How to maximise financial inclusion and deepening

Financial deepening and financial inclusion are two interrelated terms having different meanings. Financial deepening refers to the increased ratio of broad money to the total gross domestic product (GDP) of a particular country in a specific period of time, whereas financial inclusion means, as the United Nation (UN) puts it, "access to the range of financial services at a reasonable cost for the bankable people and farms." Broadly speaking, financial deepening implies money supply into an economy while financial inclusion is about the level of access to financial services available.

Financial deepening ensures liquidity in an economy. With more liquidity in the economy, more opportunities for overall per capita growth exist. Precisely, when there is more money, more resources can be mobilised at much ease as the trade barrier concerning a common medium of exchange is removed. Simultaneously, availability of financial services, viz., banking and insurance, to name the major ones, increases with more money in the economy accelerating per capita growth further. Therefore, it is well-recognised that there is a positive correlation between per capita growth and financial deepening in any economy.

The degree of financial deepening in two particular years is provided in this graph. A low-income country, Sierra Leone, shows infinitesimal change in financial deepening due to the turbulence its economy has come across. Level of financial deepening in Bangladesh, as a proportion of GDP, was only 8.35 per cent in 1975 which reached 64 per cent in 2015. The difference of around 56 per cent can be validated by the extent of GDP per capita growth in these four decades. India also shows very similar picture as a rapidly growing economy. Pakistan, Myanmar and Indonesia, all of which are lower-middle income countries, could not show any promising level of change in financial deepening. However, Singapore, a high-income country, and Malaysia, an upper middle-income one, are two extreme cases depicting a commendable level of increment in financial deepening, thanks to the mammoth financial activities prevalent in these two. However, the USA, being the largest economy of the world for a while, does not show any big amount of change in terms of financial deepening since it has already hit a plateau, thus, the progress is slow at this level.

Financial deepening, however, is a function of financial inclusion as the latter has a direct impact on the level of the former. Hence, the UN has identified it as an 'enabler' for the achievement of Sustainable Development Goals (SDGs) and featured it as a target in different forms in 8 goals out of 17. Given the praiseworthy performance of Bangladesh in achieving the MDGs, it is not surprising that the government has positioned financial inclusion as a priority to facilitate the attainment of the SDGs. To guarantee maximum financial inclusion, Bangladesh Bank (BB) has come up with a number of remedies, such as, mobile banking, agent banking, school banking, 10 and 100 taka accounts, etc. It can be said that the process has gained sizeable pace lately. For instance, introduced by BB in 2010, taka 10 accounts is government's one of the main tools to ensure financial inclusion by bringing rural farmers and other people, especially from the low income socio-economic strata under the formal banking channels. As reported by BB in its weekly paper on the progress of opening Farmers' Account and Freedom Fighters' Account as of 04.08.2012, the total number  accounts was around 9.5 million (95 lakh). After a year, a similar report on the progress of financial inclusion (including Farmers' and Freedom Fighters' Account) as of 19.09.2013 shows that the total number of taka 10 and 100 account was more than 10 million.  

Nonetheless, there are several issues in this method of financial inclusion. First, it is to be borne in mind that opening accounts alone cannot bring any change. It is the account activities -- receipt of remittances, benefit transfers, credit disbursements etc which can realise the true meaning of financial inclusion. Because there is no minimum balance requirement, the account holders show a tendency to withdraw all the money as and when required, making this an unprofitable business model for the commercial banks. Also, opening and maintaining branches at the remotest areas where the number of clients is very poor, worsen the situation for private banks resulting in a loss of interest.  But it is imperative that all types of banks, including private and public, need to work hand to hand to ensure maximum inclusion. Though Agent banking could be an answer to this, to operationalise this channel, members' profit in the extended value chain must be certain. This, in turn, puts burden on the end clients -- the poverty-struck people. Moreover, although the number of bank branches per 1000 sq. km. as shown in IMF Country Report 16/28 in January 2016 is not bad, the figures become pale when it comes to bank branches per 100,000 adults. Consequently, as the report reveals, access and use of formal banking channels are much less compared to use of informal ones in Bangladesh.

Here, mobile banking channels, such as, bKash (BRAC), Rocket (DBBL), etc., appear to be the best possible solution as these can work wonders in this scenario. Growth relating to active mobile money accounts from 0.5 million in 2012 to over 4.0 million in 2015 (IMF, Financial Access Survey Database) raises hope. Because of profitability, the number of agents has also increased proportionately reflecting the interest of the private banks involved. Besides, according to the Bangladesh Telecommunication Regulatory Commission (BTRC), the total number of mobile phone subscriptions at the end of February, 2017 reached almost 130 million which is around 70 per cent of the total population. So, it is possibly the least costly means to introduce formal banking channels to people living at remote areas. Still, transferring money across accounts (bKash cost - 5 per cent) and/or availing cash-out facilities (bKash cost - 1.85 per cent) are somewhat costly for the marginal users.

To address this issue, activating the banks already registered to offer Mobile Financial Services (MFS) should be the right strategy for ensuring optimum financial inclusion. Although there are around 15 banks licensed to provide MFS, only 5-6 of them are actually working currently. It is essential to discover why the other licence holders have chosen to stay dormant and provide solutions to the hidden issues. Reducing the current price of services offered, this initiative will increase competition in the MFS market and thereby raise the rate of financial inclusion and deepening in the country.

The writer is Assistant Director, Bangladesh Institute of Governance and Management (BIGM).

asif.hossain@bigm.edu.bd