Building infrastructure for digital financial services

Illustration: TBS

Bangladesh has a lot of opportunities to improve its financial services. More than 60% of the population do not have a bank account, 90% cannot get financing from banks, and 99% percent do not have any insurance coverage. However, with the advent of digital technologies, these challenges can be addressed.

We do not have to address these issues the old and traditional way. In the digital age, when we are behind, we can get the last mover advantage. We can learn from the mistakes of others and apply the best practices to implement the appropriate solution, avoiding a few phases of iterations and pains. 

Modern digital technologies bring a lot of promises for emerging economies like Bangladesh. It can expand and improve financial services to and for all people. We can provide quality financial services at reasonable and affordable prices. 

Digital financial services (DFS) may be defined as financial services accessed and delivered through digital channels, including payments, savings, credit and insurance. To develop DFS in our country, we need public infrastructure support so that banks, fintechs and other service providers can develop new and beneficial solutions to existing problems. 

Digital lending for small businesses and merchants

We require four key public infrastructures for DFS to flourish: (1) Digital identity, (2) Telecommunication network coverage, (3) Real-time payment system, and (4) Comprehensive and complete credit information bureau. 

Digital identity 

Establishing the identity of a person or a business is a fundamental requirement for providing any financial services, analog or digital. In Bangladesh, we have already solved this problem. We have provided national identity (NID) cards to all adult citizens. The National Election Commission provides an online verification service of the NID and associated profile photo. 

The NID system is key to the digitalisation of any country. This has been used for getting a new mobile phone number in Bangladesh for a few years now. This can also be used for other services that require user identification such as bank accounts, land records, legal agreements or income tax returns. 

In 2020, the Bangladesh Financial Intelligence Unit issued a guideline for Electronic Know Your Customer (eKYC), which enables any bank or financial service provider (FSP) to open a bank account or digital wallet using a completely digital process. A customer takes pictures of the front and back of her NID card and her selfie. The bank or FSP then verifies the NID and profile photo against the national election commission database to open the customer account. 

In the last decade, we have made very good progress opening bank accounts and digital wallets. As per the World Bank Global Findex Database 2021, we have 52.8% penetration of financial services accounts, with 37.7% having accounts in banks or financial institutions and 29% in mobile financial services (MFS) accounts. We expect to see faster growth of bank accounts and wallets with the benefit of eKYC in the next few years.

Telecommunication network coverage 

Good access to telecommunication networks around the country is necessary for the adoption of digital services, especially DFS. We have 98.5% population coverage for mobile phones, with 88% coverage of 4G networks. Internet usage has reached 32%. In the last few years, we have seen a strong adoption of smartphones that reached 50% of the users. More than 3,800 unions are already connected using high-speed fibre optic networks, and the rest are in progress.

Banks and financial institutions use online banking software, and their branches need reliable connectivity in order to function properly. Adoption of mobile phones has been the key driver of the popularity of MFS in the country. There are about 70m active MFS accounts and daily transactions are about Tk3,000 crore. Banking using agent points has also been possible based on communication networks and biometric technologies. 

Other channels such as ATMs or retailer POS operations also require connectivity. As the popularity of smartphones is increasing, we see a proliferation of new app-based financial services such as mobile banking, online banking, digital wallets, and the growth of e-commerce using electronic transactions. 

Real-time payment system 

Digital payments are widely used by MFS users in the country. This is mainly used for local remittance with cash-in and cash-out transactions. Other usages include mobile phone recharge and utility bill payments. As per a recent diagnostics report, digital payment usage is around 20% in volume and 13% in value. To increase the adoption of digital payments in the country, we need a simple real-time payment facility where anyone can instantly pay anyone else in a simple and hassle free way. 

Currently there is no way to send money from bKash to Rocket MFS or iPay digital wallet. However, there is good progress here. Bangladesh Bank (BB) in collaboration with the ICT division has already developed the Binimoy interoperable payment platform that is expected to launch shortly. In this system, any bank or wallet user can pay any other bank or wallet user without knowing which bank or FSP serves the accounts.

This is expected to revolutionise the payment system in the country, and will act as a railroad or freeway for all other financial services in the country such as savings, credit, shopping, trading, insurance and investment. For example, an organisation can disburse a payroll to its employees using just a simple click at a bank portal. Any employee can then pay rent or pay utility bills directly from her phone app. When she goes for groceries or shopping, she can pay the retailer by just scanning the QR code of the shop. The QR code will be based on the BB specified Bangla QR standard, which is compliant to the EMVCo standard jointly developed by Euronet, Mastercard and Visa. 

India launched the UPI interoperable payment platform in 2016. It has been very successful in the last few years. It facilitated more than 6 billion transactions in July 2022 in participation of 338 banks. The platform is so good that both Google and Facebook (through whatsapp) launched payment apps or features in India, and Google recommended the system for implementation in the US in a report.

Singapore launched realtime payment system PayNow in 2017, Malaysia launched DuitNow in 2019 and Thailand launched PrommptPay in 2021.

We hope Binimoy will also bring the UPI moment in Bangladesh, and the facility is adopted nationally by all banks and FSPs to expedite digital payments for different kinds of personal and business transactions, and expedite implementation of a less-cash society marching towards a cashless society. 

