Introduction to Digital Banking in Bangladesh
Bangladesh, a nation of over 175 million people, is at a critical juncture in its economic journey. The country has the opportunity to utilize its burgeoning domestic market and demographic dividend, which is active till the next decade. Despite notable progress in poverty alleviation and economic growth, a significant portion of the population remains excluded from the formal financial system. Digital banking presents a transformative solution, poised to unlock the potential of Bangladesh’s dynamic economy.
The Need for Digital Banking
The decision by Bangladesh Bank to reopen the application process for digital banking licenses is a necessary step. The previous attempt was marred by controversy, and this time, the central bank aims to impose stricter standards, requiring a higher degree of financial and technological aptitude for applicants. When fully operational, digital banks will ensure 24/7 banking access for all, promoting cashless transactions and enhancing financial inclusion. The use of advanced security measures will make digital banking more secure, transparent, and traceable, helping to combat issues like fraud, corruption, and money laundering.
Relevance of Digital Banks
Digital banking can be crucial for Bangladesh’s financial landscape due to its ability to provide comprehensive banking services without high operational costs. This type of banking has the potential to serve rural and underserved populations. Although mobile financial service (MFS) providers have revolutionized mobile money in the country, their services are limited as they cannot receive deposits and offer loans. Unlike MFS providers, digital banks can accept deposits and offer loans, thus fulfilling a critical gap in financial services.
Socio-Economic Landscape
Let’s delve into the country’s socio-economic landscape to uncover why digital banking is needed in Bangladesh.
- Disparity in financial inclusion: The most potent argument for digital banks in Bangladesh is the stark reality of its unbanked and underbanked population. About 57 percent of people over 15 don’t have a formal banking account.
- Hefty cost of cash management: The central bank governor recently noted that the country spent about Tk 200 billion every year on currency printing and circulation, storing and transporting, operating ATMs and currency sorters, etc. The introduction of digital banks can certainly help reduce dependence on paper notes, thus reducing cash management costs.
- Digital infrastructure already in place: The good news is that the foundational atmosphere for digital banking already exists in the country – nationwide mobile network coverage, about 188.8 million active mobile users with half of them having smartphones, about 136 million internet users, orientation to basic digital financial services popularized by MFS providers, growing digital payment ecosystem, etc.
- Scope of bridging MSME financing gap: With nearly 10 million micro, small and medium-sized enterprises (MSMEs) accounting for about 25 percent of GDP, they are the lifelines of Bangladesh’s economy. According to the International Finance Corporation (IFC), MSMEs in the country face a funding deficit of US$ 2.8 billion.
Challenges and Opportunities
New digital bank licenses should be granted to institutions that have proven experience in the financial technology sector. This approach ensures they can assemble the right people, build necessary infrastructure, and attract global investment. Given the macroeconomic and structural factors of Bangladesh, it is not a question of whether Bangladesh needs digital banks, it’s a question of preparedness. Creating and maintaining state-of-the-art, secure, and reliable technology infrastructure is the most crucial factor for building and maintaining people’s trust in technology-driven banking.
Refined Licensing Process
To accept new applications for digital banks, the central bank has already reformed the ‘Guidelines to Establish Digital Bank 2’, incorporating new provisions involving tougher scrutiny and elevated financial and technological benchmarks for applicants. The central bank has already raised the paid-up capital for setting up digital banks from Tk 1.25 billion to Tk 3.0 billion. By raising the required paid-up capital and demanding a higher degree of financial and technological aptitude, the central bank is not just setting a new standard; it is protecting the public and ensuring the long-term viability of these ventures.
Conclusion
A favorable environment persists in Bangladesh for transforming into a cashless or at least less cash-based economy with the commencement of further digitization of banking. The country’s large unbanked population, tech-savvy youth, widespread mobile network, thriving mobile payment ecosystem, remittance-dependency, significant financing gap in MSME, etc., — all indicate a positive outlook for digital banks to flourish. It is not just about technology; it is about building a financial ecosystem that can truly unlock the potential of every Bangladeshi citizen, from the smallest village to the bustling city. The central bank’s second attempt at licensing digital banks is not merely a procedural step; it is a critical opportunity to lay the foundation for the country’s financial sector to get compatible with access to finance for all digitally with transparency.
