Towards inclusive digital finance reforms for sustainable development

Rabindranath Tagore wrote in his poem 'Durbhaga Desh' (ill-fated country), "Poshchate rekhechho jare shey tomare poshchate tanichhe," which roughly means those you leave behind will pull you back. 

A century later, in 2012, the famous book 'Why Nations Fail' by Daron Acemoglu and James A Robinson argued the same. The book argues against extractive economic institutions structured to extract resources from many by the few. If this trend continues, they argue, the nations are bound to fail. 

Instead, the authors argue that there is a link between inclusive economic and political institutions and prosperity. The book provides several case studies on both sides of the coin. This is the core call of the SDGs — leave no one behind. This call for reforms for inclusion is anchored on that perspective.

Bangladesh is perhaps the most suitable example of realising developmental aspirations through inclusive policies. As pointed out by internationally acclaimed economist Stefan Dercon in his 2022 book titled 'Gambling on Development', "Progress is not at all the result of a grand design. Instead, it is, almost coincidentally, a matter of politics and economics not doing the wrong thing. It seems to have worked in Bangladesh and could serve as an example to others." 

The country's economy, emerging as one of Asia's most 'remarkable and unexpected success stories' during recent years, is being widely acknowledged by global experts as a role model of development despite many challenges in governance. 

And they attribute a significant share of this success to policies promoting inclusive finance. However, the success story of our inclusive development may be challenged unless macroeconomic stability is ensured. 

At the beginning of this fantastic journey, I was fortunate to be responsible for regulating Bangladesh's financial sector. From then on, we went for a 'developmental approach' that emphasised channelling finance to the real sector. 

Gerald Epstain of the University of Massachusetts rightly summarises this campaign as a commitment to "promote and maintain a high level of output, employment, and real income, fostering growth and development of the country's productive resources along with preserving monetary and financial stability." 

While our central bank's philosophy was 'developmental,' we resorted to 'digital finance to make it relevant for today's global realities.' To materialise our aspirations of developmental central banking, we opted to leverage digital technologies. And our smart move provides enough grounds for optimism to achieve a cashless society in Bangladesh.

Critical measures taken to digitise the financial services in Bangladesh over the last decade or so can be summarised as: introduction of automated Credit Information Bureau (CIB); automated cheque processing, National Payment Switch, BEFTN, and RTGS; linking the KYC process with the national database maintained by the National Election Commission (through utilising the NIDs); implementation of online and paperless supervision, ISS (Integrated Supervision System); major changes in traditional reporting of trade services by launching online reporting of all inward and outward remittance transactions of authorised dealers; and digitisation of financial services for last mile service delivery (online banking, mobile financial services, and agent banking). All these digital financial investments have been yielding the desired results.

IMF data shows that the number of bank branches per 100,000 adults in Bangladesh started increasing by 2010. This number grew faster once the commercial banks' non-branch agent outlets started operating in earnest. 

Between 2010 and 2021, the number of bank branches and agent outlets per 100,000 adults increased from eight to 16 (doubled) (IMF, 2023). Data from the IMF also shows that between 2003 and 2021, the number of MFI branches per 100,000 adults increased from seven to 18 (almost tripled).

The wide acceptance of Mobile Financial Services (MFS) by the country's population is perhaps the biggest testament to Bangladesh's success in digitising financial services. Average monthly MFS transactions went through a quantum jump amid the pandemic (between April and July of 2020, the amount more than doubled from Tk310 billion to Tk650 billion). 

The customers continued to rely more on MFS transactions from that point on. Consequently, as of August 2023, the average monthly transaction via MFS is Tk1.1 trillion (an almost 70% increase over three years). Over the same period, registered MFS users increased from 43 million to 212 million. The number of MFS agents has increased from 1 million to 1.53 million.

Agent banking is another digital financial solution that was gaining popularity (especially for rural banking) before the pandemic, and people started to rely on this even more amid the pandemic. Between March and June 2020, the amount deposited via agent outlets topped Tk102.2 billion. During the same period, loans disbursed through agent outlets more than tripled to Tk7.2 billion, and remittances channelled through such outlets increased from Tk70 billion to Tk270 billion monthly. 

This trend of rapid growth continues. As of June 2023, the year-on-year growth rate of amount of deposit stands to be 19.14% (current deposit Tk334.6 billion), the year-on-year growth rate of loans disbursed stands to be 70.58% (loans disbursed as of June 2023 is Tk76.4 billion), and the year-on-year growth rate of inward remittance received stands to be 33.74% (inward remittance received as of June 2023 stands to be Tk1.3 trillion). As of November 2023, 15,671 agents serve 200 million agent banking account holders.

These tools provide convenience and promote financial inclusion by reaching the unbanked population. The Bangladesh Financial Intelligence Unit (BFIU) issued a comprehensive guideline for Electronic Know Your Customer (eKYC) in 2020, revolutionising the account opening process for any bank or financial service provider. 

Under this streamlined eKYC process, a customer engages in a straightforward procedure by capturing images of the front and back of their NID card and a selfie. Subsequently, the bank or financial service provider utilises advanced technology to meticulously verify the authenticity of the NID and the profile photo. 

According to industry experts, this digitised KYC method expedites the account opening process and enhances security measures by leveraging technological advancements.

The financial institutions in Bangladesh have invested heavily in robust core banking systems and central software that enables them to manage and streamline critical banking operations that form the backbone of their activities. According to industry experts, these systems integrate various banking processes, including account management, transactions, and customer relationship management.

Cash recycling machines (CRMs), set up by banks in Bangladesh to help clients deposit, withdraw, and transfer money instantly, almost doubled in the last financial year. As of September 2023, banks installed 3717 such machines, according to data from the Bangladesh Bank. Five years ago, the number of such machines stood at only 219. 

Banks have been increasingly installing CRMs as they offer a range of core banking services, reducing customers' reliance on branches and giving them more freedom to carry out financial transactions whenever they want since the machines operate round the clock.

The discussion above is sufficient to establish that the successful utilisation of digital technologies has been the engine for the 'silent revolution' of financial inclusion in Bangladesh. Yet, it must also be acknowledged that there remains significant scope for improvement, especially in the context of the global economy's ever-changing landscape of financial realities. Fortunately, Bangladesh continues to move in the right direction. 

Bank-MFI linkage programs to further include the under-served, nano-loan programs undertaken jointly by Banks and MFS providers, Bangla QR (pilot initiative for QR-based transactions), insurance-supported credit card, smart credit cards for farmers, 'Taka Pay' (the country's card scheme), etc. are some of the most recent digital inclusive finance initiatives undertaken by the stakeholders.

Digitally driven financial sector innovations have contributed significantly to Bangladesh's incredible macroeconomic journey. Undoubtedly, such digital innovations will continue to be pivotal for further positive transformation of our economy. However, to materialise the true potential of digital finance in Bangladesh, we must first deal with the macro economy's prevailing uncertainties (generated from external economic factors) and effectively address the governance challenges in our financial sector.

The writer is an Emeritus Professor of Dhaka University and former Governor of Bangladesh Bank.