Fostering Better Financial Inclusion in Bangladesh Through a More Competitive Mobile Financial

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Table of Contents

List of Tables

List of Figures

Abbreviations

Fostering Better Financial Inclusion in Bangladesh Through a More Competitive Mobile Financial Services

Introduction

Global Progress with Financial Inclusion

Mobile Financial Services Market Structure

Rapid Expansion of Mobile Financial Services in Bangladesh in Recent Years

Reconciliation of Global Findex Data with Mobile Financial Services Data

Product Diversification of Mobile Financial Services

Bangladesh Regulatory Environment for Mobile Financial Services

Lessons from the Bangladesh Experience

Lessons from the International Experience

Recent Reforms Undertaken by India

Regulatory Challenges in Establishing a Competitive Mobile Financial Services Market

The Way Forward

Institutional Coordination

References

List of Tables

Table 1: Bangladesh Progress with Financial Inclusion in International Comparison, 2014

Table 2: Mobile Money Schemes: Successes and Failures

List of Figures

Figure 1: Percent of adults having a financial account

Figure 2:The Economics of Mobile Financial Services

Figure 3: Gross Number of Agents (000)

Figure 4: Growth of Mobile Money Accounts

Figure 5: Gross Monthly Transactions (mil US$)

Figure 6: Mobile Money Account Penetration (%)

Figure 7: Product Composition (%)

Figure 8: Market Share of Mobile Financial Services Providers (%)

Abbreviations

BBBangladesh Bank

BTRC Bangladesh Telecoms Regulatory Commission

BDBLBangladesh Development Bank Limited

CICOCash-In/Cash-Out

DBBLDutch Bangla Bank Limited

GSMAGSM Association

G2P Government toPeople

ICTInformation and Communication Technology

KYCKnow‐Your‐Customer

MFSMobile Financial Services

MFIMicrofinanceInstitutions

MNOs Mobile Network Operators

OTC Over-The Counter

P2P People to People

RBIReserve Bank of India

USSD Unstructured Supplementary Service Data

USAIDUnited States Agency for International Development

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Fostering Better Financial Inclusion in Bangladesh Through a More Competitive Mobile Financial Services

Introduction

Financial inclusion plays a critical role in reducing poverty and achieving inclusive growth (World Bank 2014; and Curl, Ehrbeck and Hole 2014).Research shows that when people participate in the financial system, they are better able to start and expand businesses, invest in education, manage risks and absorb shocks.Access to bank accounts, savings and payment mechanisms increases savings, empowers women and boosts investment and consumption.Greater access to financial services for firms and individuals may help accelerate growth and reduce income inequality (Demurgic-Kunt and Levine 2009).

In recognition of the critical role of inclusive finance, an increasing number of national governments have taken measures to improve access to and use of financial services.Among bank regulators in 147 jurisdictions a survey found that some 67% have mandate to promote financial inclusion (World Bank 2014).International organizations (such as the World Bank and G20) are formulating strategies to promote financial inclusion.In recent years, more than 50 countries have set ambitious goals and targets for financial inclusion (World Bank 2014).

Global Progress with Financial Inclusion

Measurement is key to understanding financial inclusion, identifying barriers and building on opportunities.The Global Findex Database launched in 2011 has enabled a systematic approach to measuring progress with financial inclusion.The 2011 Global Findex defines financial inclusion as having an account that can be used to store money and receive payments. The growth in global financial inclusion between 2011 and 2014 is shown in Figure 1.

Figure 1: Percent of adults having a financial account

Source: Global Findex 2014

In many low-income economies financial inclusion through a financial institution (formal banking, credit union, cooperatives or micro finance institutions) is constrained by the availability of infrastructure or cost of service of the financial institution, especially in remote rural areas.With the advent of the ICT revolution and rapid adoption of mobile telephone services, financial inclusion is now possible through mobile phones. In recent years, Mobile Financial Services (MFS) has increasingly become a potent source of low-cost financial inclusion in many countries.

