Financial inclusion, broadly understood to be financial services, is gaining greater importance to the policy makers worldwide mainly because of its appeal as a tool for sustaining economic welfare and also for reducing poverty. In addition it also supports economic and financial stability in the long-run by making the transmission of monetary policy more effective as it means more saving and investment at the bottom of the pyramid. Moreover, it produces legitimacy to the process of economic democratisation pushed by most policy makers. The concept is gaining wider acceptance not only amongst international financial institutions but also by the standard-setting bodies, including Bank of International Settlement (BIS).
Individual countries are also coming forward with many innovative ideas and policy interventions to enhance the level of financial inclusion. Bangladesh, surely, stands out to be a unique country which has been recently praised for its innovative financial inclusion strategy. The central bank of the country, Bangladesh Bank, has taken the lead in bringing motivational changes amongst bankers and others involved in the financial sector. Before we focus on the various initiatives taken by Bangladesh in enhancing financial inclusion in recent years let us look into this concept more in depth to know about the measures of financial inclusion. Fortunately BIS has recently published results of a survey conducted by the Irving Fisher Committee on Central Bank Statistics (BIS, 2016) which provides diverse measures of financial inclusion.
The paper talks about various shades of definition, central bank mandates, policies and governance structures, data types and sources and finally international collaboration. It confirms that there is no standard, universally acceptable definition of financial inclusion. Some central banks have official definition of it typically including availability and use of financial services in addition to various other aspects. The challenge of clarification of the definition of small and medium-sized enterprises (SMEs) - and distinguishing them from households - remains. Again some central banks have formal mandate for financial inclusion and some others have taken specific actions through regulations or directives in the areas of financial education and literacy by pursuing consumer protection, by designing and implementing onsite and offsite supervision of financial institutions and services. Though less recognised, the traditional role of central banks in pursuing price and financial stability also contributes towards financial inclusion. Also financial inclusion contributes to financial stability through expanding the base of deposit and lending. It should also be recognised that the domain of financial inclusion in many central banks remains decentralised as it may be routed through payment system, supervisory departments and, of course, targeted actions through departments of SME, agriculture, green finance, etc. Some central banks, like Bangladesh Bank, have even a specific department of financial inclusion for coordinating and promoting financial inclusion activities within the central banks or outside. The financial services provided by commercial banks, development banks, non-bank financial institutions, micro-finance institutions, mobile financial service providers and even insurance companies, etc., need to be coordinated and promoted. Some countries also have post offices, agent banking outlets provide inclusive financial services. These too deserve to be coordinated. Bangladesh Bank, in recent years, have been able to develop this role of coordination and for which it has been globally recognised.
Although most central banks collect data on diversified financial inclusive services, specific gaps on the usage and quality of financial inclusion-related services and infrastructure remain. The gaps normally are around exact number and distribution of SMEs, (including gender dimension), smaller retail bank accounts, mobile bank accounts, micro-finance accounts, etc. These data, even if collected, are mostly estimates and not actual numbers. The non-bank financial accounts are not always rigorously supervised. Also there is no regular frequency of whatever data is collected. This can result into a financial instability as the challenge of shadow banking may not be adequately addressed. The BIS survey also confirms that a well-designed collaboration between central banks and interaction with international groupings (e.g. Alliance for Financial Inclusion) can indeed lead to effective exchange of views and best practices related to defining, measuring and analysing financial inclusion. As expected, most respondents of the survey emphasised on international data-sharing and cross-country harmonisation (not forgetting the national specificities). Furthermore, they opined for taking only those efforts to enhance data-sharing and harmonisation which primarily leverage existing international collaboration initiatives.
RELEVANCE OF FINANCIAL INCLUSION: In 1971, Bangladesh grew out of a strong national aspiration for freedom and equity. The dream of Bangladesh and the essence of the national spirit always embedded inclusiveness in it. Many challenges beset the journey started. Out of these challenges emerged early inclusion efforts through microfinance, health, and other home-grown social innovations. Bangladesh has established a new development paradigm through its novel approach to socio-economic development. It is self-dependent yet collaborative, focuses on high growth while being inclusive, and respectful of heritage and yet pragmatic in use of new technology. A perspective plan (2010-2021) and two five year plans, 6th (2011-15) and 7th (2016-20) have moved the nation from investment-driven and resource-dependent framework to a broader socio-economic transformation vision, unifying the various state and non-state actors with specific milestones and complementary roles. Macroeconomic achievements of the last decade has been especially commendable. For example, gross domestic product (GDP) rose from 72 billion USD in 2005-06 to 221 billion USD in 2016. The figure touches 250 billion USD by now, according to the latest Bangladesh Bureau of Statistics (BBS) estimates. The structural transformation of the economy during this period has also been quite significant: 25 per cent of GDP was from industrial sector in 2005-06 and now it's 31 per cent. Inflation has been reduced from 12 per cent in 2007-08 to 5.0 per cent now. Over 13 million jobs have been created in last eight years. Export earning tripled from over 10 billion USD in 2005-06 to over 34 billion USD in 2015-16. Size of the Annual Development Programme (ADP) and revenue earnings have increased by 4.5 times and almost four times during the same period. In 2007, poverty rate in Bangladesh was 36.8 per cent which has decreased over the years and became 23.2 per cent in 2016. More importantly, extreme poverty rate was 22.6 per cent in 2007 which decreased to 12.1 per cent in 2016. Per Capita Income (USD) of Bangladesh has also increased steadily and in 2016-2017 it became 1,602 US Dollar. The latest BBS estimate puts it as 1,610 USD. In addition, overall consumption of Bangladesh has almost tripled in the last decade. Overall investment quadrupled in the last decade (Rahman, 2017). Former Chief Economist & Senior Vice President of the World Bank Paul Romer declared that Bangladesh now is capable of achieving more growth and more equality (Romer, 2016). He said in a workshop in Dhaka last year, "We know from the recent experience in Bangladesh that it is possible to have more growth and more equality."
