Financial inclusion goals: Barriers and challenges

Chowdhury Mohidul Haque The term, 'Financial Inclusion', has gained importance all over the world from the beginning of this century. Four goals of universal financial inclusion were identified. These are, first, access at a reasonable cost for all households to a full range of financial services, including savings and deposit, payment and transfer services, credit and insurance; second, sound and safe institutions governed by clear regulation and industry performance standards; third, financial and institutional sustainability, to ensure continuity and certainty of investment, and fourth, competition to ensure choice and affordability for customers. Financial inclusion has direct relationship with access to finance. Access to finance fundamentally depends on demand while financial inclusion on supply. Access to finance refers to the right of entry of individuals or enterprises to financial services, including credit, deposit, payment, and other financial services. People who have no access to financial services are unbanked and those who have limited access are under-banked. One of the major goals of financial inclusion is the delivery of financial services to the disadvantaged and low-income segments of society at affordable costs. Contrarily, where financial services are not available or affordable, it is financial exclusion. According to World Bank, an estimated 2.5 billion working-age adults globally have no access to formal financial services delivered by regulated financial institutions. About 80 per cent of the adult population of Bangladesh have no bank account. The availability of banking and payment services to the entire population without discrimination is the prime objective of financial inclusion policy. BARRIER: In many countries, including Bangladesh, financial access is still limited to only 20-50 per cent of the population. Many poor people and SMEs (small and medium enterprises) are excluded from the financial access. The reasons for exclusion are many. First, the poor lack the education and knowledge needed to understand financial services that are available to them. Second, bank officers might find it unprofitable to serve the small credit needs and transaction volume of the lower-income population. Additionally, banks may not be geographically accessible for the poor since financial institutions are located in richer neighbourhoods. The poor are also burdened by lack of collateral and inability to borrow against their future income because their income streams tend to be hard to track and predict. The barriers to financial inclusion include, among others, complexity in opening bank account; complex KYC (Know Your Customer) requirement: unwillingness of the bank officials to open bank account to low-income people and importantly, lack of regulatory pressure on the banks to serve unbanked people. In the lack of financial access for the poor, microfinance institutions have managed to fill up the gap and provide financial services to poor people, women, ethnic minorities and unbanked rural population in the country. There is still a lot of work to be done to build inclusive financial economy. This includes taking advantage of the technological advances in developing financial infrastructure to lower transaction costs, encourage transparency, discloser and competition to encourage existing institutions to expand their services and enforce prudential regulations in the private sector. In Bangladesh, the goal of financial inclusion would be better served if the Bangladesh Bank (BB) plays the role of a facilitator for the entry of low-income people into the banking system. The banking sector today has 56 banks with over 8,000 branches. In spite of this, more than 80 per cent of Bangladeshi people cannot access credit from a formal source and have to depend on other informal sources. This is required to be addressed on a priority basis. The Government has recently given license to nine new banks. Government policy for granting new banking licenses to the private sector is intended to promote financial inclusion and increase competition. This is a positive step for the sector as a whole as it reduces barriers to entry. It is important to understand how this measure is implemented in conjunction with other measures to enhance the cause of financial inclusion. CHALLENGE: The primary reasons for poor financial inclusion in Bangladesh are economic in nature. The sizes of saving and borrowing are low and the geographical spread of the rural customers makes it uneconomical for banks to set up branches close to them to serve them profitably. As a result, the majority of bank branches in Bangladesh are concentrated in urban areas and large towns and last mile access remains a hurdle in regular use of banking services. The regulator has been trying to promote financial inclusion through instructions, mandating banks to have a certain number of branches in under-banked areas. Banks, on the other hand, consider this as unnecessary obligations. They make limited effort to bring about inclusion in the true sense and promote financial products amongst the under-banked. CONCLUSION: To improve last mile access, the regulator needs to take various steps with appropriate safeguards. Bangladesh Bank may allow all registered cooperative societies to become agent of the banks and open bank accounts and raise deposits on behalf of banks. The technology platform of proposed agent banking across the banking sector should be simple and standardised. Mobile phones can be used as the standardised platform across the banking sector as this channel is much cheaper than card-based technology and mobile penetration is already significant. The National Identification Number (NID) should be considered as a standard tool for identification to facilitate KYC. The Government may also look at reforms of co-operatives system. This new step will help achieving the goal of financial inclusion through an already existing network. The writer, a former executive director of Bangladesh Bank, is CEO, BCFInAS. [email protected]