Why financial inclusion matters in Bangladesh

Financial inclusion matters in Bangladesh. Access to formal financial services -- in payments, savings, credit, and insurance -- for financially excluded individuals transforms individual lives; and financial institutions can reach new customers creating a ripple effect that drives improvements across the economy.

Jesse Jackson once said, 'capitalism without capital is just plain -ism - and we can't live off -ism'; similarly, financial sector is sustainable when it provides required services to all in the society and the economy. The policies must work to narrow, and finally close, the gap between those who have access to formal financial services and those who live on the margins. The underserved population must be included into the larger financial ecosystem. Underserved individuals, entrepreneurs, and MSME (micro, small and medium enterprise) owners benefit from financial inclusion; while banks, financial institutions and the government benefit from including the underserved into the formal financial sector.

Financial inclusion improves income and increases savings enabling the previously underserved to invest in necessities, such as healthcare, education, food, growing their business, and managing financial risk. Digital inclusion, in particular, lowers the cost associated with sending and receiving payments such as subsidy payouts, or remittances, and paying recurring bills. Receiving social benefits through mobile phones saves recipients the commuting and waiting time. In other words, financial inclusion enhances economic empowerment, which in turn improves overall welfare while providing the building blocks for further growth.

Bringing entrepreneurs and their businesses into the formal financial sector is an important first step to building better-connected financial markets. It allows connecting with young entrepreneurs who need capital. Gaining access to financial services enables entrepreneurs and MSME owners to help invest capital and grow their businesses. This in turn empowers them to make better business decisions, which result in business expansion, job creation, and support economic prosperity.

Scale matters for the banks and financial institutions, and growing the business and the market means developing new and innovative products and services for the new segments of the financial economy. This is particularly true at present since technology is facilitating competition from new types of players who provide similar services and readily take advantage of the value of consumer data. Creating brand equity for new customer segments and reaching new, previously underserved customers helps create a valuable, enduring relationship.

Reducing the size of informal finance provides greater transparency in financial transactions by increasing security and regulatory oversight. Financial inclusion and account ownership can help reduce corruption, discourage tax evasion, and allow for more effective subsidy payouts. Reverting to digital payments for subsidy and pension payments instead of the traditional cash disbursement method cuts down administrative costs and improves efficiencies.

Over the past three years, financial inclusion has made great strides and delivered numerous benefits to all segments of society in Bangladesh. The Global Findex Report shows that 50 per cent of adults owned an account at a financial institution or through a mobile money provider in 2017. Financial institutions are the driving force in this inclusion story. In order to extend financial services to the un- and under-served populations, we need banks, policymakers, NGO-MFIs (non-governmental organisations and microfinance institutions), insurance companies, telcos and others to work together to eliminate obstacles and explore new solutions.

Financial inclusion, built on sustainable business models with mainstream financial service institutions, brings individuals and small businesses into an ecosystem where they can flourish and integrate into the broader formal economy. It is important to ensure that the works of industry, public sector, civil society, and other parties on financial inclusion are additive to one another, coherent and cohesive, and force multipliers. Only by working together can we make a difference and a lasting impact.

Technology is changing the cost equation in fostering financial inclusion and increasing the benefits for all parties involved. It is making more cost-effective for traditional financial institutions to reach previously untapped markets and allow new market entrants to better serve customers at every part of the economic pyramid. Financial institutions are digitising the customer journey to create a seamless customer experience utilising technology to increase customer reach, make access on-demand 24/7, and reduce transactional costs.

One particularly exciting improvement is modernising the customer onboarding process. Regulators, in partnership with financial institutions, have introduced e-Know Your Customer (e-KYC) initiatives which have significantly increased the account ownership. Biometric information and digital NIDs (National Identity Cards) are being used to authenticate users and create credit histories, which in turn lowers default and fraud rates.

However, it is not enough for financial institutions to merely increase the number of underserved customers; they must also ensure that accounts are being used by the customers. One way to accomplish this is by developing innovative products focused on design and tailoring solutions to low-income consumer needs.

The four basic products -- payments, savings, credit, and insurance -- have undergone massive transformations over the past several years. The use of digital payments, meaning access through a mobile phone or the internet, is on the rise. The electronic mobile wallet, an application that enables P2P, P2B, G2P, P2G, and other transactions, is a good example of an innovative product utilising digital payments. Electronic wallets allow remittances and bill payments to be conducted in a matter of minutes, saving low-income segments valuable time and money.

Financial institutions have been increasing financial service accessibility in rural areas. They are using agent networks to reach underserved rural populations. These systems -- wherein financial institutions designate authority and responsibility to third parties in order to offer services to typically low-income or remote customers -- have increased customer trust, financial capability, and use of products. They have also lowered the costs associated with providing services to these underserved segments of the market and reduced the costs to savers who make smaller deposits. The use of technology by agents and tailoring savings products to the needs of savings groups and low-income segments will further ensure the underserved are being incorporated into the formal economy.

Globally, financial institutions are using data from social media, mobile call data records, bill payment patterns, and psychometric testing to establish credit profiles and target previously invisible consumers. Advanced analytical techniques enable financial institutions to provide access to credit to clients, with historically low financial transaction data, who are otherwise excluded from the formal financial sector. Predictive analytics are being used to assist financial institutions in forecasting the credit needs of MSMEs and low-income consumers, helping previously unbanked customers grow their businesses.

Machine learning is transforming insurance, analytical tools are re-defining traditional risk models, and identity and onboarding solutions are creating a more convenient on-demand service while decreasing costs for insurance companies. Safeguarding the underserved against financial risk can help people at the base of the economic pyramid manage the stresses of illness, crop failures, natural disasters, or income loss due to the death of wage earners. The development of microinsurance along with innovative delivery models of microinsurance products have opened up new avenues in the insurance sector.

Financial institutions have and will continue to innovate, creating products and services that are best suited for the unbanked market. High costs, long distances, lack of documentation, and distrust of the financial system have been identified as the main barriers to opening an account. At present, financial institutions have an unprecedented opportunity to dramatically grow their customer base in a sustainable manner by leveraging new technologies.

Incorporating the previously unserved is becoming a more attainable goal for financial institutions, and while financial institutions and regulators are embracing new technologies to make financial services more affordable and accessible, it is critically important to always keep the consumer's best interest in view. Educating underserved consumers, transparently communicating service offerings, and addressing the persistent gender and wealth gap are of utmost importance to increase trust in the financial sector.

Technology is the means to realise the vision of creating tailored financial products and services for vulnerable consumers. Digital technology is not an end in itself, it is a means to achieve broad-based financial inclusion and achieve the SDGs (Sustainable Development Goals). Emerging technologies are empowering financial institutions to go the extra mile and serve the underserved market.

As we progress towards a more digital age, it is critical to realise the right to financial inclusion. For Bangladesh, connecting the people to capital matters. Similarly, helping individuals to take advantage of economic opportunities and associated benefits also matters. And, this is why financial inclusion matters.

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

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