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Unlocking digital transformation in Bangladesh

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27 Jun 2022

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How digitally-enabled microfinance is transforming Bangladesh’s rural economy

Change is driving financial inclusion. In Bangladesh, the rural economy has powered the move towards greater prosperity. Sound and consistent policy framework – backed by substantial investments in technology, rural infrastructure, and human capital – has led to major socio-economic gains. Micro-finance institutions (MFIs), a key segment of the rural financial market, play a vital role.

The services and resources that MFIs channel to rural areas provide jobs for those on lower incomes – bridging the financial gap, raising domestic consumption, and advancing inclusion. MFIs are instrumental in supporting rural agriculture, which proved its mettle and helped support the country during the ongoing pandemic. With a swell of new jobs in non-farm sectors, and with villages becoming more connected to cities, the need for financing will continue to rise. Low access to formal credit among rural households and microenterprises means that MFIs will be the main conduits of this financing.

According to a World Bank study conducted in Bangladesh, households that diversified beyond farming via microfinance saw their income grow by almost 29% compared to those whose income remained exclusively dependent on farming. Better access to credit was key. Microfinance is also driving micro-entrepreneurs in urban areas. Take the story of Minara Parvin. Minara grew frustrated at seeing her husband Nazrul work six-day-weeks in a factory for little reward. She approached the Adamjinagar branch of an NGO that we work with. With their help, Minara and Nazrul set up Tapoe Lone Enterprise to produce lace. The business grew quickly and now employs 75 people. Tapoe Lone Enterprise has made it possible for the couple to educate their children – empowering them to lead better lives.

Significant growth

The microfinance sector in Bangladesh has seen significant growth in recent decades, but MFIs must address scalability – expanding social lending activities while lowering cost. Historically, microfinance operations have been manual, making them inefficient. Operations ranging from disbursements to repayment collections remain dependent on physical cash. Client information continues to be captured through paper-based forms; monitoring, assessment, and training continues to be conducted through physical visits and meetings.

The solution to this? Digital transformation. Driven by the Government’s objective to build an inclusive digital financial ecosystem it has become essential for the microfinance sector to adopt digitisation.

Digital interfaces offer solutions, slashed costs, and increased efficiency, but they remove human contact from the equation. What the MFIs have, and what technology cannot replicate is their connection with customers. The insights that come from face-to-face interaction are crucial, especially for group-based lending.

New data sources

In today’s world, the convergence of technology and data creates unique circumstances. New sources of data can boost access to finance and benefit previously unbanked populations. Usage and recharge data for mobile phones, or even mobile wallets can be leveraged to create credit scores. As a result, personal data protection, data governance, and cybersecurity will become increasingly relevant and necessary.

Developments in the sphere and current regulatory frameworks have created the perfect atmosphere for the introduction of a new generation of financial firms. Nimble and customer-centric, these firms will operate in spaces occupied by large financial institutions, as well as  reaching the unbanked and under-banked – and they will do so profitably. In a country that has proven to be a hotbed for inclusive financial innovation, these firms will join the fight against poverty. Each sector of the financial services industry will be impacted by these firms in the not-too-distant future. To keep up, MFIs will need to address these forces of disruption by becoming disruptive themselves.

The task ahead is to foster an ecosystem that fully captures the opportunities being unleashed across industries. The Microcredit Regulatory Authority is responsible for promoting sustainable development of MFIs. With a conducive regulatory system, digital financial inclusion ecosystems can thrive. The potential of digital financial inclusion in enhancing economic growth, narrowing income inequalities, and reducing poverty is immense. By building a collaborative ecosystem and fostering innovation, we can lead transformation across this vital sector and drive sustainable, inclusive development.

Ultimately, to enable successful digital transformation, innovation and technology will need to blend with the core values, human capital, systems, and processes that define MFIs and the important work that they do.