Regarding Financial Inclusion in Bangladesh: Md. Arfan Ali

Technological Innovations, Agent Banking and Digital Financial Services for Financial Inclusion in Bangladesh

Md. Arfan Ali

President and Managing Director, Bank Asia Limited

1. ABSTRACT: This study examines the financial inclusion in Bangladesh through technological innovations, agent banking, and digital financial services. The technological innovation includes internet banking, mobile banking, automated teller machines, blockchain, BACPS, RTGS, and software. Agent Banking is the latest concept on the corner whereas defined by Bangladesh Bank, Agent Banking means providing limited scale banking and financial services to the underserved population through engaged agents under a valid agency agreement, rather than a teller/ cashier. An agent is the owner of an outlet who conducts banking transactions on behalf of the bank. Moreover, Digital Financial Services includes electronic payments systems (P2P, P2B, B2B, G2P, etc.) and electronic banking products or services. All the three things are consecutively supported the financial inclusion in Bangladesh. Financial inclusion plays a vital role in achieving inclusive growth of a country. Besides a recent report of The Daily Star has shown that the cost of using cash in Bangladesh is about Tk. 9,000.00 crore every year. The study, therefore, attempts to assess the contribution of technological innovations, agent banking and digital financial services for financial inclusion in Bangladesh. This would help to find out new opportunities for inclusive growth of Bangladesh because there is no research evidence related to this issue

2. INTRODUCTION: Financial Inclusion, a key enabler for reducing poverty, improving prosperity and therefore remarkably acknowledged as one of the very vital components to drive Sustainable Development Goal in Bangladesh. According to Global Findex Data (2018), 59% of the adult population (% age 15+) of Bangladesh are out of financial institution coverage. Digital Financial Service(DFS) has been contributing innovations that could give a smooth, smart and prompt solution to all types of financial activities for both the unbanked and underbanked groups. In today’s world, DFS aims to compete with traditional financial methods in the delivery of financial services. Some of the most active areas of DFS include Mobile Financial Service (MFS), Agent Banking Service and aggregator based financial services. Agent Banking service is a distributed banking solution that facilitates full-fledged banking services to the customers at their doorsteps and creates convenience channeling remittance, deposit, and withdrawal of cash and also supporting through small loans for CMSE (Cottage Micro and Small Enterprises), low-cost housing and also for agricultural farmers at an affordable cost.  Well-functioning financial systems are essential for the development of our economy which in due course promotes inclusive economic growth and eradicates poverty from the country.

Led by initiatives from the Bangladesh government and supported by private sector innovations in terms of technology for service delivery, the country has seen impressive growth in Agent Banking services in particular securing 29,06,655 number of customer accounts with Tk.37,345.00 million deposits since 2014 to March 2019 (as per Bangladesh Bank quarterly report, March 2019) where the rural customersare3.55 times higher than the urban customer. This growth shows the biggest hope for the industry players to be more strategically focused and technologically advanced to respond to consumer expectations while trying to defend market share against an increasing array of competition and vast untapped opportunities. A great deal of emphasis is being placed on digitizing customers data processing unit with advance level security, using data and analytics more extensively and digitizing processes and services,  reassessing organizational structures to be better prepared for the future of banking. This transformation illustrates the increasing desire to become a ‘digital bank’.

Financial institutions have been coming up with groundbreaking ideas of channeling the banking services through individual and institutional agents, Union Digital Center, Micro-merchants, and Telecommunication partners. E-commerce companies are joining their hands with DFS providers which can upscale their business through rural agent networks. Researchers have highlighted providers’ innovative use of data analytics and artificial intelligence to solve liquidity issues and boost business volume. We are seeing organizations innovate in targeting, expanding services, re-configuring delivery channels, delivering proactive advice, integrating payments and applying blockchain technology in certain cases. As part of these mega-trends, banks are also experimenting with new mobile applications and voice-enabled gadgets to enhance delivery to end mile customer. Open banking APIs accelerate innovation and collaboration, leading to expanded banking ecosystems that could include more than just financial services to make a consumer’s lifestyle better. Ultimately, the consumers are the driver need to continue to accelerate its investments in innovation and digital enhancements.