MFS is still at an evolutionary stage. Globally, 62% of the adults reported having a financial account in 2014. Some 98% reported having a financial institution account; 1% reported having both a financial and mobile money account; and 1% reported having only a mobile money account (2014 Global Findex Database). According to the 2014 Global Findex, while only 2% of adults reported having mobile money account globally, in sub-Saharan Africa 12% do. Of this half are mobile money accounts only.All 13 countries in 2014, where the share of adults with mobile bank accounts are 10% or more, belong to sub-Saharan Africa.In 5 of these 13 countries (Cote d’Ivore, Somalia, Tanzania, Uganda and Zimbabwe), more adults reported having a mobile money account than an account at a financial institution.

More recent data suggest that MFS is catching up in Asia, especially in Bangladesh.According to Global Findex 2014, the level of financial inclusion in Bangladesh is modest by international standards.While more recent data, especially in light of recent growth in MFS, might show stronger performance, the scope for progress with financial inclusion is large.

Table 1: Bangladesh Progress with Financial Inclusion in International Comparison, 2014

Source: The Global Findex Database

Mobile Financial Services Market Structure

MFS delivery relies on two service platforms: (1)Electronic money platform that connects senders and receivers; and (2) Agent platform that enables people to physically put in cash or take out cash from mobile money accounts (cash-in/cash-out or CICO platform).This delivery system involves three actors: senders, receivers and agents. It also involves availability of appropriate technology: mobile phone; mobile phone connectivity; and the data link (typically, the Unstructured Supplementary Service Data or USSD facility).

The Demand Side

The MFS market operates on the principle of easy and low cost access to financial services. Much of the clients are low income in rural and remote areas who need to have easy access to agents and can engage in low-cost financial transactions through their mobile phone.Accordingly, the regulatory requirements for mobile account have to be simple and the financial cost of transaction low.Attracting customers to use mobile money account therefore hinges critically on low-cost transaction options (the ease and low cost electronic money platform). For example a recent USAID sponsored study (Parvez et. al., 2014) found that 91% of MFS users in Bangladesh cite low transaction costs as the most important factor driving the use of MFS services.

The Supply Side

Given the market structure, a typical MFS service provider must have a substantial network of agents spread all over the country and especially in rural areas to provide easy access (the Agent platform challenge).It must also have very low service charge to attract mobile money account users.The platform requires substantial investments. To reconcile this with low unit cost of transactions, the scale of transactions must be large enough to justify the investment.In economist’s parlance, the MFS market is characterized by a decreasing cost curve and a perfectly elastic demand curve at very low unit price of service (Figure 2).

Figure 2:The Economics of Mobile Financial Services

Critical Role of Ease of Doing Business

A critical link between demand and supply coordination is the ease of doing business, reflected in the MFS Regulatory Requirements.The simpler and less restrictive that the entry/exit rules are, the better are the incentives for service providers to invest and the lower will be the transaction costs.Similarly, the simpler and easier the registration requirements are for customers and agents, the lower will be the transaction costs.

Technology

The technology requirements for growth of mobile money accounts are relatively simple: availability of mobile phones; mobile phone connectivity; and the data platform for transmission of mobile money transactions.The adoption of ICT technology globally has greatly facilitated the availability of low-cost mobile phones and related services in remote parts of the globe.Because of competition among service providers, both voice and data services are now available at a low cost.For mobile money transmission, there are a number of technical options. But the USSD is the most commonly used technical platform. Proper pricing of USSD services and open, unrestricted access to USSD are important regulatory matters to enable a competitive mobile money market.

Rapid Expansion of Mobile Financial Services in Bangladesh in Recent Years

Financial inclusion got a big boost in Bangladesh from the recent surge in mobile financial accounts and transactions, especially since mid-2014.This progress reflected in all three indicators of MFS growth: rapid expansion in number of agents (Figure 3); growth in the number of mobile money accounts (Figure 4); and the increase in monthly mobile money transactions (Figure 5). The growth of gross monthly transactions is truly impressive.

