There are no two words about the common consent that the activities of banks and financial institutions must be highly regulated and monitored. Effective regulatory and supervisory framework in a country aims to effectively control the intermediation process by allowing limited risks so that the interests of the small depositors can be protected. Generally, regulatory relaxation without prudential regulation and supervision may create mishaps that might affect confidence in the banking sector, and common people might be exploited.
Thus, there is logical and ethical basis for employing extensive regulation for safe and secure financial intermediation. However, less-regulated banking or regulatory gentleness may not always be harmful or unethical. Sometimes regulatory gentleness might be even desirable to attain certain macroeconomic goals in the context of developing countries. Especially, less-regulated and less-complex financial services might play an effective tool as part of a broader financial-inclusion strategy. In several instances, such less-regulated financial services play a gainful role in credit delivery and financial inclusion as these can facilitate the availability of financial services to certain sectors that might otherwise have difficulty in access to payment, deposit, and credit services.
A combination of innovative technology and regulatory gentleness became a remarkable force in developing countries like Bangladesh to promote financial- inclusion drives in recent years.
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The policy and planning documents of Bangladesh recognize the necessity of inclusive finance and banking as part of its broad strategy of sustainable and inclusive macroeconomic growth. This is aligned with the country's commitment to attaining SDGs targets. The Eighth Five-Year Plan and the Perspective Plan (2021-41) are instrumental in attaining all the above-mentioned policy documents and referred access to finance for achieving a host of policy targets associated with agriculture, SMEs, and inclusive businesses. The action plan and strategies formulated as part of the National SME Policy 2019 and the National Agricultural Policy 2018 have references to relevant banking and financing services that have notable implications. The National Financial Inclusive Strategy of Bangladesh (NFIS-B), approved in August 2021, is a major policy document of recent times adopted by the government to undertake financial- inclusion measures in an organized and sustainable manner. Implementation of this strategic document is expected to promote financial inclusion in a big way through supporting and promoting sustainable banking and finance initiatives by the banks and other segments/components of the financial sector of Bangladesh.
Aligned with the government policy approach, Bangladesh Bank (BB) has been proactive in promoting inclusive finance for attaining national sustainability goals. The central bank also started playing the crucial role of National Financial Inclusion Strategy Administrative Unit (NAU) to implement the NFIS-B.
Expansion and implication of Digital Financial Services (DFS), especially Mobile Financial Services (MFS), is probably the most remarkable example of the beneficial impact of less-regulated financial services. These technology-driven financial services became a remarkable force for promoting financial inclusion in several developing countries, including Bangladesh. Payment Systems Department (PSD) of the Bangladesh Bank and the Finance Division of the Ministry of Finance have specific policy and regulatory initiatives to promote the availability, accessibility, and affordability of mobile financial services. Mobile financial services are becoming increasingly popular to open personal retail accounts, receive micropayments through MFS, offer efficient remittance services, and deliver micro-and small credits.
Notable growth in the number of MFS agents and registered clients, and transactions are evident. Simplicity, ease, and affordability have been important drivers for the expansion of the MFS where the supportive regulatory approach and regulatory gentleness have implications. MFS has taken the availability of financial services and loanable funds to the next level with accuracy to the target beneficiaries. Through the digital way of social-safety-net benefits distribution, the MFS services are becoming accessible to remote and poverty-stricken areas. The new ways of social-protection benefits distribution improved the accessibility and affordability of MFS and eased the life of the beneficiaries of the social-safety-net funds.
Agent banking is another notable area of both less-regulated banking and financial-inclusion drives, and it is a relatively new area of venture for banks in Bangladesh. Bangladesh Bank has issued various supportive circulars, circular letters, and guidelines on Agent Banking operations. The first guideline on Agent Banking for the banks was issued in December 2013 by the central bank for promoting agent banking as a complementary channel for financial inclusion and supervising agent banking of banks. The Prudential Guidelines on Agent Banking Operation in Bangladesh required obtaining prior approval from the Bangladesh Bank for agent-banking operations, and as per BB guidelines, banks are to inspect their agent-banking activities. There is no capital requirement for banks to start agent-banking activities.
