from the consumption-pushed domestic demand where financial inclusion has been playing a significant role.
Indeed, Bangladesh has been performing far better than many of its peers in terms of fending off the effects of the pandemic-induced economic shocks. But it is yet to attain the macroeconomic objectives that were set prior to the pandemic. Bangladesh will have to take a course that is going to be significantly challenging (due to the situations in the global arena mentioned above). And in this context, the developmental role of the central bank needs to be re-emphasized.
The policymakers and the entrepreneurs of Bangladesh today, need to look more inward. The authorities need to make sure that the credited flows are directed to enable spending on nationally produced goods and services; to invest in productive capabilities and creating more jobs; to enhance social protection; and to ensure excess liquidity does not create further inflationary pressure. In fact, in the wake of falling revenue and rising public debt, experts felt that there was little to no alternative to the central bank but to expand its balance sheet. And BB did not hesitate to follow this path, knowing fully that keeping the economy liquid was more important than worrying about inflation.
When the economy started recovering the central bank began to balance its act by mopping up the excess liquidity through selling of USD and government bonds. The floating of digital trading of government bonds in the secondary market platform of Dhaka Stock Exchange has also been a smart move to manage debt market digitally.
In this context, expansion of digital financial services as part of BB's inclusive finance campaign has become even more relevant today.
Towards Digital Finance in Bangladesh
Leveraging digital technology to make services more accessible, especially for the poor and marginal, is gaining momentum as a core strategy for inclusive development all over the world. This can be observed across a growing number of sectors – from healthcare to education and sustainable development. The financial sector is no exception. And when it comes to utilization of digital innovations to enhance financial inclusion, Bangladesh perhaps is one of the pioneer countries.
As of 2018, 50 percent of Bangladesh's population had access to formal financial services, an increase of 57 percent since 2013. This has been possible because of the government's campaign for achieving "Digital Bangladesh" since 2009-10. Complementing this drive of the government, the central bank of the country started moving towards using technology more actively to expand financial services to the doorsteps of people, including those living in hard-to-reach areas.
BB's success in utilizing digital financial innovations to serve the underserved over the last decade or so requires revisiting, especially in the context of the pandemic-induced global economic slowdown and the subsequent process of recovery. Bangladesh certainly deserves to be recognized as an "early starter" as far as digital financial innovations are concerned.
Key measures taken to digitize the financial services in Bangladesh over the last decade can be summarized as:
l Introduction of automated Credit Information Bureau (CIB) to enable effective credit risk management and ease doing business in Bangladesh
l Automated cheque processing, National Payment Switch, BEFTN and RTGS introduced to enhance speed as well as reliability of banking services
l Linking the KYC process with the national database maintained by the National Election Commission (through utilizing the NIDs)
l Implementation of online and paperless supervision, ISS (Integrated Supervision System), has been a great success
l Major changes in traditional reporting of trade services by launching online reporting of all inward and outward remittance transactions of authorized dealers
l Digitization of financial services (online banking, mobile financial services, and agent banking) has revolutionized access to finance in Bangladesh
l Banks in Bangladesh have already started adopting blockchain technology, which,on a broader scale, will significantly help the country in trade-related transactions making it paperless, real-time, low-cost, faster, and free of errors
l Above all, backed by the innovative initiatives of Bangladesh Bank, today the banks are using core banking software and have dramatically automated most of their internal and external operations
This drive for digitization has, as expected, yielded significant positive impact in financial inclusion in Bangladesh. This is clearly visible in the periodical Financial Access Survey (FAS) conducted by the International Monetary Fund (IMF).
Review of the datasets of the FAS 2015 and FAS 2020 reveals that:
l Number of commercial bank branches per 100,000 adult persons in Bangladesh has increased from 8.61 in 2015 to 8.99 in 2020 (4 percent increase in 5 years)
l Number of ATMs per 100,000 adult persons in Bangladesh has increased from 7.09 in 2015 to 10.18 in 2020 (44 percent increase in 5 years)
l Number of registered mobile money agent outlets per 1,000 square kilometre has increased from 4,408 in 2015 to 8,141 in 2020 (85 percent increase in 5 years)
l Number of registered mobile money accounts per 1,000 adult persons in Bangladesh have increased from 310 in 2015 to 825 in 2020 (166 percent increase in 5 years)
l Value of mobile money transactions as percentage share of GDP has increased from 11.26 in 2015 to 20.45 in 2020 (82 percent increase in 5 years)
It should be obvious from the discussion that digital financial service (DFS) has made reaching the "bottom of the social pyramid" possible for the financial service providers at a low cost and with high pace. DFS has not only proven its efficiency and reliability to the private sector and/or the non-state actors, but also the government itself.
