Dhaka Sunday February 17, 2013

Mobile Financial Services: Its Impact
and Future in Bangladesh

BRAC Bank, bKash and The Daily Star recently organized a roundtable on " Mobile Financial Services: Its impact and future in Bangladesh". We publish a summary of the discussions.

-- Editor

Salehuddin Ahmed, Managing Editor, The Daily Star
Bangladesh, with a population of 150 million and a per capita income of around $800, has seen a steady economic growth over the last 15 years. We have successfully reduced the poverty rate to 31 percent in 2010 from 60 percent in the early 1990s.This development reflects in the growth of the financial sector, supported by the recent transformation in banking technology.

Bangladesh can use mobile financial services not only to accelerate financial inclusion, but also to bring more than 85 percent un-banked population to the mainstream in a cost effective manner.

I found the poor and especially the women generated many of the innovative ideas in Bangladesh. The classic examples are microfinance and non-formal education of BRAC. Second lesson that I got is that, the tools of empowerment or power tools is usually been given to the men. I have found from the statistics that bKash has 25,000 agents and Dutch-Bangla Bank has 20,000 agents. My question is that how many among them are female. I think there is no female agent. I think we should consider giving the tool to the women and inclusion of women as agent. Good guidance will definitely help them to overcome the problem regarding illiteracy and inexperience.

Syed Mahbubur Rahman, Managing Director & CEO, BRAC Bank
In our country where only 15-20% of the population is banked, we have limitations in terms of reaching out to the population. Mobile financial services can really help in bringing this piece to the formal economy. In our country, we have already seen launching of Mobile Financial Services (MFS) by few banks. Bangladesh Bank has already said that it should be Bank-led model. We call today's forum to make people aware of the services, as a new service there might be some misperception. We will try to get some clarity about those as well. We have tried to bring all the relevant stakeholders in a common platform. This forum is open to all, it doesn't represent BRAC Bank or bKash particularly.


Pial Islam, Managing Partner, pi Strategy Consulting
I would like to present the global perspective of mobile financial services based on our work with World Bank, ADP, CGAP and other organizations around the world. The percentage of the adult population of the world who do not have financial bank account with any financial institutions is about 77%. Mostly poor segments of the population are excluded from financial services. Another point is that most of the bank accounts are limited within the people in between age 18 to 60. People under 18 and over 60 are typically disadvantaged in this sector. There is also a difference in terms of rural-urban divide. Rural people have less access to financial services around the world than their counterparts in the urban areas. There is also a gender as well as income divide.

Financial inclusion is something that allows household and business to have access to two components - access to appropriate financial services and then effectively make use of those financial services. An important distinction is that financial development has disproportionately helped the poor. Many poor people in the rural communities who do not have the access to financial services in a formal financial institution would be paying a negative interest. They have to pay for the safekeeping of the fund.

When we look at financial inclusion and mobile payments, it helps in improving country's Gini Coefficient as well. The number of mobile phones and POS machines has been increasing significantly, and there is practically a mobile bank in the pockets of large number of people around the world. This is not different in Bangladesh either. There is a significant price reduction and phenomenal impact on ability to reach the base of the pyramid segments.

At a recent CGAP conference we were looking at Mobile Money specifically and found the responses from people of different countries that they think the biggest challenge is not technology but the business model where partnership play a big role. Partnership between existing platforms, such as a bank, a Mobile Network Operator as well as an agent network could be leveraged for local market access. Although this task of getting 77% of unbanked around the world into some sort of banking interfaces and experiences is very daunting, we see strong reason for hope at global level. Financial inclusion and innovations across axis has become number one priority in many countries.

Dr. Muhammad Abdul Mazid, former Chairman, National Board of Revenue
Mobile financial services are popularly known as “Mobile Banking”. The financial experts have already agreed that the mobile banking will speed up financial inclusion and bring more unbanked people under the banking system as the fast expanding mobile telephony has opened windows of opportunities of creative partnerships between banks and telephone companies and cost effective arrangements for delivery of financial services in Bangladesh. According to regulatory framework, only the bank-led model is allowed in Bangladesh where the financial institutions provide the service and take the compliance responsibilities according to the definition; mobile operators provide the mobile connectivity and the customers and agents use their own handsets. Bank-led model is regulated by the central bank in Bangladesh. In September 2011, it has issued the Guideline on Mobile Financial Services (MFS) for the Banks. They have made it mandatory that there are Know Your Customer (KYC) forms for all customers and agents for security and better management purpose. Greater speed, easy accessibility, affordability, availability are the benefits of MFS, which are sometimes and in many cases very difficult to get in classical banking system. Security, convenience and mobility are other aspects that are ensured in this system. All mobile operators are involved in providing connectivity to MFS providers. bKash and DBBL are leading in this sector with about 2 million registered customers and 40 thousand agents nationwide.