Agent banking received a notable boost during 2020-22 and the growing number of banks are coming up with expansion strategies. Payment, deposit, and inward remittance services received remarkable enhancements. Especially, the increase in the number of women accountholders is encouraging. Though at a slower pace, loan disbursement is picking up. The less-regulated agents of this banking channel might prove to be an affordable and easily accessible banking conduit to the disadvantaged and low-income remote population in the near future.
Financial inclusion through offering easy account-opening services to the disadvantaged population, targeted deposit products, targeted small-and micro- enterprise financing, and agricultural financing to the farm sector has been a noteworthy approach to the expansion of financial services to the excluded section of the country. Using MFS and agent banking, and the adoption of technology for these basic financial services would bring visible changes in the financial-inclusive approach in the country. However, it is regulatory support and carefully adopted regulatory gentleness that needs to play effective roles in optimizing the outcome of the ventures. Regulatory gentleness is also necessary for ensuring adequate access to microcredit and micro-insurance services.
It is recognized that all entities and activities in the financial sector are different in terms of regulatory stringency and have less-regulated components and elements. Generally, less-regulated entities and financial services have regulatory and supervisory arrangements. However, these are hardly under capital and prudential requirements, stringent consumer- protection arrangements, and access to regulatory support in case of financial distress.
However, all less-regulated financial services do not have uniform destabilization impacts and need to be delicately regulated to accrue the beneficial impacts in addressing financial exclusion and poverty in the country. Innovative and technology-focused financial-inclusion drives have become an even more powerful development tool in the context of the Covid-19 development to support vulnerable enterprises, households, and individuals. It is evidenced that fintech companies are more likely to expand credit access to new and financially constrained borrowers after the start of the pandemic and in the new normal. Minimum regulation and monitoring of these activities might cause instability while too stringent regulation may deny benefits. Especially, the regulatory and monitoring arrangement is needed to ensure transparency, customer identification, and mandatory redress of customer complaints. Besides, certain issues of distortions due to differential regulatory implications in the innovative financing market should not disincentivize the ongoing movements.
For an organized approach, as measures to strengthen financial stability efforts, we need to map payment, deposit, and credit services by adopting a set of suitable definitions (narrow to broad) based on certain regulatory criteria: regulatory arrangement, supervisory arrangement, reporting arrangement, capital and prudential requirements, consumer- protection arrangement, and access to regulatory support. Less- regulated entities and activities need to be categorized based on their beneficial impacts (financial inclusion, socio-economic development) and stability risks like liquidity risk, leverage risk, interconnectedness and contagion risk, crime risk, etc. However, their movements should be under continuous monitoring. This exercise became particularly necessary in the context of the new normal when less-regulated banking is receiving remarkable policy boosts throughout the globe.
All innovations for financial inclusion should have similar regulatory and business incentives for fair competition and efficient monitoring. DFS providers should be brought under uniform but soft regulatory control-mainly to follow certain procedures and furnish certain information-or monitoring management for ensuring transparency and customer protection. Agent-banking activities and linkage arrangements should be under monitoring scanner by the regulated banks/NBFIs to handle reputation and crime risks under a given 'guidance framework' adopted by stakeholders' consultations.
Management of banks and financial institutions should set up their own monitoring, capacity-development, disclosure, and customer-protection arrangements to handle risks associated with their less-regulated banking and financing activities. Finally, monitoring-and risk-management initiatives on part of market players, like banks and NBFIs, would be the best way to escape the possibilities of confronting stringent regulatory framework through the ongoing financial innovations associated with mobile banking, agent banking, and other financial-inclusion drives targeting smaller enterprises and vulnerable sections of society.
Dr Shah Md. Ahsan Habib is Professor, Bangladesh Institute of Bank Management.
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