What good is financial inclusion without savings?

A Dhaka city rickshaw puller Mohammad Samad, 34, a former assistant confectioner from the northern district Joypurhat, opened a bank account prior to accessing a loan from an NGO. 

He received the loan to secure a lease on farmland and within one year repaid the money. In the last two years, Samad has not deposited a single taka to the bank account.

The rickshaw puller earns Tk15,000 maximum a month and transfers three-fourths of the money to his wife's MFS (mobile financing system) account. Does she save? 

"She cashes out the transferred money instantly to manage the household and children's education costs. However, she deposits Tk50 every week to the savings box of a local NGO," said Samad, father of two school-going children. 

Given that they have a bank and MFS account, Samad and his family fall under the definition of people covered by financial inclusion. But what is the use of a bank account if it becomes dormant? 

Theoretically, financial inclusion is based on the concept of encouraging savings among the poor. The national economy can flourish more when financial inclusion strengthens the availability of economic resources. Economic theory suggests that a high level of domestic investment – largely financed by domestic savings, helps achieve faster rates of economic growth and development.

Unfortunately, like Samad, despite being included in the formal financial system via agent banking and MFS, many poor families in Bangladesh can hardly save money for income security. 

According to Bangladesh Bank, there were more than 12 million agent banking accounts and 106.4 million MFS accounts till September 2021. However, amongst the registered MFS accounts, only 40.7 million were active, meaning there were no transactions in nearly 60 million accounts in July-September of that year. 

In the last decade, the coverage of the banking system has expanded, following the government's instructions for financial inclusion of underprivileged communities, including farmers, RMG workers, social safety net beneficiaries and informal workers. The number of no-frill accounts – that opens with Tk10/50/100 or zero personal deposits – has grown. 

According to Bangladesh Bank's quarterly report, as of June 2021, the number of different components of no-frill accounts, including school banking, reached 24.2 million with cumulative deposits of Tk 2,665.94 crore. 

Despite the impressive growth in bank accounts, we still have some way to go in ensuring that money is actually being deposited into those accounts.  

Citing the Directorate of National Savings' data that claims Bangladeshis save an average of 18 percent of their annual income, Bangladesh Bank executive director Debdulal Roy said, "The rate should be 25 percent. Some of our neighbouring nations' personal savings rate is more than 25 percent." 

He explained that personal savings depend on income patterns. For savings, a person must have surplus income.

The central bank officer said deposits to the no-frill accounts, particularly belonging to farmers, school children and working children, fell during the peak of the pandemic. 

"The good news is that the accounts are seeing deposits now following the easing of Covid restrictions as well as banking-friendly measures by the government. If the inflation rate remains under control, poor people may be able to save something," Debdulal said. Given that the inflation rate has been high in recent weeks, that remains highly unlikely.  

MFS, though a kind of banking, facilitates only money transfer. This correspondent talked to some low-income people that only have MFS accounts. They said they cannot save their deposits to the MFS account for long. Banking principles consider deposits for at least one year as savings. 

Jakir Hossain, a senior citizen, works as a gatekeeper at Dhaka's Rampura residential building. He sends half of his salary to the MFS account of his elder son Hanif Akand, 28, supervisor of a Sayedabad-Sharankhola bound bus. 

"The family expenses including my octogenarian mother's medicines and educational cost of my younger son is managed by the meagre amount of money we, father and son, earn. What I send through mobile (MFS) is withdrawn instantly. What will we do with a bank account?" Jakir wondered. 

Although the pandemic has exacerbated the situation for low income groups, some persistent issues keep nearly half of the adult population out of banking coverage. 

Global Findex 2017 of the World Bank estimated that nearly 51 million adults in Bangladesh are unbanked.

Difficulties in accessing banking coverage due to remote locations, inconvenient documentation procedures, lack of suitable banking products, lack of financial literacy, low incomes and not having the ability to unlock economic opportunities remain barriers to financial inclusion in Bangladesh, according to Policy Research Institute Director, Dr Bazlul H Khondker. 

Bangladesh lags behind banking inclusion when compared to some of its neighbouring countries. According to the latest financial data, the number of deposit accounts per thousand population is around 849 in Bangladesh. 

The number is less than that of India and Bhutan, while higher than that of Pakistan, Nepal and Afghanistan. Also, the gap between rich and poor account holders is high in Bangladesh, with 17 percentage points, compared to India (5), Pakistan (12) and Nepal (12). 

A significant amount of monetary transactions still take place outside the banking system. 

According to Bangladesh Bank, the amount of cash outside the banking system and cash in hand stood at Tk 2,08,296.4 crore out of Tk Tk 2,27,017.06 crore currency in circulation, in November 2021. The high amount of cash outside the banking system lowered the money multiplier rate to 4.82. 

Such a high degree of transactions in cash also undermines tax collection, as well as facilitating illegal money transactions.

Bazlul H Khondker, also an economics professor at the University of Dhaka, believes that the promotion of financial literacy among people, particularly women, is the key to financial inclusion. According to Global Findex 2017, 65 percent of Bangladeshi adult women are unbanked.

Bazlul recommended that the government subsidise smartphone purchases by the underprivileged as the country's banking system is being digitised. 

"More importantly, pension schemes and health insurance need wider appeal. People should know that their savings will fund their health or pension insurance," he said. 

As branch operating costs are high, several commercial banks in the country are now offering their services through agent banking. Agent banking, however, has some risk factors, both for the agents and depositors. 

There have been several news reports on the embezzlement of depositors' money by agents. A few months ago, a business partner of Khokon Deb, a banking agent at Chaparhat of Lalmonirhat district, embezzled more than five lakh taka worth of deposits and went into hiding. Now the depositors are demanding their money back. 

Professor Md Main Uddin, Chairman of the banking and insurance department at the University of Dhaka thinks agent banking could have been a good option for encouraging savings among the rural people, "but the particular banking facility still lacks the trust of potential depositors."  

Sadiqur Rahman. Illustration: TBS