Digitising microfinance: The next frontier of financial inclusion in Bangladesh

For nearly five decades, microfinance has been a cornerstone of Bangladesh's fight against poverty and a globally recognised symbol of its developmental innovation. Pioneered by institutions like Grameen Bank and BRAC in the 1970s, it has empowered millions of low-income households, particularly women, granting them access to small loans and savings. 

This access to capital has been transformative, helping families start businesses, educate their children, and build resilience against economic shocks and natural disasters. Today, the sector serves over 41 million Bangladeshis — with women comprising the vast majority of borrowers — and disburses loans worth Tk263,000 crore in 2023 alone.

Yet, this powerful engine of social change largely runs on an analogue framework of cash, paper ledgers, and manual fieldwork. The current model, while effective, is resource-intensive. It relies on field officers travelling to villages, manually collecting repayments, and disbursing cash, all while maintaining paper records. 

This reliance on physical processes makes operations costly, slow, and inherently risky. Consequently, interest rates often hover around 24%, a significant burden for the very people the system is designed to uplift.

Now, as Bangladesh surges forward with its digital ambitions, powered by the widespread adoption of mobile financial services (MFS), the microfinance sector is poised for its most significant evolution yet. A strategic transition to digital operations offers a clear path to lower costs, reduce risks, and expand financial access, fundamentally transforming the sector for borrowers and lenders alike.

Digital dividend: Faster, safer and more affordable

The promise of digitisation is to replace the friction of cash and paper with the efficiency of mobile wallets, digital records, and real-time data. The potential impact is profound. By eliminating cash handling, manual reconciliation, and paper-based reporting, microfinance institutions (MFIs) could slash operational expenses by an estimated 20–30%.

For borrowers, the benefits are immediate and tangible. The current system often requires them to travel to a branch office to make a payment. Digitisation eliminates this opportunity cost. Loan disbursements and repayments could happen instantly via mobile wallets, saving time and money. Transactions also become far safer with reduced risk of theft and fraud, leaving a transparent digital trail that enhances accountability for all parties.

Furthermore, digitisation creates a formal financial footprint for millions who were previously invisible to the broader financial system. Digital transactions help build a credit history, which can unlock access to a wider range of financial products, such as larger loans for business expansion and formal bank accounts.

For MFIs and regulators, real-time data provides huge oversight, enabling early risk detection and more informed, agile decision-making. With better data, MFIs can also move beyond one-size-fits-all loan products and develop customised offerings based on a borrower's specific needs and repayment capacity.

The numbers illustrate a compelling case for change. An analysis projects that within three years of implementation, sector-wide digitisation could yield, firstly, Tk15,800 crore ($1.3 billion) in annual savings. Secondly, the ability to reach 6.3 million additional borrowers if these savings are reinvested. And a potential drop in interest rates by about 4 percentage points, bringing them closer to 20%.

These figures represent more than just economic efficiency. They signify millions of families gaining access to more affordable credit, fostering the growth of small enterprises and improving household financial health.

A roadmap for transformation

This transformation will not happen overnight. It requires a pragmatic, phased approach to build a sustainable and trusted digital ecosystem. The journey involves several key steps:

Upgrading core systems: The first step is moving from paper-based records to modern, cloud-based Core Banking Systems or Loan Management Systems (LMS) that can handle digital transactions securely.

Piloting and integrating: Rather than a nationwide launch, MFIs should start with pilot programs in select branches. This allows them to test and refine their processes, integrating their systems with major mobile money providers to ensure seamless, interoperable fund transfers.

Empowering staff and clients: Technology is only as effective as the people who use it. A critical component is investing heavily in digital literacy. Field officers must be retrained to act as digital ambassadors, equipped with tablets or smartphones and trained on digital field applications (DFAs). For clients, extensive awareness campaigns are crucial to build trust and demonstrate the benefits of moving from cash to mobile wallets, fostering the necessary behavioural shift.

Leveraging data analytics: The collection of digital data is just the beginning. The real value lies in using analytics to understand client behaviour, refine credit scoring models, and design innovative products. This data-driven approach allows MFIs to better serve their clients while managing risk more effectively.

Strengthening security: As operations go digital, robust cybersecurity measures are non-negotiable. This includes protecting institutional and client data against fraud and data breaches through encryption, secure networks, and regular security audits.

Scaling and innovating: Once the core digital infrastructure is proven and stable, MFIs can expand their digital offerings to include micro-savings, insurance, and remittance services, further deepening financial inclusion and creating more value for their clients.

A collaborative effort: Roles for public and private sectors

Realising this vision requires a coordinated effort from both public and private stakeholders.

The government and regulators, particularly Bangladesh Bank and the Microcredit Regulatory Authority (MRA), must create an enabling policy environment. This includes establishing clear, streamlined regulations for digital Know-Your-Customer (e-KYC) processes, promoting interoperability between financial platforms, and expanding high-quality mobile and internet infrastructure, especially in rural and remote areas. Offering incentives for MFIs that adopt digital solutions and funding large-scale financial literacy campaigns would significantly accelerate the transition.

The private sector—including MFIs, mobile money providers, and fintech companies—must drive innovation. This means investing in secure and user-friendly technology, developing digital products that are designed for low-income and low-literacy users. Building and maintaining client trust through transparent communication and responsive customer support will be paramount to their success.

Navigating the challenges

This digital leap is not without significant risks. Cybersecurity threats loom large, as a single major breach could erode trust across the entire sector. The digital divide remains a substantial barrier; disparities in smartphone ownership, inconsistent rural network coverage, and a persistent gender gap in digital literacy could exclude the most vulnerable. 

Finally, there may be resistance to change from both staff accustomed to traditional methods and clients who value the personal interaction and community aspect of their MFI groups.

However, these challenges are manageable. A phased rollout, strong public-private collaboration, robust security protocols, and a sustained, human-centred focus on building trust through training can mitigate these risks effectively.

Reimagining microfinance for a Digital Bangladesh

Ultimately, digitisation is about more than efficiency; it's about reimagining financial services for the digital age and aligning the microfinance sector with that vision. It means a farmer receiving a loan instantly on his phone to buy seeds at the optimal moment. It means a garment worker securely saving small amounts daily through her mobile wallet, building a vital safety net for emergencies. It means an MFI officer evolving from a loan collector into a valued financial advisor.

Bangladesh has long been a global pioneer in financial innovation. Digitising microfinance is the next logical chapter in this legacy. The potential to unlock Tk15,800 crore in annual savings, reach millions more people, and lower the cost of credit is too significant to ignore. For the millions of families who rely on microfinance, this is not just a technical upgrade—it is the promise of a faster, safer, and more inclusive financial future.

Shahid Khandker (left) and Farhad Ahmed (right). Sketches: TBS

Shahid Khandker is a retired Lead Economist and Farhad Ahmed is a retired Senior Transport Sector Specialist, both at the World Bank, Washington, DC. They are also trustees at Human Capital Initiative (HCI). They can be reached at shahid.khandker@gmail.com and farhad.ahmed2011@gmail.com, respectively.  

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.