In our country most of the peoples' livelihood is agro-based and they live in villages. There is also a growing urbanization for livelihoods. People are coming to the cities, they are earning money and they want to send the money to their parents living in the villages. There is a significant domestic remittance flow but the physical infrastructure is still poor.

Dr. AB Mirza Azizul Islam, former Adviser to Caretaker Government
I would like to present some inquiry before you. Firstly, what sort of programs do the Financial Service Providers have to expand the coverage of this service? Second, we have heard that inward remittances can be made very expeditiously but we have not heard anything about the cost of this service, how affordable these services are for the poor. Third, what is the degree of security, as we know that with this global information technology the incidence of hacking also has increased dramatically? What are the possibilities of hacking? If there is some hacking into somebody's PIN number then what sort of security is there of the deposit of that customer? Fourth, in terms of regulatory framework do you see any lack of coordination or inconsistencies between the two major regulators, which will have to play role in this area, one is Central Bank and of course the other is the Telecom Regulatory Authority?

Md. Nazrul Islam Khan, ICT Secretary, NPD, Access to Information
In our project of Digital Bangladesh we use the term “services at the doorstep of people”. In this perspective the term “Service at Peoples' Hand” or “Instant Service” will be more suitable. The biggest barrier for our department is to identify a person. Studies show that there are some identified standardized formats in other countries. We prepared a standardized format and arranged approval from the Cabinet Division. We handed it over to Statistics Bureau, to execute this. We felt that the procedure needs an independent or a semi-independent body to govern it. Therefore, we selected Statistics Bureau rather than the Home Ministry to prepare a population register. A population register will help to identify a person only through accessing a database. In a situation when a person needs an urgent passport, information from different department is needed. For example, if there is any case had been filed against the person or not. A departmental register will be helpful then. Thus a combination of departmental and peripheral register will help in developing a population register. The estimated cost for this project is of Tk. 1200 crore. Although the estimated figure of cost is large, a population register should have been made as soon as possible. As a second option we can apply a guerrilla method which will not be that expensive. People under each Union will be called to capture photo and biometric finger print with the help of Union Chairman and other representatives of that union. Another option is to make everyone fill-in the standardized form, who is willing to take any service from UISC. Incrementally an amount of information can be complied and a population register can be built. When this project is implemented it would contribute in the growth of mobile financial services in Bangladesh.

Abdul Muyeed Chowdhury, former Adviser to Caretaker Government

In Bangladesh, it is difficult for poor people to remember the PIN number. We have to innovate some kind of system whereby the account holder can be easily identified.

It is important to look into the security aspects of various security IDs itself. But for financial services we only need one simple identity - it is my money. Even if I have 10 cases against me I should be able to draw my money unless it is being attached by a court order.


Khondkar Ibrahim Khaled, former Chairman of Bangladesh Krishi Bank and former Deputy Governor of Bangladesh Bank
In our country middle class and lower middle class also maintain savings accounts in different banks where a service charge is deducted after 6 months from their savings. The Government especially Bangladesh Bank decided that big banks make large amount of profit which can be cross subsidized. Opening a bank account with Tk 10 is not possible but still it has been opened so that a poor person can open a bank account and get the facilities with zero service charges. And the number of account is not less, it is 13 million where as the total number of adult and able population is around 8-9 crore. As it is a subsidized system the question of retainability and sustainability is arising here. We need to think of alternatives.

In Bangladesh, Micro Finance Institutions (MFIs) are now currently brought under laws. Under this Act, MRA (Micro Regulatory Authority) is already being established. It is different from Bangladesh Bank but still connected with it. Bangladesh Bank Governor is also the Chairman of MRA with its own managing director and managerial body. Bangladesh Bank has introduced an innovative Bank-led financial service. Similarly, if MRA can introduce MFI-led financial service then there will be no regulatory issues. MRA is still not a strong regulator but over time, they may get stronger with broader scopes and lower expenses. We need to target the segment that is immediately after the already banked population . In general, regulators create hindrance in the process to ensure the security of the involved parties against cheating and fraudulent activities. Is telephone authority capable of handling this responsibility? I think they are not able to do it and this is not their mandate.