An evolution of business model heading through a journey taking along entrepreneurs, aggregators, remittance partners, development partners, Government visioning the outcomes of new employment generation, business expansion of the CMSE enterprises, strengthen farmers and digitization of mattress money for a thriving economy like Bangladesh.

3. OBJECTIVE OF THE STUDY: The main objectives of the study are as follows:

1. To know the consequence of technological innovations, agent banking, and digital financial services.

2. To examine the role of technological innovations, agent banking and digital financial services for financial inclusion.

4. EVALUATE THE TECHNOLOGICAL INNOVATIONS, AGENT BANKING, AND DIGITAL FINANCIAL SERVICE:

4.1 Technological Innovations and Digital Financial Services:

Today, information and communication technology has become the heart of the banking sector and the banking industry is at the heart of every robust economy. Electronic banking system has become the main technology-driven revolution in conducting financial transactions. The modernization of ICT has set the stage for extraordinary improvement in banking procedures throughout the world and Bangladesh has no exceptions. Banks that are using ICT related products such as online banking, electronic payments, security investments, can deliver high-quality customer services with much less effort. Technology has already enabled most of the banks in Bangladesh to introduce innovative products to their customers in the form of ATM/POS, Mobile app/Telebanking, Web banking, etc. Customers of banks have felt the positive impact of technological solutions implemented by banks. Banks play a vital role in developing the economic and social conditions of a country. Use of technology in banks reduces the cost. Banks have realized that cost of transaction drastically reduces from brick and mortar structure of the branch to online delivery channels like ATM, POS Terminal, Mobile Phone, Internet, etc. Each of these channels has its own specific advantages in terms of improved customer service and reduced transaction cost. That is why technology innovation becomes the key factor in devising a new business model to reach out to the customers for the banks.

Banking sector of Bangladesh consists of six state-owned commercial banks (SOCBs), forty-one private commercial banks (PCBs) where eight are Islamic Shariah Based Banks, nine foreign banks (FBs), three specialized banks (SBs), and five non-scheduled banks. The nationwide outreach of scheduled banks is limited to 9,271 branches. With the pace of time banks are brought under online operations and Alternative Delivery Channels (ADCs) are also introduced.

According to the Bangladesh Bank (BB) guideline, commercial banks are categorized as Category-1 and Category-2. Category-1 means Centralized ICT Operation for managing core business application solution through Data Center (DC) with backup assets for the continuation of critical services including Disaster Recovery Site (DRS)/Secondary Data Center to which all other offices, branches, and booths are connected through WAN with 24/7 attended operation. Category-2 means Decentralized ICT operation for managing distributed business application solution hosted at DC or operational offices/branches with backup assets for the continuation of critical services connected through WAN or having standalone operations. It is seen that at the end of 2019 around 92 percent of banks have introduced real-time online banking, meeting the Category-1 architecture. The rest of the banks have introduced either Category-2 (3%) or Mixed Category (5%) architecture. Banks of Mixed Category partially implemented Category-1 architecture and gradually transferring the branches to meet the Category-1 architecture from Category-2 architecture. SOCBs and SBs mainly fall in this category.

In 2017-18, the total amount of transaction through all the systems accounted for 180 percent of GDP mostly through BACPS(Bangladesh Automated Cheque Processing System) and RTGS (Real Time Gross Settlement). The BACPS started in operation in Oct. 2010 and RTGS in Oct. 2015. The average value per transaction in BACPS (High) and RTGS are BDT 6.01 million and BDT 16.57 million respectively, which are much larger than the average value per transaction processed in any other system. The BACPS (Regular) processed 35 percent of GDP. Any disruption in these two platforms, even for a short period of time, may cause tension in the overall financial system. Therefore, BACPS and RTGS could be identified as systemically more important than any other payment platform from the perspective of financial stability. Recent transaction through RTGS is shown as follows:

The Fintech ecosystem of Bangladesh has demonstrated gradual evolution during the last couple of years, mainly based on payment and clearing systems whereas other areas of Fintech are yet to be developed. Apart from the payment system, which might be susceptible to cybersecurity and other operational risks, the systemic risk from other channels of Fintech is still considerably low. Again, other than some isolated domestic frauds and forgery, the possibility of systemic risk from payment system does not appear to be a major issue as the domestic regulation is quite comprehensive and monitoring is reasonably tight.