Comprehensive credit information bureau 

The last but not least item in digital infrastructure is a universal, complete and integrated national-scale all-inclusive comprehensive credit information bureau (CCIB). It will help prevent the problem where a bad borrower takes a loan from one bank, does not repay the loan timely, and then takes another loan from a MFI. 

Credit is one of the most significant categories of financial services, if not the most significant one. Credit is also the riskiest. Banks and other lenders manage other people's money, from the deposits of people and businesses, to lend to people and businesses in need of money. Banks need to properly assess the credit applicants' ability and willingness to repay the loans. In a society, there will always be some bad borrowers who do not want to repay their loans, especially when they can get away with it. 

Credit risk assessment has always been very challenging because the lenders did not have access to reliable information on their borrowers, and therefore, in most cases the lenders resorted to collaterals, usually fixed assets, against the provided loans. However collaterals are not good indicators of payment capability and intent, and in some cases this method fails. In Bangladesh, we have a very large national-level default rate amounting to 9% as of June 2022. This is very high, and is a big challenge for our financial system performance and stability. 

Currently, Credit Information Bureau (CIB) operated by BB is the only credit bureau service in the country, and it has been providing credit reports to banks and NBFIs since 1992. The service provided is quite basic, considers only negative reports, does not include information on positive repayment events, and does not provide any credit score. 

Although the CIB service is available online, there is no API available for online integration with lending software from banks or fintechs. The credit bureau coverage in Bangladesh is 7.6% which is significantly low compared to our SAARC neighbours India, Pakistan or Sri Lanka. For example, credit bureau coverage in India is 63.1%, which is 730% more than that of Bangladesh. 

Using modern digital technologies and the best practices from around the world, it is possible to establish a CCIB efficiently with proper support from the government, regulator(s), lenders and other stakeholders. We need to establish and maintain a live database and all the lenders such as banks, NBFIs and MFIs must register all their loans with this database. 

Banks and lenders will also record all repayment and missed repayment events. Before approving any loan, a lender will check with the CCIB for borrower's credit performance (or lack thereof) and a credit score. Credit score is an algorithmically computed scoring number for a borrower that represents the quality and riskiness of this borrower at this time. 

For example, in the USA, credit score FICO Score was introduced in 1989 to help lenders make accurate, reliable and fast credit risk decisions across customer life cycle. It gives each consumer a score between 300 and 850 where a high score implies good borrowers. 

FICO score is calculated using data in a client's credit report, including payment history, amounts owed, length of credit history, new credit and credit mix. If a client's FICO score is bad, she will have difficulty buying a car or apartment or in certain cases even renting a place to live. 

Our neighbouring country India launched the first private credit information bureau CIBIL in 2004. When a lender performs a CIBIL check for a person, the credit report will contain personal and employment information, credit account details including payment status, credit enquiries and a credit score between 300 and 900. A score of 650 or above is considered good. Each business will also get a score between 1 and 10 where 10 is the best possible score. 

Ideally, a CCIB should be established with a licence from BB under BB oversight, but would be operated outside BB. The banks and lenders will become members and data contributors as well as data users for this bureau. There are international best practices to establish efficient bureaus like that. Once again being a late mover in the private credit information bureau establishment, we can learn from the best practices from around the world. 

Going forward 

From the four key infrastructure components presented here, Bangladesh has already completed numbers 1 and 2. Number 3 is almost done. Therefore establishing a CCIB is the key missing pillar. 

It is now high time that we take initiative to implement number 4 - a comprehensive credit information bureau, and this will require initiative from the government and regulators and collaboration of all related stakeholders. More than 120 countries around the world have already established private credit bureaus. India implemented its first credit information bureau CIBIL outside the central bank in 2004. Currently India has four private credit information bureaus. Pakistan has also launched its first private credit information bureau Tasdeeq in 2019 with a licence from State Bank of Pakistan. 

One way to implement this would be to establish a joint venture between banks, NBFIs, MFIs and fintechs. It may be implemented using a public-private partnership model. One starting point may be to establish a CCIB only for small businesses which is used by initial member lenders for loans less than 50 lakh taka. We may run a pilot program and then onboard more members as the system matures. 

CCIB is essential for proper digitalisation of the financial services sectors, and a prerequisite for implementing end-to-end digital lending or the coveted digital banks. A CCIB will reduce the risk of bad loans, will reduce the overall non-performing loans in the country, and will clean and strengthen the whole financial services sector. 

The good borrowers will benefit because they can get loans at lower interest rates and depositors will benefit because they will get better returns with less risk. This will create an opportunity where credit assessment and decision will be much easier, cheaper and quick, and lenders will be able to lend more to small businesses and the micro, small and medium enterprises (msME) sector. It is well-known that when msME sector gets more investment, it will create more employment and millions of families will benefit. 

Sketch: TBS

Dr Shahadat Khan is a fintech enthusiast, co-chairman of BASIS Standing Committee on Fintech and Digital Payment, and the Founder and CEO of TallyKhata. He may be contacted at shahadat@progoti.com.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.