Economic growth is highly correlated with our financial inclusion and education. The players in the field should work for education at their own level. We can form a concise flexible body named Mobile Financial Service Promotion Bureau like Export Promotion Bureau. The constituting bodies of the bureau will be the Central Bank, Banks, MFI and MRA, BTRC, MFS, academicians and other stakeholders. Its first work will be to identify the problems, to find out where is the bottleneck. It will conduct some research to understand the issues. It would introduce new services with lower cost that would be popular in the lower income customer group. Ultimately, the MFS operators will deliver these services found by the Bureau.

Abul Kashem Md. Shirin, Deputy Managing Director, Dutch Bangla Bank Limited
A bank cannot establish more than 10 branches in a year. According to this data to spread a bank through branches in every Upazilla it will take 50 years. And if we want to establish a branch by a bank in every union then it will take 450 years. In this circumstance, mobile banking has been established. Through mobile banking, we can reach every village of Bangladesh. Dutch Bangla Bank started in March, 2011 and covered the whole Bangladesh with 20,000 agents by March, 2012.

Mobile banking is affordable for the poor because you can deposit 20 or 30 taka, and in the same way, you can draw small amounts of money. Maintaining a bank account is very costly. It costs almost 2000 taka for maintaining an account. In mobile banking there is no such cost. If you do not do any transaction for a year, it will cost you nothing.

Michael Kuehner, CEO, Robi
One technical but very important point is the identification of consumers. There is a strong and strict requirement from the regulator and the Home Minister to identify all of the users who buy a SIM card. This is very tedious and challenging work. We are requesting for online access to the national data bank, which is carrying the identity of most of the people of the country in an authorized and proven way.

This would make the identification process much easier for the MFS providers also. However, the authority says that it is not secured, as there is a chance of being hacked. Concerns are also expressed in this forum about security. Mobile networks are possibly the safest platform in the world. There are no incidences where mobile platform was hacked. There are some exceptions on the smart phone site as the client of the smart phone of course have open software piece where a lot of things can happen. In Bangladesh, smart phone represent less than 2% of the population in the market. I think we can easily say that hacking into a phone of any user in Bangladesh is literally excluded because mobile networks are proprietary and very safe against the hacking from outside.

Dr. Mahabub Hossain, Executive Director of BRAC
Financial inclusion can contribute to financial growth by easing the financial transaction in terms of both mobilisation of savings as well as accessing the credit for doing small business and others. It will also increase the financial income of the poor people. In Bangladesh, micro-finance played that role very well. One major advantage of MFS is that it is a more user-friendly process for the user with fewer formalities. That is why the poor people feel comfortable and prefer MFS than banks. We have nearly 20 million microfinance members of MFI's who are currently transacting with small loans. These poor people generate regular income but cannot accumulate that income to pay at the end of the year. So making repayment weekly has been an effective instrument for getting this recovery. But the cost of MFI services is very high because of weekly involvement of the bank officers with the clients. So some of the MFIs are now thinking of moving from weekly repayment to monthly repayment system because it will reduce the cost of serving the loan. However, we still have poor people who feel much more comfortable with paying weekly rather than monthly. Through mobile financial services, we can reduce the cost of delivering micro-credit tremendously.

Iqbal Quadir, Professor, Massachusetts Institute of Technology
The point is how the provision for mobile financial services is to be made. On one hand, it is a banking service obviously and I see reports and guidelines from Bangladesh Bank that this sector is to be regulated by Bangladesh Bank. At the same time, because the network technology is coming by another set of entities that is regulated by another regulator. Therefore, there is a natural confusion even though banking service is to be regulated by the Bangladesh Bank. Sometimes it is perceived to be partially provided by another entity. On that regard, I'd like to add a point that the technological ability to provide certain technology does not naturally make that entity capable of providing financial services due to the regulatory frame work that protects customers interest.


Shameem Ahsan , Sr. Vice President, Bangladesh Association of Software
and Information Services ( BASIS)

People want to buy from distant locations around country but they have to follow a lengthy transaction process. When we say that there is a scope for mobile payment they feel more interested to buy things from online store. Some mobile payment is happening but they do not feel comfortable with hectic KYC process. We should make the KYC easier.

