Banking industry to meet diverse needs of the economy

Across the globe, financial services industry has undergone rapid changes and transformations in recent years. In addition to the global financial turmoil, the transformation is attributable to various factors including rapid advances in information technology, the evolving macroeconomic environments and geopolitical changes to name a few. Against this backdrop, how do we see the future of retail banking? What factors shall shape things in this sector in future? Let me share some of my thoughts.  
During the post-crisis years, across the world and in Europe, authorities took initiatives to strengthen financial stability-focused supervision in addition to relying heavily on creating liquidity through quantitative easing. The high social cost of the failure of banking institutions has forced authorities to strictly supervise and regulate them. However, such strict supervision and regulation have generated unwanted consequences as well.
POST-CRISIS BANKING INDUSTRY: We have seen three distinct business models which are emerging in the post-crisis banking industry worldwide.
First, regionally-focused banks operate a focused geographical footprint and do not offer typical 'global' businesses. In the post-crisis era, this has seemingly become the most favoured model. Typically, these houses are strong in retail banking and are anchored in a specific country or region. Regionally-focused banks are uniquely placed to help their communities - evaluating local risks and providing financing solutions to local customers and industries. They are strongly embedded in local or regional communities and create stable, loyal customer bases amongst savers and depositors, and small or medium-sized businesses. These banks avoid the costs of complexity which arise from running complex business portfolios or complying with different national supervisory regimes. This segment has undertaken significant reform since the crisis. They have since improved risk discipline, focused their balance sheets, reinforced links with local communities and focused more intensely on core competencies.
Secondly, global mono-line banks with a global footprint focus on specific global businesses - for example, 'pure-play' investment banks or global wealth managers. Some have consistently followed this model; others have retreated to it after abandoning universal banking aspirations.
Thirdly, global universal banks - institutions, which combine global presence with a full range of banking products and services, have a meaningful presence in investment banking. Pre-crisis, many large banks aspired to this model; in the post-crisis shake out, only a small number still do.
SHADOW BANKING: But the unwanted consequence is a new paradigm for the banking industry that has taken shape and which has continued to develop rapidly during last couple of years, namely, non-bank financial intermediaries, often called "shadow banking". The shadow banking sector is a diverse set of institutions which invest and trade their own capital, and also perform traditional banking functions like lending, market making, managing funds, and providing risk-management solutions. They do not take deposits, are typically not publicly listed, and mostly sit outside the bank regulatory framework. They make a very important contribution to the system - providing large blocks of capital, making investing considered higher risk by traditional banks.
However, shadow banking also poses systemic risk - contagion effect from shadow banking into the traditional banking sector through creditor banks.
BB'S CATALYSING ROLE: Worthy as the global initiatives of strengthening financial stability-focused supervision are, doubt remains whether these will be enough to avert future recurrence of instability, unless we reorient the ethos and objectives of financial markets and institutions towards socially responsible directions, seeking longer-term gains from inclusive financing of all productive initiatives of all population segments.
The Bangladesh Bank (BB) has chosen to take catalysing role in reorienting our financial sector's goals and ethos in socially and environmentally responsible direction, guiding the sector in mainstreaming corporate social responsibility (CSR) in corporate goals and objectives and launching a comprehensive well-orchestrated financial inclusion campaign in which banks and financial institutions are participating with spontaneity and enthusiasm. This is meaningfully helping attainment of the inclusive growth and poverty eradication goals of the Government's near and longer-term national development plans, by upholding healthy output and employment growth in Bangladesh economy even in the backdrop of ongoing global slowdown.
NEW RETAIL BANKING BUSINESS MODEL: Anyway, the retail banking services which we have to provide in the future will be significantly different from what we were familiar with in the past. The new retail banking business model will be shaped by several developments that have taken place in the financial and economic world, and in Bangladesh, to be more specific.  
