Does digital financial inclusion narrow the urban-rural income gap in Bangladesh?

In 2017, the richest 1 per cent of the world's population held about 82 per cent of the world's wealth; in contrast, according to the 2021 Global Multidimensional Poverty Index, 1.3 billion people are multidimensionally poor of whom about half (644 million) are children under age 18 and nearly 85 per cent live in Sub-Saharan Africa (556 million) or South Asia (532 million).

Income inequality in Bangladesh (Gini coefficient) has been rising steadily--from 0.36 in 1974 to 0.48 in 2016, thereby crossing the internationally recognised 'warning line' of 0.40. This huge income gap has become an important reason that restricts the country's inclusive and equitable development. The income share accruing to the bottom 40 per cent of the households has declined from 18 per cent in 1974 to 13 per cent in 2016.

Further, the ratio of income share of top 10 per cent to bottom 10 per cent of the households  has increased from  10.14  in  1974  to  37.78 in  2016  showing  a rapid  worsening  situation  for  the  bottom  10 per cent  households' share  in total income. Over the 1974-2016 period, income share has declined for the lowest four quintiles while the income share has increased in the top quintiles. There are also clear indications that not only the poor, but the middle class has also suffered losses in the share of their incomes.

Widening  income  gaps  are  the  consequence  of  a  series  of  factors  including  weak  labour market  institutions,   inadequate  social  protection  systems, low quality of governance, poor-quality of health and education services, inadequate access  to credit and financial services and asset concentration. Globalisation and skills-based technical change are also important drivers of rising household income inequality in Bangladesh. These are often strengthened by existing patterns and intergenerational transfers of inequality resulting from skewed access to higher level of education. Researchers generally believe that the expansion of income gap in Bangladesh also stems from the widening income gap between urban and rural areas.  However, the good news is that these trends in income inequality are reversible; it is possible to shift from increasing to decreasing income inequality through appropriate policy reforms.

Bangladesh's unbalanced status of economic and social structure including the urban-rural divide is rooted in the unbalanced financial structure. Influenced by the existing urban-rural 'dual economy', the financial system absorbs deposits from the rural residents and transfers to the urban areas due to various factors that favour credit flows to urban locations. As a result, the poor-especially the rural poor-- are easily stuck in the 'poverty trap'.

It is widely held that inclusive finance can help individuals, especially the poor people, alleviate poverty by increasing their access to and use of financial services which can narrow the urban-rural income gap. But inclusive finance faces many problems including high operating cost and, consequently, high interest rates. At present, the development and application of the internet and digital technology provide a new way to resolve these difficulties.

Combining the digital technology with financial services and using digital technologies such as big data and cloud computing can reasonably portray the credit image of customers and improve the information asymmetry of financial lending. Moreover, the application of digital technology breaks through the limitation of geographical space, solves the 'last kilometer' problem of financial services, saves the service cost and expands the service group. In 2021, Bangladesh's internet penetration rate has been as high as 73 per cent while the number of mobile internet users is 67 per cent. The popularity of smartphones facilitates the application of more functions.

Digital financial inclusion has not only developed in B2C, but has also made achievements in other operations. In addition to providing effective financial support to consumers and individuals, digital financial inclusion can also reach the enterprise level. Digital operation has greatly reduced transaction costs, and the digital information footprint can be tracked so that the flow of credit funds can be controlled. The digitisation of inclusive finance has made financial services, such as supply chain finance, microfinance, and leasing more operational, effectively alleviating financing constraints at the enterprise level, and providing financial support for cottage, micro and small enterprises (CMSEs). The full bloom of digital financial inclusion provides the rural residents with financial support, helping them in their consumption, investment, entrepreneurship, and risk prevention. It is expected that the combination of digital technology and financial services will help promote the development of inclusive finance, improve the availability and inclusion of financial services, and narrow the urban-rural gap.

In Bangladesh, the rapid development of digital technology has made an important impact on inclusive finance by easing the service barriers faced by traditional finance, such as information asymmetry, high transaction cost, behavioural differences and lack of competition in the financial market. At the same time, the combination of digital finance and inclusive finance has been beneficial to financial service users, digital financial providers, the government and the economy. The impact of digital financial inclusion on the urban-rural income gap is also likely to be substantial through strengthening the convergence mechanism of digital financial inclusion by lowering the threshold effect, mitigating the exclusion effect and consolidating the poverty reduction effect. In short, digital inclusive finance can effectively make up for the shortcomings of traditional finance and has an important impact on the income gap between urban and rural areas.

Thus, the integration of digital technology and financial services provides strong support for resolving financial exclusion and easing financing constraints. The underlying inclusive development concept helps the vulnerable groups to enjoy the financial services they deserve, thus playing a role in poverty reduction and alleviating the urban-rural income gap. Digital inclusive finance also narrows the urban-rural income gap by promoting entrepreneurship of residents through developing CMSEs. The convergence effect of digital inclusive finance on the urban-rural income gap can be made stronger with quality education and skill training.

The priority for Bangladesh is to promote the development of digital inclusive finance through expanding its service features and development mode for which the government needs to provide greater room for innovation.

The policies should focus on expanding the coverage of digital inclusive finance and strengthening the depth of its use and the degree of digitalisation, to provide more diverse and efficient digital financial services to more people. For the lagging areas, the government should provide appropriate financial support, strengthen local internet infrastructure construction, step up publicity efforts, and sensitise the rural residents to adapt to digital financial services. Also, efforts are needed to create a better business environment to strengthen the role of digital financial inclusion in entrepreneurship development for alleviating poverty in the rural areas and improve income distribution.

No doubt, digital inclusive finance is a relatively new concept in Bangladesh, and there are many blind spots in the financial supervision system. Lack of supervision can easily lead to the misdirected growth rather than healthy development of digital inclusive finance in the country.

Dr Mustafa K. Mujeri is Executive Director, Institute for Inclusive Finance and Development (InM). 

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