There should be a system that if I have a bank account I can transact through any mobile banking services. In Bangladesh, we see bank led model only, but there are other models like Google, Amazon.com, PayPal and so on. They are neither a bank nor a telephone company but giving mobile services and payment services. Therefore we should think of these new avenues.

Finally, mobile financial services should be connected with other financial services. It should be a package. In our country, we talk about twenty thousand crore taka from mobile phone service, but from value added services we get only 400 crore taka. This is only 20% of the global average. There is possibility of being a market of 4000 crore taka in Bangladesh. Through mobile, we can reach to grassroots level with information of health, education, agriculture and so on. Then there will be a demand of mobile payment.

There is also a lack of proper policies, which has created obstacles for entrepreneurs to come up with innovative ideas. If an entrepreneur wants to provide an innovative service, he or she has to share 70-80% revenue with the telephone operator. There is no protection for intellectual property. BTRC started working on a guideline for VAS but it is yet to see the daylight.

M. Khalid Shams, former Chairman, Grameenphone and former
Deputy Managing Director of Grameen Bank

We always overplay the security issue. When the first scope of being connected with marine fiber came we shied away overplaying the security reasons. As a result, we lost 20 years. We are running the risk again. Banks are by nature conservative. As a regulator, Bangladesh Bank should set up a small group to identify the security risk in mobile banking. It will be the best because we are now in a learning curve. We have to be careful but we should not let the possibility be missed.

My second point is that if financial inclusion is the objective as every body is emphasizing on it then how to reach the very large number of people who have been left outside the room of banking services. How do you create synergies among various partners? I think we need to look into existing models in various countries. Financial providers will have a comparative advantage if they can come up with differentiated products for villagers, girls, students, farmers and so on. Therefore, the banks and financial institutions have to demonstrate clearly that we are providing financial services to the poor people then all confusion will wither away within short time.

There are some risks in the service, but Bangladesh should seize the opportunity. MFS providers should come up with new products for the targeted people.

Dr. Hassan Zaman , Chief Economist, Bangladesh Bank
Two years ago, when we put these regulations in place we thought of the bank-led model, telco- led model and of having a hybrid model. In countries like Kenya, this mobile financial services has expanded hugely and a telco-led model drove it. We can have quick outreach and improved financial inclusion quickly if we go for a combination of models or we can be more conservative, and go for the bank-led model and then expand the financial inclusion gradually. Now why did we go for the latter? The two key reasons are as follows:

One is that as a regulator of the financial system, the safety of bank depositors and of financial flows is of paramount importance to us. Therefore, from the consumer protection angle, when we know that this is poor people's money which is going into a certain system, we need to be confident that the money is safe. And that safety of money we get through the institutions that we have licensed. We want to make sure that if there is any issue with that safety of the deposits we can hold all those we have given licenses accountable to any issues that we face. We cannot hold any other party accountable directly.

The second key issue is the monetary policy. We need to have a handle on how much money is flowing in and out of banks in order for us to have a sense of whether the interest rates instruments we are using to regulate monetary policy and therefore ultimately inflation, how much it is. At the end of the month, each bank reports to us about financial flows, which includes the accounts which are currently part of their mobile financial services system. At this point I'm not sure if we'd be able to get that from telcos for example. These are some of the key reasons for the rationale for why we opted for this model and why we are very keen on sticking to this model, whilst being somewhat flexible to innovations as well.

3 to 4 months ago, we prepared a report on the regulatory challenges that we are facing. One of the key findings of the report was that as a regulator our job is to promote competition. In three years of time we have only two major players in this industry which has all the risks of monopolistic competition. As promotional activity, we suggested various donors who have shown their interest to invest in this sphere which will increase the investment in the long run. Another regulatory challenge is ensuring compliance. We have a bank-led model. We want to make sure a simplified KYC form. We are now launching quite a major financial literacy campaign.

In terms of ensuring compliance, we see some cases where telcos are coming up as in fact the front for other banks to then provide those services. The issue that I want to be very clear on, that we don't want to see a case where we have different forms of money being created by a telco and then saying that a bank is a channel that cannot be. Telco is the channel by which these services are being provided, the bank provides the basic financial security and instrument, not the other way around. And along those lines, another regulatory challenge is mediation between telcos and banks with respect to charges and various gateways etc. We see this as part of our role to promote this industry, and we do it.

