According to a report aired by BBC a few days back, as many as 2.5 billion poor people of the world are deprived of access to any form of finance from institutional sources. For some years now, leaders of the G-20 countries have focussed their attention on financial inclusion as a new mantra to free these poor from the shackles of poverty. They are working in concert with the international and regional donor and financial agencies to crystallise several programmes to achieve this goal. They have also recruited consultants and are sending project funds to the developing countries to promote financial access. In the final analysis, however, success of these initiatives will depend on the efficiency and sincerity of the recipient governments to implement the multi-layered programmes.
Fortunately, the idea of inclusive growth has also caught on with Bangladesh policy makers. The government has established a SME (Small and Medium Enterprise) Foundation while the central bank has set up a special credit department and asked the banks to establish more rural branches and create dedicated SME desks in their branches. What is, however, more important than this routine exercise of institution building, is addressing the structural inadequacies and the hurdles that stand between the poor and financial services.
One crucial inadequacy is the lack of meaningful presence of the financial institutions in the backward regions. They are concentrated in their comfort zones in metropolitan Dhaka and, to a lesser extent, Chittagong which together account for nearly 80 per cent of the bank loans. With so much financial resources dedicated to these cities, there remains very little for the borrowers in other regions, not to speak of the poor desperately crying for a space in the hyped financial inclusion programmes.
The banks in the private sector which are fast growing in size, are particularly averse to fan out to the rural areas. The central bank's dictum to open rural branches often set them off in search of commercially important locations, especially those adjacent to metropolitan cities that have not yet been formally declared as municipal areas.
We should not, however, harbour any illusion that mere presence of bank branches will per se ensure their participation in the inclusive growth programmes. Empirical evidence and statistical numbers suggest that the commercial banks mostly use the upcountry regions as catchment zone for collection of deposits, which they use for the benefits of the elite clients in the metropolis, many of which, like Hall-Marks, Bismillah Group, are of dubious credibility. By the end of the last calendar year the banking system collected Tk. 946.18 billion as deposits from the rural areas but invested there less than half of it (Tk. 420.74 billion), denoting a shift of a colossal amount of Tk 525.44 billion from the credit-starved rural economy. The poor in those regions are left with the painful option of meeting their credit needs from the money lenders at costs, in cash or kind, often exceeding 100 per cent on annualised basis.
It partly explains why the intensity of poverty in some parts of the country is so high and why close to 30 million people still live in abject penury. One can conclude that without any compulsion to recycle the money collected from the outlying districts for lending operation there, the idea of asking the banks to spread out to the outlying regions to promote inclusive growth will continue to remain counterproductive.
We often try to draw a sense of comfort from microfinance deliveries in meeting the credit needs of the poor. Commendable as their roles are, the contribution of the MFIs to the credit needs of the country is only about 4 per cent of the credit portfolio of the mainstream financial institutions. The small amount of money they lend may help a equally small segment of the poor community to make their two ends meet but cannot take them past the poverty line. On the other hand, the high cost of MFI finance-- anything from 20 to 30 per cent--leaves very little surplus to escape from the poverty trap.
The latest move of the central bank to establish nationwide automatic cheque clearing platform and promotion of mobile banking are laudable steps to broaden the base for financial inclusion. However, cheque clearing is of little significance for the poor. Most of them would never see in their life time what a cheque looks like. Similarly mobile banking, though important innovative means of money transfer and boasts of ten million clientele, does not ensure access to finance nor generate new money from the banking system. By and large, it has merely taken over the tasks formerly performed by money transfer operators including courier service companies.
The concept of promoting financial inclusion through small and medium enterprises (SMEs) has been rightly chosen as a key strategy to promote access to finance for the poor. However, the way the scheme is structured and the modality for its implementation need a second look to turn it into a true purveyor of institutional finance and a change agent. There is not much that one can read in the programme to relate it to the SMEs.
The SME scheme defines a small business enterprise as those having fixed assets of up to five million taka and an industrial unit with fixed assets of Tk 15 million (without counting the costs of land and building) and sets the range of loan from Tk. 50,000 to Tk. 50,00,000. Similarly, the medium enterprise is defined as having fixed assets (in addition to land and buildings) of Tk 100 million and no upper limit has been set for the loan amount. These definitions are apparently borrowed from the advanced countries; they do not capture the realities of Bangladesh. What we consider as large enterprise would fall in the category of small or medium scale enterprises in the developed world.
What these definitions and credit ceilings mean is that the banks are mostly financing their existing clients - big and medium-- engaged in low value-added trading activities and reporting these to the regulatory authorities as SME loans. In the process, they create an illusion of compliance without meaning to sincerely scout new small or medium enterprises, especially in the country side. In the meantime, the rural enterprises continue to remain clueless with regard to the source of finance to run or expand their businesses.
These schemes and cosmetic changes here and there will not address the real needs of the poor. Determined actions and strong political will are key to ensuring equitable distribution of wealth including credit inputs across the communities. Reforms may begin with decentralising the financial institutions to free it from the clutches of the few who preside over their financial empire from their vantage point at Dhaka. It means we need to establish regional banks preferably by splitting the existing banks, beginning with the state owned banks. This will not be an easy task but a beginning needs to be made somewhere.
We must remember that the USA, the citadel of free market economy, has enacted a litany of anti-monopoly, anti-trust laws to dismantle the stranglehold of a few powerful groups over the country's financial resources. One law that dates back to the evolutionary period of banking in the US restricts the banks from extending their area of operation beyond the boundary of the state in which they are licensed to operate. It explains why the US has close to eight thousand commercial banks, mostly single branch unit banks, in addition to Savings and Loan Associations and myriad other financing outfits.
Admittedly, given the influence of the elites that dominate the financial sector, restructuring of the existing banks will not be easy. Until we can prepare ourselves to attend to a major overhaul through a political consensus, targets can be set for the banks for each Region/Division or, if possible, each district for dispensation of credits at least to the extent of the deposits collected from those locations. The targets may also specify the proportion of funds which, as a minimum, must be used for micro, small and medium enterprises.
The writer is a former
central banker.
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