Ensuring financial inclusion is pivotal to achieving the short- and long-term macroeconomic objectives. Inequality in access to opportunity is often a prime culprit - be it the opportunity of education, health, or financial services. Inequality is not just a moral issue - it is also a macroeconomic issue. Financial inclusion ensures broader social inclusion and fosters inclusive growth at the same time. Above all, it opens up blocked opportunities for the poor. It contributes positively to financial stability as well. More diversified funding and loan base, lesser reliance on unstable savings channel and political legitimacy are ensured through financial inclusion. These are the direct relationships between financial inclusion and financial stability. There are indirect relationships as well, e.g., promotion of stability as household levels, greater income equality, and improved transmission channels for better monetary policy implementation. Hence, financial inclusion in the context of Bangladesh and other similar emerging economies, is a critical tool for attaining macro-economic objectives.
DEVELOPMENTAL ROLE OF THE FINANCIAL SECTOR: The recent global financial crisis in developed countries brought into focus the role of financial sector in general and the role of the central bank in specific. Due to lax regulations in the developed countries jobs were lost, asset value got wiped out and financial security shattered. At the same time, a quiet revolution of financial inclusion took place in many developing countries like Bangladesh. In these countries innovations ensured financial services for the previously excluded segments of the society. In case of the developed countries reform measures focused on helicoptering money to affected financial institutions. However, the broader response was visible in many developing countries, including Bangladesh, where newly created money was taken through 'bullock carts' to ground, and impacting real economy (both from demand and supply sides). These have brought into light the developmental role of the central bank. The developmental central bank focuses on four core aspects, namely- (i) catalysing innovation and efficiency of banks, (ii) coordinating role with private sector and across public sector agencies, (iii) setting examples of public sector innovation and reform, and (iv) financial inclusion for social cohesion.
In case of Bangladesh, during recent years the monetary policy mandate of the central bank has revolved around - maintaining price stability while supporting output and development; secondly, instituting a new emphasis on the quality of monetary policy implementation; and thirdly, prioritising inclusive and environmentally sustainable growth. The focus has been on experimentation and implementation, while being mindful of what monetary policy can and cannot do. The core idea has been to combine short-term business cycle fluctuation management with long-term sustainability agenda. Areas emphasised are: technology and market infrastructure, regulatory framework, and refinancing initiatives. The overarching goals here are: (i) to improve monetary transmission channels; (ii) to promote macro-financial stability risks through inclusion, regulation, and supervision; (iii) to induce directional bias towards more productive and sustainable activities. Bangladesh Bank's inclusive financing thrust has thus been on output initiatives in —
* Agriculture supporting food security and food price stability
* SME financing promoting output, employment and income generation
* Green financing supporting environmental sustainability
Attaining these requires significant institutional changes, and Bangladesh Bank has responded to this call in a potent and efficient manner. The institutional changes ensured during recent years include the following:
* Bangladesh Bank opened new departments (agri, SME, sustainable finance, CSR, financial inclusion) with a focus on financial inclusion.
* New thrust for opening more branches in the rural areas.
* Encouraging partnership between banks and micro-finance institutions (MFIs) to increase coverage in previously unreached areas.
* Similar partnership for quick disbursement of remittance to the recipients.
* Revamping corporate social responsibility (CSR) for reaching the extreme poor through scholarship and health programs.
* Motivating banks to provide loans to women entrepreneurs (at least one from each branch).
* A portion of the refinanced SME loans earmarked for the women entrepreneurs.
* Massive digitisation of the payment system including development of national payment switch, mobile finance services (MFS) and electronic fund transfer.
* Consumer protection through Customer Interest Protection Centre (CIPC) with a dedicated hotline.
* Providing better CAMELS rating, enhanced refinance, easier approval of new branches if banks excel in financial inclusion.
* Strengthening institutional capacity of the central bank for better supervision of the financial institutions engaged in financial inclusion.
Dr Atiur Rahman is former governor, Bangladesh Bank.
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