Figure 3: Gross Number of Agents (000)

Source: Bangladesh Bank

Figure 4: Growth of Mobile Money Accounts

Source: Bangladesh Bank

It is important to note two important caveats: First, the data on the number of agents is derived as an aggregation of agents reported by MFS providers. These agents are not necessarily exclusiveto the reporting MFS provider. Indeed it is quite common for an agent to work with multiple entrepreneurs (at least 2). A second major caveat is that the transaction volume reflects transactions through registered accounts as well as through over-the counter (OTC) transactions.In 2014 an estimated 75% of transactions were OTC type (Parvez et. al. 2014). The Bangladesh Bank rightly discourages OTC transactions asthe risk of money laundering, transfers of theft money etc. can be quite serious. Converting OTCs to mobile account based money transactions is a major challenge moving forward.

Figure 5: Gross Monthly Transactions (mil US$)

Source: Bangladesh Bank

Reconciliation of Global Findex Data with Mobile Financial Services Data

The Global Findex result showing a financial inclusion index of 31% for Bangladesh in 2014 has come under criticism from the Bangladesh Bank in light of the rapid growth of mobile money accounts.There are two ways of reconciling the two: First Global Findex counts only unique accounts. Multiple accounts (adults having bank account, micro finance account and mobile money account) will only be counted once. Second, the survey for Global Findex was conducted in early 2014 and misses out on the rapid growth of mobile money account over the past 18 months (13 million new accounts between March 2014 and September 2015).Assuming that some 80% of the new mobile accounts since the survey are mobile accounts only with no access to any institutional financial accounts (i.e. 10. 4 million accounts, which is a very generous assumption), financial inclusion index rises to 42%.

Bangladesh made remarkable progress in penetrating the mobile financial market (Figure 6). According to GSMA data, some 41% of mobile phone owners (unique subscribers) had a mobile money account in 2015, growing from a low of 22% in 2013.The progress has been particularly rapid between 2013 and 2014. Yet, some 59% of mobile owners do not have a mobile money account, showing the scope for future expansion.When measured against a target of 100% mobile phone coverage of adults (age 15 plus), total mobile money accounts amount to only a modest 27%.According to Bangladesh Bank (BB) data, some 60% of the accounts are inactive (defined as accounts with no activity over a 3 month period). These results clearly show that there is a large unfinished agenda for the MFS.

Figure 6: Mobile Money Account Penetration (%)

Source: BB and GSMA

Product Diversification of Mobile Financial Services

The MFS is still at its infancy stages in terms of product composition. As of November 2015, some 96% of transactions involved money transfers, of which 79% were cash in/ cash out type transactions and 17% were people to people (P2P) transactions (Figure 7).Other products include private salary payments (0.9%); utility payments (0.7%); and others (2.4%). A tiny volume (0.03%) also represented inward FE.There are no government to people (G2P) transactions yet.

Figure 7: Product Composition (%)

Source: Bangladesh Bank

Bangladesh Regulatory Environment for Mobile Financial Services

The Bangladesh Bank provided a supportive regulatory environment for MFS through the MFS Regulations of 2011. It developed simple and easy to implement guidelines to balance prudential requirements with ease of mobile money account operations.But it also imposed an important regulatory constraint: Only banks are allowed to provide MFS. However, they are allowed to have minority non-bank, non-MNO shareholders.To ensure low-cost transactions it used its moral suasion authority to facilitate the pricingof the mobile phone facility use (USSD) as a certain small percentage of MFS revenues from actual transactions.By preventing Mobile Network Operators to enter the MFS market it also de-facto encouraged unrestricted access to USSD.