4.2 Agent Banking:

Agent banking is a limited scale banking and financial service for unserved or unbanked through a person/ institutions under a valid agency agreement, rather than through self-arrangement of the bank by a teller or cashier, according to Bangladesh Bank agent banking guideline 2013.

Within 5 (five) years of its inception, agent banking has been able to attract a huge number of clients, forcing most commercial banks to take up this alternative form of financial service in addition to branch-based banking.

An agent is a third party owner of an outlet who conducts banking transactions such as cash deposits, withdrawals, small value loan disbursement and recovery of loans, transfer of funds, paying bills under the government’s social safety net programs, and account inquiries on behalf of a bank.

Although the central bank issued an agent banking guideline in 2013, by the end of March this year, the number of agent banking accounts stood at 29,06,655 with deposits of Tk. 3,734.50 crore, according to the latest estimate of Bangladesh Bank. Now 19 commercial banks run the Agent Banking operation as follows:

Trends of Agent Banking in Bangladesh

Period	Number of accounts	Deposit (in Crore Taka)
Oct-Dec, 2016	5,44,536	380.68
Jan-Mar, 2017	7,12,499	481.38
Apr-Jun, 2017	8,72,865	651.21
Jul-Sep, 2017	10,38,242	922.08
Oct-Dec, 2017	12,14,367	1,399.39
Jan-Mar, 2018	14,68,797	1,634.36
Apr-Jun, 2018	17,77,400	2,012.77
Jul-Sep, 2018	20,28,864	2,577.49
Oct-Dec, 2018	24,56,982	3,112.41
Jan-Mar, 2019	29,06,655	3,734.50

Banks are Providing Agent Banking Services

1.       Bank Asia Limited	11. Midland Bank Limited
2.       Dutch Bangla Bank Limited	12. The City Bank Limited
3.       Al-ArafahIslami Bank Limited	13. Islami Bank Bangladesh Limited
4.       Social Islami Bank Limited	14. The Premier Bank Limited
5.       Modhumoti Bank Limited	15. United Commercial Bank Limited
6.       Mutual Trust Bank Limited	16. AB Bank Limited
7.       NRB Commercial Bank Limited	17. NRB Bank Limited
8.       Standard Bank Limited	18. Brac Bank Limited
9.       Agrani Bank Limited	19. Eastern Bank Limited
10.   First Security Islami Bank Limited

Agent Banking Operation in Bangladesh and the number of Agents & Outlets

Sl. No	Name of Bank	Agents			Outlets
		Urban	Rural	Total	Urban	Rural	Total
1.	Bank Asia Limited	112	2,555	2,667	125	2,623	2,748
2.	Dutch Bangla Bank Limited	245	466	711	403	2,312	2,715
3.	Al-ArafahIslami Bank Limited	17	125	142	19	198	217
4.	Social Islami Bank Limited	2	32	34	3	91	94
5.	Modhumoti Bank Limited	0	314	314	0	314	314
6.	Mutual Trust Bank Limited	25	62	87	26	77	103
7.	NRB Commercial Bank Limited	1	2	3	30	533	563
8.	Standard Bank Limited	2	21	23	2	21	23
9.	Agrani Bank Limited	7	193	200	7	193	200
10.	First Security Islami Bank Limited	0	21	21	0	22	22
11.	Midland Bank Limited	1	28	29	1	29	30
12.	The City Bank Limited	15	39	54	36	118	154
13.	Islami Bank Bangladesh Limited	34	315	349	34	315	349
14.	The Premier Bank Limited	9	12	21	37	56	93
15.	United Commercial Bank Limited	18	61	79	18	61	79
16.	AB Bank Limited	8	22	30	8	22	30
17.	NRB Bank Limited	0	50	50	0	50	50
18.	Brac Bank Limited	8	44	48	4	46	50
19.	Eastern Bank Limited	1	3	8	1	3	4
	Total	501	4,365	4,866	754	7,084	7,838

Agent Banking Operation in Bangladesh and Gender Wise Deposits

(Figure in crore Tk.)