In January 2010, with prudent directives from the central bank, the retail banks started allowing ultra-poor citizens of the country to open no-frill accounts worth BDT 10 (approximately USD 0.1) so that they may receive Social Safety Net Programme (SSNP) support from the government via these accounts. Indeed, the proliferation of Mobile Financial Service (MFS) and agent banking services in Bangladesh have proven that early policy moves towards the right direction can provide cushion in case of shocks. And Bangladesh is now reaping the benefits of its early moves in the arena of DFS.
MFS and Agent Banking: Two important success stories in fintech development
How the silent revolution of digital finance in Bangladesh has helped the country in coping with the pandemic can perhaps be most vividly described through the successes of the MFS and agent banking in the country. The faster pace of internet banking has also been equally helpful to the digital banking, particularly during the periods of lockdown. The collaboration between banks and fintech companies to mutually expand their services has also proved beneficial to the users of the financial services. More particularly, the country went onboard with these two digital finance innovations relatively early due to prudent and bold policy moves by the central bank.
Almost a decade ago, BB, after considering the prospects and challenges of MFS, chose to implement the "Bank-led Model" of MFS in the country. Within three to four years, virtually all citizens were brought under MFS coverage. The country is now enjoying the wider benefits of that prudent and early decision amidst the pandemic.
In the face of the new challenges brought by Covid-19, people from all walks of life in Bangladesh are increasingly depending on digital solutions, and MFS perhaps is the most prominent among them. Between March and November 2020, approximately 15 million new MFS customers have joined in. This makes the total number of MFS users almost 100 million.
In November 2020, monthly transactions rose to more than BDT 500 billion (a 30 percent increase in less than a year). During this period (March-November 2020), monthly merchant payments via MFS more than tripled to almost BDT 19 billion; the monthly utility bill payment via the same almost doubled to over BDT 8.3 billion.
Gaining confidence based on this increased reliance of the people on MFS, Government of Bangladesh opted for cash assistance to five million vulnerable poor families hit by the coronavirus pandemic through four major MFS operators. In the post-Covid period, it is expected that more people will be relying on MFS. And experts believe that MFS proliferation will become a key determinant in the growth of MSMEs in Bangladesh. Already some experiments are being conducted on how banks can utilize the robust database of MFS providers to provide them smaller ticket credit package without human intervention. If pursued, this will revolutionize the depth and breadth of DFS in Bangladesh. In fact, City Bank and bKash have already joined hands in rolling out this nano credit with appropriate regulation from the central bank. I hope other banks will also come forward to take advantage of this digital financial inclusion related regulation.
Agent banking is another digital finance innovation brought in by BB in 2013. This innovative digital financial service model has become especially favoured by bankers who intend to expand their businesses through covering those customers living in hard-to-reach areas without incurring high costs for running their own branches. This is like a franchise business for the banks as well.
A nationwide survey conducted by Unnayan Shamannay, in 2018, has revealed that:
l 52 percent of the agent banking service users reported they are saving time because of agent banking outlets being close to their place of work/residence
l 67 percent of them reported they do not have to spend additional money to travel to the outlets (previously they had to spend money for travelling to the nearest bank branches)
l Most importantly, 20 percent of these respondents claimed that they were not able to save any money before agent banking was available in their respective localities
As a result, this model of financial service has become increasingly popular within a matter of only a few years. As of October 2020, the total number of agent outlets stood at over 14 thousand. Of course, the pandemic has made agent banking deliver further on its great potential. Only a year ago, this number was below 10 thousand. During the same period, the number of accounts facilitated by agent banking outlets almost doubled to 88 million. And deposit mobilized through these accounts more than doubled to BDT 137 billion. Most importantly, remittance received by these accounts quadrupled amidst the pandemic.
These encouraging figures further emphasize the need to properly harness the potential of agent banking in the process of economic recovery. It must be noted that running a bank branch costs BDT 0.5 to 0.7 million per month, whereas agent outlets are much cheaper. It is also a model that is easily accessible by the common customers. This, indeed, can be a reliable means to ensure access to finance for hard-to-reach areas. This last mile service to the earlier unbanked and underbanked people of Bangladesh holds promise for digital transformation of Bangladesh which is simultaneously inclusive.
Looking Ahead
Digitization of financial services has revolutionized access to finance in Bangladesh. And of course, this will be pivotal in making the country's economic recovery desirably inclusive. But there is no alternative to "learning by doing".
At the same time, special care needs to be taken to ensure that digital infrastructure and access-to-internet become affordable and sustainable. Moreover, a policy environment focusing on customer benefit must be the top priority, which necessitates ensuring interoperability, favourable tax policy etc. Gaining and maintaining customer confidence is also pivotal. DFS needs to ensure that customers get acclimated to the "new normal" and fraudsters do not spoil the show which has been developed with painstaking efforts.
Dr Atiur Rahman is the former Governor of Bangladesh Bank and Bangabandhu Chair Professor of the University of Dhaka.
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