Finally, we have safety net programs in Bangladesh which is still massive, 2-3% GDP of the annual budget. About 60% - 70% are cash based and other 40% are food transfers. Those who get old age pensions or those who get benefits for being war veterans do not have to queue up in line for hours; if they can get their money on mobile phone through MFS. This should be the next frontier that we need to move to. As a regulator we are ready to help other organs of government to move in that direction.

Kamal Quadir, CEO bKash
True partnership between mobile operators and financial institutions is essential in order to generate a win-win business case for both parties and users to get the services at an affordable cost. I will give a concrete example here: 85% of bKash's income directly goes to the agents operating all over the country. Of the remaining 15%, mobile operators get 8.05%, and 6.95% goes to bKash. Now if there are 10 bKash type services in the country then we will see the mobile operators generating significant revenues from this sector. bKash is working with all the major operators under such partnership. Mobile operators are showing their eagerness because there is a general trend of increasing revenue for them from the MFS under the current arrangement.

Nawed Iqbal, CTO BRAC Bank
I want to touch the point that although there are a few banks that already have licenses, not all the banks are coming in. Some of the reasons are the very high initial investment and the high risk associated with new venture undertakings. Most of the banks are approaching with existing process of banking for MFS. This approach is similar to the initial stage of introducing ATM and cards, which most of the banks shied away. Then third party came to the scene like E-cash, Q-cash, and set up the network. Then the local banks started to understand that it is not rocket science.

Another point is the impact and future aspects of MFS in Bangladesh. I have read an article where it was discussed that in not too distant future the card industry and retail banking is going to merge because these all are based on retail. Therefore, we need to look into that side also how we can expedite the process.

Pial Islam
One experiment is happening in Bangladesh about G2P (Government to People) payments. With the Ministry of Disaster Management, an effort has been undertaken to provide payments to the vulnerable poor through mobiles. The target audience is very deprived/ poor and hence has no or very limited familiarity with the features of mobile phone. There are 600 thousand beneficiaries of the EGPP program and 30% of them own a mobile phone. Therefore, they are less familiar with the mobile technology compared to other average Bangladeshi. This target group audience also does have trouble remembering PINs. We tried to teach them to think about communication patterns from the surroundings with numbers e.g. a plough resembles the number 7. So a little training can go a significant way in enabling that.

Regarding cards, for this TG we have to think differently as their needs are different. A2I and Bangladesh Krishi Bank are experimenting with alternative technologies like Q.R. codes. These experimentations are extremely helpful in the early stages.

Another point that I make is about using MFI network to take the agent network to scale. Many of the MFI networks are already quite exhausted in providing services that they traditionally do. So re-training and re-tooling is needed. The agent-banking model (called the business correspondents) has not fully worked in India. In India they are looking at micro finance network. Therefore, Bangladesh should cautiously look into the microfinance network model, and agents should be properly trained and re-tooled.

Abdul Muyeed Chowdhury
We have talked about MFS services focusing on the poor. The trend of MFS focuses on the general people in the rural areas. But I would suggest that the banks should consider this very seriously. Mobile banking has already started in the developed countries of the world.

I would like to share some points-
1) Rationalization of cost of MFS services.

2) We should not be too concerned with the security of MFS in Bangladesh.

3) Government is seriously thinking about an Electronic ID better than that one made by the Election Commission. This would be very useful to have via the statistics division (BBS). Also some Union based identity in the database will be helpful.

4) MFS should be regulated by Bangladesh Bank similar to MRA (Micro-credit Regulatory Authority) where the Governor of the Bangladesh Bank is the Chairman.

5) Simpler system for the illiterate people is needed.

6) MFS should be considered as commercial issue. People will be interested only if it makes money.

7) A committee should be formed to study, monitor and recommend to the regulators.

8) Simplification of KYC.

9) Telecoms should continue to provide connectivity and increase their revenue rather than getting into MFS itself. It should be done by the bank because the central bank should always regulate the industry.

10) Women agents should be appointed. This should be seriously examined. BRAC Bank, bKash and DBBL can explore this right way.

11) G2P (Government to person) payments is an area where MFS will be useful.

12) Differentiated MFS products are needed for traders, youth, women, students, poor and ultra Poor.

13) Two regulators, Bangladesh Bank and BTRC, should meet time to time and talk to each other to understand the industry concerns.

If we can address these and implement other recommendations that have been raised by the participants, then we can smoothen the path for widening and deepening the reach of the MFS in Bangladesh.