Male	Female	Others	Total
2,604.59	972.22	157.69	3,734.50

Quarterly Deposit in Agent Banks

(Figure in crore Tk.)

Sept. 2018	Dec. 2018	Mar. 2019
2,577.49	3,112.41	3,734.50

Agent banking has been able to get such popularity mainly for its simplicity to the clients and cost-effectiveness for the banks.

According to a research paper titled, “Alternative delivery channel: Opportunities and challenges of the new banking environment” by Bangladesh Institute of Bank Management (BIBM), agent banking has become popular because of its benefits for both the banks and clients, while the country’s economy is also being benefited through financial inclusion. The banks have been able to increase customer volume, improve financial appearance, lower operating costs, expansion of business, increase deposit collection, improve banks’ branding and widen their spreads.

Agents are physically closer to remote populations and many operate out of pre-existing locations that are well-established and known to local communities. These locations also maintain longer hours of operation than traditional brick and mortar branches. This is particularly helpful for MSMEs that have high cash handling requirements and large cash inventories later in the day after branches close.

The second problem the service addresses is product availability. Unlike earlier deployments in Bangladesh that were restricted to a smaller set of offerings such as domestic money transfer, airtime purchase, and limited bill payment, Banks’ are a regulated financial institution and its network of rural banking agents provides customers with access to the full complement of banking services and financial products. Agents offer deposits, withdrawals, savings, payments, money transfers, credit, lending, and insurance.

Another problem addresses is pricing and affordability. The combination of digital solutions and reduced infrastructure costs allows Bank to offer rural customers “no-frills” accounts that have minimal or no balance requirements, and limited transaction or servicing fees. With respect to savings, individual and enterprise customers can open short-term, long-term or variable accounts. With respect to credit and lending, Banks offer a range of financing with more flexible terms and conditions around funding limits, funding use, and repayment schedules. Agents also serve as collection points for credit, loan, or insurance payments.

Finally, addresses the need for financing and transaction services within agri-value chains. Through its digital payments and disbursement processing capabilities, Banks adopts a holistic approach to lending and payments whereby farmers and other agri-value chain actors can transact digitally in person (e.g. at a rural collection point such as a cooperative) or remotely via mobile device or rural banking agent. These services improve both the availability of working capital to increase trading activity and the timeliness of payment collection, especially for farmers, so that earnings can be accessed more quickly.

Beside one of the research paper published Amity Global Business Review has shown that the agent banking has also some challenges and for sake of the challenges following measure to be taken:

Banks to ensure training for agents and officers of an agent regarding banking product including the processing of credit file although the customer has minimum complain regarding services of the agent. Banks may be prepared universal form including charge documents for credit file as most of the agents requested for which. Opening hour of agent is also a concern of customer as well as agents so the timing should be revisited based on a local market time schedule. In this regard, a commercial bank may use a separate server for agent banking.

Maintaining liquidity is also a challenge for agent and some of the customers are keep-away the agent because of cash shortage. The issue to be solved with high priority. Although the security scared does not happen frequently but training for security scared is required as the matter is uncertain.

Commercial banks to develop a smooth operational procedure for agent as some of the agent said that they face problem to deal with main bank branches and co-operation of them is poor in some respect.

More agent banking outlets should be opened to offer more services to increase the geographical coverage as the factor is the main causes of financial inclusion through agent banking. Notably, the targeted customer feels free to enter into the agent in compare to the main bank’s branch. The agent should keep it up and maintain the loyalty of the target customer.

The selection of agent is also an important issue. The agent should be locally respected as well as an influential person so far customer can keep faith on him as well as on a bank. Banks may also arrange promotional activities for achieving faith on agent point.

Finally, costing for banking through agent should be less than the main banking branch to attract the attention of the targeted customer. As such, commercial banks may take help of information technology and mitigation of challenges shall be the ultimate opportunity for agent banking.