Bangladesh went for an open banking policy in the early eighties. The reform introduced competition into the banking industry to make it more efficient in delivering complex and sophisticated banking services to the economy. Over these years, we have observed the steady development of a banking network spreading all over the country providing financial services in competition with each other.
In the recent past, numerous new technological advancements were introduced to the country's banking system. The adoption of advanced information and communications technology (ICT) that connected the branch network of the respective bank digitally helped all banks to elevate themselves to a system of centralised banking.
Meanwhile, the BB upgraded the payments infrastructure by introducing Automated Clearing House (BACH). The Bangladesh Electronic Funds Transfer Network (BEFTN) came into being to simplify the bank-to-bank clearing process. E-Payment Gateway and Real Time Gross Settlement (RTGS) system would follow these developments in near future.
Another important aspect of retail banking is the change in the age profile of the customer base. The current generation is different from earlier ones by knowledge, aspirations, patience and love for modern technology. Since modern technologies enable them to have instant interaction with others, they expect similar service standards from everybody else. The access to internet by the customers enabled them to compare financial products and services. They are much more informed and have to be handled accordingly. Hence, the banking industry needed to adopt itself in order to service this new breed of customers.
DIGITAL TECHNOLOGIES: The commercial banks are now increasingly using digital technologies and, there has been a remarkable change in delivery of services, marketing tactics and the usage of banking services by customers. The banks are now increasingly using short message services (SMS) and internet banking to keep the customers updated about account information and also inform them about new changes that have taken place in their respective banks.
We are also observing a change in the traditional payments systems undertaken by bankers with the entry of new non-financial payment service providers. Mobile phone companies' payment system operators are the newest competitors to the banks. These alternative payment systems are becoming more and more popular due to a number of advantages. They are flexible, low cost, reliable and instantaneous, making it difficult for banks to compete with them.
In Bangladesh, the banks have been advised to partner with these alternative payment system players in order to enjoy the benefit of synergy arising from such partnerships.
BRANCHLESS BANKING: Another important development is the tendency to have less-branches or branchless banking. Traditional bank branches are usually established at strategic geographic locations to provide financial services in that locality.
However, bank branches are costly, need huge infrastructure and logistics for operations, have to be run by staff whose requirement increases with business expansion. An alternative strategy currently implemented through the globe is the development of 'branchless banking'.
Branchless banking dramatically reduces the delivery costs and therefore ideal for reaching out the unbanked mass. A number of channels are being used. Telephone banking, automated teller machines (ATMs), the engagement of bank agents, mobile banking, kiosks and internet banking are some of the important banking channels in use today.
NO-FRILL ACCOUNT FOR THE FARMERS: Rural Around 29 million families of rural Bangladesh are engaged in farming activities and 50 per cent of those are share-croppers. This large segment had no access to formal financing. To overcome this situation and to ease the access to finance for the farmers, the central bank of Bangladesh has taken several initiatives: from the FY2011, it is mandatory for all banks to disburse agro and rural credit amounting to 2.5 per cent of their loan portfolio.
The banks having limited rural network are allowed to provide credit through partnering with micro-finance institutions (MFIs), thus creating an effective complementary linkage. With a view to ensuring effective and meaningful participation of women in the mainstream economy, banks are asked to extend credit facilities to women for various self-employment and income-generating agricultural and non-agricultural activities.
One of the most significant initiatives taken is to open No-frill account for the farmers. State-owned commercial and specialised banks are guided to open farmer's account with deposit of BDT 10 (almost 12 cents) to facilitate direct transfer of subsidies, as well as agricultural credit to farmers' bank accounts. More than 9.75 million accounts have been opened by different banks so far. Retention of these customers in the formal financial system is the biggest challenge for us.
Recognising the importance of development of small enterprises in achieving inclusive economic growth, the BB has taken policy for the banking industry that encourages banks to have at least 40 per cent share for small enterprises in their portfolio with increasing efforts in broadening the portfolio to micro, small and women entrepreneurs. The results are promising.
