Special care needs to be taken to ensure that digital infrastructure and access to internet needs become cheaper and sustainable. At the same time, 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. Digital financial service needs to ensure that customers get acclimated to the ‘new normal’ with ease and fraudsters do not spoil the show, writes Dr Atiur Rahman
Need for Developmental Central Banking Re-Emphasized
Maintaining a healthy stable pace of growth is imperative to take low-income, climate change-threatened Bangladesh on a sustainable development path towards broad-based prosperity. Besides prudent fiscal policy, there is an ample scope for the accommodative monetary policy to support this inclusive growth strategy. Bangladesh Bank (BB) being the central bank is statutorily mandated to support attainment of the country’s developmental aspirations alongside maintaining price and financial stability.
Back in 2009, the primary focus of BB amid the global financial crisis was on upholding domestic demand by making holistic use of its mandate. Since then, BB has been promoting inclusive financing with particular attention to the underserved segments of agriculture and the SMEs (Small & Medium Enterprises). Environmentally-benign ‘green’ output processes were also adopted by the BB to promote sustainable development. Priority to women entrepreneurs in financing access figured importantly in BB policy initiatives. In fact, it has been trying to touch the ground to change the real economy for many. The massive countrywide thrust in promoting inclusive, green financing began with sustained ongoing sensitisation and motivation campaigns to take on-board all banks, financial institutions, and clientele group stakeholders. The motivational campaign, 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 (ibid).
BB’s policy supports for inclusive, 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 the BB and external development partners.
BB’s success in terms of expanding its developmental role has become even more relevant in the context of the post-pandemic economic recovery. As was the case during the last global economic slowdown in 2008-09, the world and hence Bangladesh are once again facing a massive socioeconomic crisis originating from supply-chain dislocations and fall in domestic demand. Of course, after a year and half since the onset of COVID-19, the global economy is now poised to stage its most robust post-recession recovery in 80 years. But experts are still fearing that this rebound will be uneven. This ‘unevenness’ is what policymakers and stakeholders in Bangladesh need to be careful about. For example, Foreign Direct Investment (FDI) inflows to developing economies in 2020 decreased by 12 per cent from USD 702 billion to USD 616 billion compared to the previous year. The picture is equally grim, if not more, regarding aid commitments including ODA. Aid commitments by key bilateral development partners have come down from USD 93 billion in 2019 to USD 59 billion in 2020. The IMF is also concerned about this uncertainty mainly due to vaccine divide.
All these indicate a challenging path ahead for Bangladesh, even though Bangladesh has been performing far better than many of its peers in terms of fending off the effects of the pandemic-induced economic shocks. The credit must be given to the government for its coordinated prudent fiscal and monetary policies. But still 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, BB’s developmental role needs to be reemphasised. The policymakers and the entrepreneurs of Bangladesh today need to look more inward. But 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 inflationary pressure – the government requires to make sure that credit flows can create the fiscal space. In fact, in the wake of falling revenue and rising public debt experts felt that there was a little to no alternative to the central bank but expanding its balance sheet. And BB did not hesitate to follow this path knowing fully that keeping the economy liquid was more important than worrying so much about inflation. When the economy has started recovering, the BB is balancing its act by mopping up the excess liquidity through selling of USDs and government bonds. The floating of digital trading of government bonds in the secondary market platform of Dhaka Stock Exchange has 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 becomes even more relevant. On the one hand, this revisit is going to reveal how a campaign of digitization initiated over a decade ago has contributed towards ensuring resilience in the face of the unprecedented challenges posed by the pandemic. On the other hand, the successes achieved, challenges faced, and lessons learned by the digital finance endeavours in Bangladesh can shed light on how to further leverage the digital finance solution to equip the economy better for the desired pace of recovery.
Developmental Central Banking & Digital Finance in Bangladesh
Leveraging digital technology to make services more accessible especially for the poor and marginal people 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 per cent 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 all people including those living in the hard-to-reach areas.
BB’s success in utilising digital financial innovations to serve the un/under-served 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. Since 2009, the central bank has practically revolutionised financial services in the country through its bold and yet prudent moves for leveraging latest fin-tech to enhance outreach of financial services with special focus on covering the previously un/under-served. Key measures taken to digitise the financial services in Bangladesh over the last decade can be summarised as given below:
- Introduction of automated Credit Information Bureau (CIB) to enable effective credit risk management and ease of doing business in Bangladesh.