5. FINANCIAL INCLUSION:

5.1 Digital financial services facilitate financial inclusion: Having access to financial services helps drive economic development. People can escape poverty through financial services that will help them to invest properly in their health, education, and businesses. Financial services are also important for people who need to work through emergencies, such as sudden illnesses, that can push them into financial ruins.

The current situation of financial services in Bangladesh is that there are 57 banks with more than 10,000 branches with three more banks receiving license recently. However, this is still considered as not enough by many financial experts and economists to cover around 164.7 million people. So, regarding the reach of the banking services, the central bank of Bangladesh introduced a guideline with an aim to provide banking services for the entire population of the country. As per the guideline, 50 percent of the new branches opened by banks in a calendar year should be established in rural areas.

However, many banks might hesitate to invest in rural areas as it is not cost-efficient. It is also very difficult for rural, especially the illiterate population, to take advantage of traditional banking that requires a lot of paperwork. Moreover, most of the banks’ customers live in urban areas. This scenario has led to the financial gap for the country. To fill this gap, mobile financial services (MFS) was launched between the time range of 2010-2011 by Brac Bank (bKash), Dutch Bangla Bank (Rocket) and Trust Bank.

Since the launch of MFS, it has proved to be the finest integration of finance and technology in Bangladesh. MFS has significantly contributed to rural-urban fund flow as efforts are being made to popularise mobile money as a viable alternative to physical and plastic money. Further growth of MFS would not only ensure higher penetration at the ‘bottom of the pyramid’ market but also contribute to the growth of online e-commerce transactions.

However, MFS in Bangladesh is yet to become a conduit for formal banking products such as savings and credit products. Most of the users use it for payment-related services. Cash-in and cash-out transactions are dominant, followed by person-to-person (P2P) transaction. Only 2 percent of the 26.9 million accounts have regular banking accounts.

Consequently, this places 50 percent of the country’s population to remain unbanked. So, what can be done to fulfill the gap and increase the financial inclusion of the country? Interoperability can be introduced in the country. Interoperability is the ability of different systems to connect with one another. Interoperability among the digital payment channels would ensure clients’ benefits, facilitate competition based on product innovation and boost the growth of a digital finance ecosystem.

The partnership of an MFS with a bank can be considered as a crucial phase for financial inclusion. This gives hope that soon, interoperability will be introduced in the country. Most countries that are successful in MFS run a hybrid model where banks, mobile operators and other stakeholders can participate.

Then, financial literacy is another key to achieving optimum inclusion, and Bangladesh needs to run a very conclusive program on that. The country’s financial market has remained underutilized due to the information gap between consumers and financial service providers arising out of financial illiteracy. As a result, consumers are not able to make the right decisions on their finance. Particularly in rural areas, consumers are not well informed of their rights and options. A lack of financial literacy or financial illiteracy may drive people to make poor financial decisions that can have a negative impact on the economy.

On the other hand, digital financial service (DFS) can complete the cycle of financial inclusion. The goal of financial services made available via digital platforms is to contribute to poverty reduction and to contribute to the financial inclusion objectives of Bangladesh. Greater digital financial services channeled to rural and poor communities can improve access to finance for bank customers in rural and poor communities who cannot conveniently access banks located in the formal sector due to poor transportation networks and long queuing hours in banking halls. And it will reduce bank customers’ presence in bank branches and reduce cost because a bank would cost-efficiently maintain fewer branches, and the lower costs would have positive effects for bank profitability and financial inclusion in rural and poor communities.

Moreover, easy-to-use digital finance can provide a more convenient platform for individuals to carry out basic financial transactions including payments for electricity, water supply, money transfer to family and friends, etc. If digital finance platforms are easy-to-use, users of digital finance services can help inform and persuade their peers in the formal and informal (rural) sector to take advantage of DFS, leading to greater number of individuals using digital finance thereby leading to greater financial inclusion.

The change in digital finance can bring to an economic revolution. Bangladesh Post Office has recently introduced Nagad, a DFS platform. Nagad is a digital service which facilitates customers’ daily financial needs like cash in, cash out, send money, mobile recharge, etc. A successful branchless banking service, like MFS and DFS, can help materialize the dream of full financial inclusion of the people.