In the year 2012, micro enterprises occupied 54 per cent of the portfolio of banks and non-banking financial institutions (NBFIs). The increased volume of loan utilised by small enterprises during the period is an indication that a number of small enterprises have been brought under the financing umbrella and part of those small enterprises are evolving into medium-sized enterprises.
ISLAMIC BANKING: Islamic banking industry of Bangladesh, grossly one-fifth of the total banking sector comprising eight banks, has been growing faster than the conventional banks. Islamic banks are now focusing on a wider horizon, encompassing not only the conventional Shariah products but also products geared to SMEs, microfinance, and financing in the agriculture sectors.
Bangladesh has a large Muslim population, and among them, the embrace of Islamic banking is increasing at a faster rate due to their faith. It is indeed desirable to encourage Islamic banks to develop new products for their customers who are willing to invest their savings in the Shariah-based products. However, these new products necessitate maintaining close monitoring so that no adverse shocks can arise from their expanding horizons.
MOBILE FINANCIAL SERVICES: In order to ensure the access of unbanked people by taking advantage of countrywide mobile network coverage, the BB issued 'Guidelines on Mobile Financial Services (MFS) for the Banks' in 2011 for adoption by the commercial banks of Bangladesh. Since the banks are trying to reach the unbanked population the mobile account may be the instrument in this regard. The mobile accounts will rest with the systems of the banks and can be used for depositing money, fund transfer and other financial services. The popularity of MFS is growing day by day.
In January 2015 the number of registered account holder reached 25.2 million. The daily transaction volume is around BDT 3.78 billion. Although peer-to-peer (P2P) transaction is popular, other transactions like salary disbursement, utility bill payment, etc. are growing gradually.
In addition to significantly simplifying the process of establishing drawing arrangement with foreign exchange houses, the BB has taken a number of initiatives such as approvals to use branch offices of the MFIs, non-governmental organisations (NGOs) and branches of the Bangladesh Post Office as collection points for remittance money in order to distribute remittance in the fastest way to remote areas of the country. Remittance is also being distributed through mobile phone operators.
PLASTIC MONEY: The growth of 'plastic money' in the name of Credit Card, Debit Card, Prepaid Card has changed the concept of hard cash possession of currencies. The central bank of   Bangladesh has accommodated the concept of transactions through cards in local currencies in early 1990s which have achieved a significant growth since then.
In late 2000s travellers were allowed to use international cards while on visit abroad. Previously, the foreign exchange transactions were limited to corporate banking only. The introduction of international card services and accommodative foreign exchange (FX) policy changes by the BB have opened up space for retail FX banking.
The retail banking landscape has gone through a complete transformation now-a-days. It is in the interest of banks to take cognisance of these changes and adapt themselves to the changing environment. While retail banking offers phenomenal opportunities for growth, the challenges are equally daunting. This requires product development and differentiation, innovation and business process re-engineering, micro-planning, prudent pricing, attractive marketing, customization, technological upgradation, cost reduction, and so on. How far the retail banking can grow in future would depend upon the banks' capacity to meet the challenges and make use of the opportunities.
Maintaining the path to sustainable economic growth in the real economy is the overriding challenge facing Bangladesh today. Only by achieving this goal, we can reduce the income and wealth gap between different segments of the population, and sustain socially inclusive prosperity which is at the heart of the nation's aspiration.
Only by sustainable growth can we tackle the unemployment which has left millions of our young people without job and prospects. This is a time for all who are involved in the banking industry and beyond to unite around to create a banking industry diverse enough to meet diverse needs of Bangladesh's economy. The task is daunting. But if we succeed, we will be able to do our part in improving the future for millions of our people.
S.K. Sur Chowdhury is Deputy Governor of Bangladesh Bank. The article is based on the
presentation he gave at 'International Retail Banking Summit in Bangladesh' held at the BIBM auditorium in Dhaka on April 25, 2015.
 afm.asad@bb.org.bd