Bangladesh's bumpy digital finance voyage

In the ever-evolving realm of global finance, the transition towards cashless societies has emerged as a transformative force, unlocking a myriad of benefits for nations embracing digital currencies. From bustling metropolises to remote corners of the world, countries have witnessed the power of digital finance in fostering economic growth, enhancing financial inclusion, and streamlining transactions. Amidst this global shift, Bangladesh finds itself at a crucial juncture, where the pursuit of a cashless future holds immense potential. However, critical analysis reveals both missed opportunities and challenges in the government's policies, including the ambitious Central Bank Digital Currency (CBDC) programme.

The numbers underscore the urgency for change. In Bangladesh, approximately 45 percent of the population lacks access to traditional banking services, resulting in financial exclusion and limited opportunities for economic growth. However, recent advancements in mobile banking and digital payment solutions have shown promising signs. For instance, bKash, a leading mobile financial service provider in the country, had registered over 45 million users by the year 2021, showcasing the growing demand for digital finance in Bangladesh.

Despite these achievements, we face significant hurdles on our path to becoming a cashless society. The CBDC programme, introduced by the Bangladesh Bank, is aimed to digitise the national currency, fostering financial inclusion and facilitating seamless transactions.

The emergence of Central Bank Digital Currencies gained significant attention after several decades, driven by factors such as the decline in cash usage, the rise of cryptocurrencies, and the need for central banks to maintain control over their financial systems.

Currently, more than 114 countries, accounting for over 95 percent of world GDP, have either launched or are considering launching CBDCs. However, a growing number of politicians and central bankers are raising questions about the necessity of CBDCs, particularly in countries with advanced banking and payment systems. Despite this scepticism, CBDCs could still play a crucial role in modernising cross-border payments and influencing the development of new currencies. Their success will largely depend on their design. CBDCs that have been fully launched, like the Bahamian sand dollar and Nigeria's e-naira, share common features such as user holding caps, zero interest rates, and no transaction fees. These measures aim to prevent significant outflows from commercial banks to CBDCs.

However, these early experiments have witnessed limited adoption. For example, China's e-CNY pilot has faced low uptake due to existing well-established and convenient payment systems like Alipay and WeChat Pay.

Despite these challenges and the modest adoption rates, some governments are offering incentives to promote the use of CBDCs in order to drive adoption and enhance financial inclusion. Nigeria, for instance, provides discounts for e-naira payments, specifically targeting the unbanked population. The programmable nature of CBDCs is considered a unique feature, enabling the implementation of smart contracts and facilitating more efficient control over the economy.

Nevertheless, it is still early in the development of CBDCs, and many possibilities and potential cases of use remain experimental. CBDCs have the potential to revolutionise cross-border transactions and reduce reliance on the dominant dollar system. However, at present, CBDCs remain in the realm of experimentation, similar to the cryptocurrency industry.

Critical evaluation reveals several challenges that undermine the effectiveness and feasibility of the programme.

One of the primary concerns revolves around infrastructure readiness. Bangladesh's digital payment ecosystem is still in its nascent stage, with limited coverage and accessibility, particularly in rural areas. According to a report published in 2022 by the World Bank, only 53 percent of the population in Bangladesh has access to a bank account, indicating the need for substantial improvements in digital infrastructure to enable a smooth transition to a cashless system.

Moreover, privacy and security concerns surrounding the CBDC programme must be addressed. As a central bank-issued digital currency, individuals would be required to conduct transactions directly with the central bank, potentially compromising their privacy and raising cybersecurity risks. Safeguarding the integrity and privacy of financial transactions is paramount in order to build public trust and widespread acceptance of digital currencies.

To pave the way for a successful transition, Bangladesh must adopt a multi-faceted approach. Firstly, the government should prioritise strengthening the existing digital payment ecosystem and enhancing financial literacy to promote the adoption of digital finance solutions such as mobile banking and digital wallets. These initiatives would lay a solid foundation for a cashless future and foster financial inclusion at a broader scale. Additionally, the government should focus on addressing the existing challenges in infrastructure, connectivity, and digital literacy. Investments in technology and telecommunications infrastructure, particularly in rural areas, will be pivotal in bridging the digital divide and ensuring equal access to financial services for all citizens.

While our CBDC programme may face challenges, alternative strategies can harness the potential of digital currencies. Collaborative efforts with private sector players and international organisations, such as the World Bank and the International Monetary Fund, can offer valuable insights and guidance in formulating a comprehensive roadmap for a cashless future.

Bangladesh stands at a critical juncture in its pursuit of a cashless future. While progress has been made through mobile banking and digital payment solutions, there are still significant challenges to overcome. By addressing infrastructure gaps, prioritising privacy and security measures, and fostering financial literacy, we can unlock the power of digital finance to drive financial inclusion, economic growth, and improve the lives of citizens.

The journey towards a cashless society requires concerted efforts, innovative solutions, and a commitment to meeting the evolving needs of the nation.

Shahriar Rahman is editor of Toggle at The Daily Star.