5.2 Agent Banking and Financial Inclusion: Bangladesh Bank introduced agent banking in December 2013 with the aim of including rural people who were out of the ambit of banking services. Bank Asia was the first private bank to offer the new concept of banking to people. Agent banking has made a significant contribution to the rural economy over the past few years and it’s becoming increasingly popular.

People are getting remittances from abroad and they can now pay their utility bills through this channel. Some youth are also finding new opportunities of employment as agents. The number of accounts for agent banking has reached 29.06 lakh by the end of March 2019under 19 banks. Availability of mobile phones and internet facilities in rural areas have made it easier for agent banking services. Banks in the country are now focusing on agent banking for its popularity among people, especially in remote areas. Banking experts say agent banking offers several services such as inward remittance, money transfers, different deposit schemes, and payment utility service bills.

Agent banking is becoming more reliable among rural and urban people. Private Banks are trying to make a foray into areas where no formal banking services are available. Clients are allowed to have deposited and withdraw cash through the outlets operated by agents without visiting a bank branch. Nowadays, many services are available at the rural level, whereas people had to go to towns, earlier, for these purposes.

Agent banking offers limited banking and financial services to under-served population by engaging representatives under a valid agency agreement. It is the owner of an agent outlet which conducts banking transactions on behalf of a bank.

The information available from the central bank till March 2019 shows that Tk.3,734.50 crore has been deposited in the agent banking sector. Inward remittances were Tk.7,182.64 crore at the same time. Loan disbursement facility is a new inclusion to the agent banking service. Loans outstanding ware Tk. 210.39 crore under of which Bank Asia singly invested Tk. 192.29 million.

According to a study of Bangladesh Institute of Bank Management (BIBM), 3 percent of the clients of agent banking are day laborers. Twenty-nine percent of clients are businessmen at a small level, 7 percent are farmers, and 18 percent are housewives.

Bangladesh Bank Financial Inclusion Department general manager Md. Abul Bashar has said “people are enjoying banking facilities through agent banking in places where no banks have their branches. It’s almost like usual banking. Clients get detailed information on their transactions on their cell phones. The new concept of banking has become more trustworthy.”

According to financial inclusion insights wave six reports aggressive expansion of agent banking in Bangladesh contributed to a 5 percentage-point surge (20% to 25%) in registered bank users from 2017 to 2018. Active users of banks also increased by 3 percentage points (13% to 16%) during the same period.

6. CONCLUSION AND RECOMMENDATION:

In this digital age, adoption of technology and change the business model according to that adoption is one of the key factors to satisfy customer’s demand. At the same time collaboration and connectivity with the knowledge hubs like development partners, aggregators and support service providers will play a bigger in accelerating growth and sustainability in the business. We can’t ignore the challenges from the intervention of FINTECH’s and we are to be open to embracing with this partners to create convenience for the customer while giving them a robust digital experience while saving time value and effort. As reaching out with brick and mortar is not an option, we have to prepare ourselves to create these digital channels and also invest to educate the customers to adopt these channels. If we continue to disrupt the ecosystem with the help of Agent banking and other related transactional comforts, then true benefit of digital banking will cross the boundary of city limit and reach at village level to all household of customers and truly contribute to attaining SDGs as planned for the stakeholders.

7. REFERENCES:

1. The Digital Banking Revolution In Bangladesh (February 2017) – http://www.fintechbd.com

2. Banks and financial institution of Bangladesh (May 2019) – https://www.bb.org.bd

3. Bangladesh Bank Financial Stability Report (December 2018) – https://www.bb.org.bd

4. Bangladesh Institute of Bank Management (January 2016) – https://bibm.org.bd

5. The rapid growth of agent banking in Bangladesh (June 2018) – www.dhakatribune.com

6. Agent Banking Activities (March 2019) – https://www.bb.org.bd

7. Digital and mobile financial services facilitate financial inclusion (March 2019)

8. Agent banking becoming increasingly popular (October 2018) – http://www.theindependentbd.com

9. Financial Inclusion Insights (April 2019) – http://finclusion.org