"Is the battle for a poverty-free Bangladesh through Mobile Financial Services (MFS) entering risky territory with the rise of digital banks?

This question has gained prominence in the country’s financial landscape as Bangladesh Bank recently received an overwhelming 52 applications to establish digital banks, marking a new chapter in the nation’s banking sector. The digital bank guidelines have attracted interest not only from existing banks, financial institutions, MFS providers, and fintech companies, but also from ride-sharing platforms, e-commerce sites, pharmaceutical companies, hotels, and gas stations—all eager to stake their claim in this emerging financial frontier.

At the same time, many commercial banks have adopted cutting-edge technology to provide MFS solutions to their customers, presenting a new challenge to established MFS providers like bKash and Nagad. This development by Bangladesh Bank comes at a critical moment, as nearly one in ten MFS users reported experiencing fraud, according to a survey. The research paper, titled 'The State of DFS Consumer Protection in Bangladesh,' also identified several areas that require further policy attention to unlock the full potential of digital financial services (DFS) in the country. Despite concerns, the growth of MFS has been significant, with total financial flow increasing by 28.1% annually and the number of transactions rising by 15.4%. Some bankers argue that an increasing number of MFS users are now turning to their banks' digital platforms, which could capture a large portion of the MFS market in the near future.

Experts suggest that digital banks could play a transformative role in empowering community-based economies by offering collateral-free loans to small businesses—something traditional banks often hesitate to do, leaving it to MFS operators. By leveraging advanced technology and understanding local needs, digital banks have the potential not only to revolutionize the SME sector but also to make significant strides in financial inclusion. While many digital banks have gained a significant following among digital-savvy consumers, the truth is that profitability remains elusive for most of them. In fact, only a handful of digital banks have been able to register profitability.

Poverty remains a significant stumbling block in Bangladesh's journey toward becoming a Smart Nation, with a poverty rate of 18.7% at the national level, 20.5% in rural areas, and 14.7% in urban areas, according to the key findings of the Household Income and Expenditure Survey 2022. This is a notable improvement from previous estimates, where the poverty rate was nearly 24.3%. The extreme poverty rate has also dropped to 5.6%, with 6.5% in rural areas and 3.8% in urban areas.

Bangladesh's per capita income, which averaged just USD 679.63 from 1960 to 2021, reached an all-time high of USD 1,684.43 in 2021, marking significant economic progress. The success in reducing poverty can be attributed to the combined efforts of the government, private entrepreneurs, NGOs, banks, and fintech companies, along with a strategy centered on financial inclusion. This effort has been greatly accelerated by the mobile financial services (MFS) revolution, initiated in 2011 with the launch of bKash, which has since become a game-changer for the poor by providing access to essential financial services.

The impact of these collective efforts underscores the importance of continued innovation and collaboration between sectors to further reduce poverty and drive Bangladesh toward a more prosperous future.

Reducing poverty depends on helping poor people manage their money. Poor people have money – but their incomes are unpredictable and insecure. Bank accounts are one of the best ways to do that. Bank accounts help people escape poverty and survive unexpected expenses. A lot of farmers are unbanked, so they rely on cash. Another study found that farmers increased harvest investments, earnings and household consumption when they had their payments deposited into savings accounts. In Nepal, savings accounts helped women ramp up spending on education and nutritious foods. So, account-based digital payments represent a key innovation in the fight against poverty. Distributing social benefits through digital channels instead of cash has been shown to cut corruption, increase efficiency and help recipients build savings. 

Here, the role of MFS has stood the test of time. Poverty started dropping in 2011 after the entrance of mobile financial services, according to former World Bank President Mr Jum Kim. While visiting Dhaka in 2016, he explained that poverty dropped nearly 17% over the years due to the multifaceted impact of Mobile financial services (MFS) services led by bKash, the largest MFS operator in the country. Therefore, the former World Bank president termed the bKash as the most successful service for its "low fee-based business model" and "enabling the millions of unbanked to access financial services" and lauded it for its overwhelming success in advancing the financial inclusion vision into a reality. 

The impact of MFS on poverty reduction has also been reflected in a BIDS study. It shows that the country’s rural economy has shown surprising resilience over the years mainly for “the growing share of non-farm activities like trade, transport and processing, which now account for 46 per cent of rural income compared to 37 per cent in 1987”. And this was “because of the better access to capital, credit and capacity to invest in skill-building available for the non-farm sector. However, the success in poverty reduction is the combined efforts of government, private entrepreneurs, NGOs, banks, fintech and a strategy called financial inclusion, which gained momentum driven by the mobile financial service revolution which started in 2011 after the entrance of bKash, now a game changer for the poor. 

The poverty trap ensnares individuals when they lack essential resources like financial capital, education, or social connections, hindering their escape from impoverished conditions. Enhanced connectivity plays a pivotal role in fostering economic growth and social advancement, offering a lifeline to those caught in this cycle of poverty. Many development economists contend that the most effective path forward involves harnessing connectivity to bolster productivity and acknowledging that economic development should be a collective effort, driven by and for the people. When citizens can network effectively, fostering organization and productivity, their voices gain strength, paving the way for meaningful improvements.

In this context, both MFS and digital banks can play parallel roles. MFS stands as an innovative payment system, enabling individuals to conduct financial transactions and money transfers conveniently from their homes. This cost-effective solution has bolstered their disposable income, providing a secure means to store cash, even for those employed in the informal economy. More than 700,000 MFS agents are working across the country who receive a small portion of a service charge from MFS operators for the service they provide. Most of the agents are roadside small shop owners, unemployed youths and industry workers running a parallel MFS outlet.

Digital banks, as per Bangladesh Bank's guidelines, are poised to offer similar services to their customers. However, a pressing concern looms regarding how these banks will penetrate remote areas, especially when MFS operators have already reached nearly 10 million users. The challenge lies in the fact that many impoverished and low-income individuals may not possess the financial literacy required to engage with digital banks. They are more familiar with MFS operations than banking, which has provided them with invaluable support. 

Many worry that the intense competition between MFS operators and digital banks may lead to a situation where the regulator must carefully assess its consequences. What’s worrying is that digital banks will apparently make it easier to access loans and the due diligence checks might not be adequate. The fear may not be unwarranted since quite a number of financial institutes have made a scam name for themselves when entrusted with loan disbursements. It is crucial to strike a balance between fostering competition and assessing its consequences, particularly in remote areas where MFS has made a significant impact.

As we tread this evolving terrain, it remains to be seen whether MFS will maintain its pivotal role in the poverty battle or if digital banks will pose a significant challenge. The path forward hinges on ensuring that the financial needs of the most vulnerable are met effectively. Time will ultimately reveal whether MFS or digital banks will take the lead in shaping the future of Smart Bangladesh.

(The writer is the Editor of THE BANGLADESH EXPRESS and Chairman of Bangladesh Journalists’ Foundation For Consumers & Investors (BJFCI)