- Automated Cheque processing, National Payment Switch, BEFTN and RTGS introduced to enhance speed as well as reliability of banking services.
- Linking the KYC process with the national database maintained through utilising the NIDs.
- Implementation of online and paperless supervision, ISS (Integrated Supervision System), has been a great success.
- Major changes in traditional reporting of trade services by launching online reporting of all inward and outward remittance transactions of the Authorised Dealers.
- Digitisation of financial services (online banking, mobile financial services, and agent banking) has revolutionised access to finance in Bangladesh.
- Banks in Bangladesh have already started adopting blockchain technology. On a broader scale, it will significantly help the country in trade-related transactions, which will be paperless, real time, low cost, faster, and free of errors.
- Above all, backed by the BB innovative initiatives, the banks today are using core banking software and have dramatically automated most of their internal and external operations.
These moves for digitization have (as expected) yielded significant positive impact on 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 –
- 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 per cent increase in 5 years).
- Number ATMs per 100,000 adult persons in Bangladesh has increased from 7.09 in 2015 to 10.18 in 2020 (44 per cent increase in 5 years).
- Number of registered mobile money agent outlets per 1,000 square km has increased from 4,408 in 2015 to 8,141 in 2020 (85 per cent increase in 5 years).
- Number of registered mobile money accounts per 1,000 adult persons in Bangladesh have increased from in 310 2015 to 825 in 2020 (166 per cent increase in 5 years).
- Value of mobile money transactions as percentage share of GDP has increased from 11.26 in 2015 to 20.45 in 2020 (82 per cent increase in 5 years).
It should be obvious from the discussion above 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 a high pace. Digital financial services have not only proven their 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 SSNP support from the government via these accounts. This ability to reach the distressed with digital finance has been pivotal in coping with the pandemic-induced economic shock as well. Moreover, experts believe that it will be even more important in the process of economic recovery. Indeed, the proliferation of 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.
Two Success Stories: MFS and Agent Banking
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 Mobile Financial Service (MFS) and Agent Banking in the country. The faster pace of internet banking has also been equally effective to digital banking particularly during the lockdowns. The collaboration between banks and fin-techs to mutually expand their services has also been proving beneficial to the users of the financial services. More particularly, the country went on-board 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/four years, virtually all the citizens were brought under MFS coverage. The country is now enjoying the wider benefits of that prudent and early decision amid 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 around 15 million new MFS customers joined in. This makes the total number of MFS users almost 100 million. In November 2020, monthly transactions rose to over BDT 500 billion (a 30 per cent rise in less than a year). During this period (March-November 2020), monthly merchant payments via MFS more than tripled to almost BDT 19 billion; and monthly utility bill payment via the same almost doubled to over BDT 8.3 billion. Gaining confidence of this increased reliance of the people on MFS, the 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 the MSMEs in Bangladesh. Already some experimentations are going on as to how banks can utilise the robust database of MFS providers to provide them with smaller ticket credit package sans human intervention. If pursued, this will revolutionise the depth and breadth of DFS in Bangladesh.
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 too 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 –
- 52 per cent of the agent banking service users reported they are saving time because of the agent banking outlets being close to their place of work/residence.
- 67 per cent of them has 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).
- Most importantly, 20 per cent 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 very much popular within a matter of only a few years. As of October 2020, the total number of agent outlets stood at over 14,000. Of course, the pandemic has made agent banking deliver further on its great potential. Only a year ago, this number was below 10,000. During the same period, the number of accounts facilitated by agent banking outlets almost doubled to 88 million. And deposit mobilised through these accounts more than doubled to BDT 137 billion. Most importantly, remittance received by these accounts quadrupled amid the pandemic.
These encouraging figures further emphasise 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 months, whereas agent outlets are much cheaper than that. It is also a model that is very 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 services to the earlier unbanked and under-banked people of Bangladesh augur well for digital transformation, which is simultaneously inclusive.
Digitisation of the financial services have surely revolutionised 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 needs become cheaper and sustainable. At the same time 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’ with ease and fraudsters do not spoil the show, which has been developed with so much painstaking efforts.