Can digital banking unlock a new era of inclusion and growth in Bangladesh?
Manika Miti and Khairul Sadman Farabi
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Bangladesh's banking industry is reaching a turning point in its journey toward a digital future. The Smart Bangladesh Vision 2041 has set the stage for a dramatic upheaval in the banking sector, with its ambitious target of 75% digital transactions by 2027.
Over 500 enterprises, including local and foreign businesses, have shown their interest in digital banking licenses. This interest indicates a nationwide trend where the whole population is ready to embrace digital banking for their financial transactions.
In Bangladesh, digital banking represents a socio-economic revolution rather than merely a technical one. It concerns ending the cycle of debt that unregulated loan sharks sustain while ensuring everyone has access to financial services.
But those thought-provoking questions are still remaining. How much growth can be captured through digital banking in the context of our demographics? Is it really capable of unlocking a new era of inclusion?
Digital banking already achieved immense success globally; in particular, our neighbouring country, India, had already captured USD 270 billion by July 2022 from 75 digital banking units, as per the Times of India.
Since we share a similar demographic profile, Bangladesh is also moving towards the same digital banking transformation to serve 10 crore people, specifically, those who have been turned away from traditional banking due to their stringent credit standards.
In fact, right after the COVID-19 pandemic, Bangladesh's economy and financial activity have been significantly impacted by MFS-enhanced financial inclusion and transactions, and a significant increase can be observed in the number of bank accounts with deposits. Here, Digital Bank is conducting a revolution in conventional banking, and the results are very prominent.
Bangladesh Bank's recent licensing of digital banks like Kori Digital Bank and Nagad Digital Bank among a highly competitive pool of 52 applications is evidence of the nation's dedication to this digital shift. Though the procedures are stringent, they offer numerous advantages to banks, like raising capital, gaining a higher share valuation, funding for M&A transactions, and many more.
These digital banks will use technology and current networks to reach even the most remote areas with no physical locations. Creating a digital bank account is an easy and convenient process because of its alternative credit scoring methodologies. A list of authorised digital banks can be found by visiting the Bangladesh Bank website, and potential account holders can initiate the account opening procedure by simply selecting a designated beneficiary and then providing their basic personal information.
Additionally, loan applications are made through a simpler procedure through the digital disbursement of approved loans with virtual cards or QR codes instead of actual currency.
Since the banking industry has historically ignored rural communities, this transition is significant to them. With easier, collateral-free loans at single-digit interest rates—a stark contrast to the high-interest loans of conventional banking—digital banks can bring the unbanked, underprivileged rural people under the financial roof.
But digital banking has some issues as well. For example, the 2016 breach that cost Bangladesh's central bank $81 million illustrates how important it is to have strong cybersecurity safeguards in place, along with some other challenges, including a shortage of competent personnel, the adaptation of new technologies, and an unstable internet connection.
Some experts think that the government should have postponed launching it until the parliamentary election, given how difficult the banking industry is currently.
Despite some odds, the prospects for digital banking in Bangladesh are enormous. As per the Global System for Mobile Communications Association (GSMA) report, by 2025, smartphone usage is expected to reach 63%, meaning that digital lenders may anticipate a large increase in their clientele. And through this clientele, digital banks can provide a wider variety of services.
For example, a person sitting at Magura can receive his bank statement, create savings accounts, check loan status, and even invest, which MFS can't process or do so easily.
Digital Bank provides a three-tier data centre system, which assists in data encryption, making transactions more private and safer. Overall, digital banking can contribute to Bangladesh's financial inclusion by reducing the access gap in this era of mass financial involvement.
To summarise, digital banking is essentially a force for empowerment and inclusiveness in Bangladesh rather than just a financial service. As we visualise this future, it is important to remember that digital banking is not only about technology inclusion; rather, it is as much about people's inclusivity. It's about lighting entrepreneurial aspirations, improving payment processes for small enterprises, and empowering farmers with loans for agricultural supplies.
It ensures a day when financial literacy is considered a right available to all Bangladeshis rather than exclusive to the city's elite. Hence, rather than discussing the inevitability of digital banking's implications, we should focus on transforming it into a practice.