Service Providers and Competition

Presently MFS service provision is concentrated among two suppliers (Figure 8). First, BRAC/BKASH is the overwhelmingly large provider accounting for some 81.4% of the total transactions. The second important player is the Dutch Bangla Bank, accounting for 16.8% of the current transactions.The market dominance by BRAC/BKASH partly reflects the dynamism shown by the BKASH who runs the MFS as a BRAC subsidiary. But it also reflects the underlying market structure for MFS and the regulatory environment guiding MFS.

Figure 8: Market Share of Mobile Financial Services Providers (%)

Source: Bangladesh Bank

Several factors explain the rapid growth of BKASH:

• Strategic partnership: BKASH was established as a subsidiary of BRAC bank that has a strong rural presence including involvement in MFI.
• BKASH is a dedicated BB licensed MFS entity and not a side business of a traditional commercial bank.
• BKASH mobilized a large number of internationally reputed equity holders under the management of an innovative and dynamic team with good understanding of both the market and the technology.
• BKASH offers a simple easy to use technology that can work with all mobile carriers.
• The service fee charged is attractive for customers.
• BKASH has built up a well trained network of distributors and easy access retail outlets.
• BKASH uses an aggressive marketing strategy that has drawn the attention of rural customers.

The enabling environment established by BB was especially conducive to the growth of non-MNO led service providers through low-cost and easy access to USSD.

Lessons from the Bangladesh Experience

Within a 4-year period (2011-2015) Bangladesh has experienced a dramatic growth in the expansion of MFS.A combination of enabling regulations by BB and innovative business entrepreneurship by BRAC/BKASH has contributed to this growth.Yet, there is a huge untapped market for MFS. The challenges moving forward include:

• First, as noted earlier, only 41% of mobile phone owners have a mobile money account. The scope for further growth is huge.

• Second, the OTC transactions are still dominant and the transition to registered mobile money account needs to be substantially strengthened.

• Third, the MFS product penetration is at its infancy stage with heavy concentration of cash-in/cash out and P2P transactions. The full range of financial service potential of mobile money involving savings, service payment transactions, G2P payments etc. remain mostly untapped.

• Fourth, the level of activity of existing accounts is also much below potential, with the ratio of active to inactive accounts at only 40%.

• Fifth, service provision is concentrated in one large player BKASH (81% market share) and a second smaller player BDBL (17% market share), suggesting that there is scope to foster a faster growth of MFS accounts, services and product diversification with greater competition by removing all entry barriers.

These challenges underscore the strong need for a second phase of MFS reforms.

Lessons from the International Experience

Before embarking on the Second Phase of MFS reforms, it is instructive to look at the international experience.The literature of review of international experience is large. A very competent and useful summary is contained in the Gates Foundation sponsored research done by the University of Chicago researchers (Evans and Pirchio 2015). The other relevant development is the most recent policy reforms undertaken by the Reserve Bank of India in August 2015.

The Evans and Pirchio paper reports results of effectiveness of mobile money programs in 22 developing countries. Results show that MFS programs in 8 countries took off; MFS has made modest progress in 3 countries; failed to take off in 8 countries; and it is too early to call for 3 countries. The sample included 14 from Africa; 5 from Asia and 3 from Latin America (Table 2). The 4 key findings are:

•Heavy regulation, and in particular an insistence that banks play a central role in MFS, together with burdensome KYC and agent restrictions, is generally fatal to the ignition of MFS.

•MFS is more likely to succeed in poorer countries that lack the basic financial infrastructure.

•The growth of send/receive and cash-in/cash-out platforms must go together.

•Ignition and explosive growth occurs quickly or not at all.

The Research emphasizes that the first result on the regulatory framework is the most robust and important finding.

Key Regulatory Features for Success:

1. No restriction on MFS ownership, except in Bangladesh that requires bank-led MFS.
2. All countries except Bangladesh allowed mobile network operators to take the lead in MFS
3. Simple regulations for KYC.
4. Minimal restrictions on who could serve as an agent

Key Regulatory Features for Failure: