By Joseph Moss, International Banker
As the global banking industry continues to usher in a seismic wave of innovation led by digital banking, Bangladesh has emerged among the most fervent proponents of this new paradigm. The modestly sized but densely populated South Asian nation is seeking to transform its society, in part by embracing a smarter financial system and aiming for a mostly cashless, technologically savvy population to arise over the next couple of decades. With the first set of eight digital-banking licences approved in October in principle, Bangladesh is set to spread its digital-banking wings and embrace its digital future.
Indeed, Dhaka is aiming for a minimum of 75 percent of local transactions to be executed digitally by 2027 as part of its nationwide Smart Bangladesh Vision 2041. With 61 conventional banks currently operating in the country, many of which already offer their customers digital services and applications, establishing full digital banks is the next logical step to fulfilling its ambitions.
Bangladesh’s central bank approved a formal framework to establish digital banks in June. “Digital innovation is continuously modifying the landscape of the financial system all over the world,” Bangladesh Bank (BB) stated on June 23 during its formal invitation to entrepreneurs seeking to establish digital banks. “Bangladesh Bank (BB) promotes an enabling regulatory environment allowing innovation to make a robust, efficient and secured financial system. Accordingly, BB recognizes the role of digital platforms and [the] usage of artificial intelligence in driving greater efficiency in the delivery of financial products and services and in widening the outreach of the financial system. Towards this end, BB has decided in principle to issue license[s] for full-fledged digital banking.”
BB also laid out key guidelines within its digital-banking framework, requiring any new digital bank to:
- have a minimum capital of Tk125 crore (US$11.4 million),
- offer efficient, low-cost and innovative financial products and services,
- have a strong corporate-governance framework,
- comply with all applicable laws and regulations, and
- submit a business plan for approval by the central bank.
By August, an estimated 52 applications had been submitted from more than 500 domestic and foreign companies interested in seeking digital-banking licences, including financial institutions, mobile financial-services providers, gas-pump companies, pharmaceutical companies and foreign fintech (financial technology) firms.
At a Bangladesh Bank board meeting on October 22, eight financial institutions were formally approved for the ultimate prize. Nagad Digital Bank and Kori Digital Bank were given letters of intent (LOIs) to complete outstanding terms and conditions within six months; bKash Digital Bank, DG-10 Bank and DigiAll were all approved to add new digital-banking “wings” to their existing banking licences; and three fintech entities—Smart Digital Bank, Japan-Bangla Digital Bank and North East Digital Bank—will duly receive their LOIs after their digital banks’ successful commencements of operations.
Bangladesh is now firmly on the path towards realising its lofty innovation aspirations. According to AZM Fouz Ullah Chowdhury, head of digital financial services at Meghna Bank Limited, the proliferation of digital banks could spur tremendous benefits and conveniences for customers, with lenders playing crucial roles in promoting financial inclusion and boosting the potential for financial transactions across the country’s broad economic and demographic cross-sections. “Given the significant number of underserved individuals, digital banks can guarantee essential access to financial services for unbanked populations,” Chowdhury explained in a September 27 article for Bangladeshi news outlet The Business Standard. “Furthermore, digital banking channels can streamline the collection of payments for various services and the distribution of benefits, enhancing overall customer convenience.”
Given that digital banking aligns with their lifestyles, Chowdhury pointed to Bangladesh’s tech-savvy youth population as the key to mass adoption. “Globally, the Gen Z demographic exhibits a strong feeling towards adopting digital banking platforms, not only for their routine financial transactions but also for their lifestyle requirements,” he added. “This preference is driven by their comfort and the user-friendly nature of these platforms. Gen Z individuals are particularly motivated towards digital transactions, especially via mobile applications, QR [Quick Response] Code, and Near Field Communication (NFC) technology, which allows for the convenient tracking of financial activities.”
It is also hoped that branchless digital banking will provide a breakthrough to address the financial needs of Bangladesh’s poorest rural communities effectively. Digital lenders can solve a myriad of longstanding problems that these historically unbanked and underbanked groups have faced, including more suitable financing options for agricultural ventures, better microfinance solutions and easier access to expertise and support for small businesses. With many of these problems solved by simply having smartphone access to a mobile-banking application, digital banking can comprehensively transform the economic prospects of all Bangladeshis (urban and rural dwellers) and thus contribute dramatically to poverty reduction and rural development.
“The rise of branchless digital banks has the potential to breathe new life into Bangladesh’s economy. With reduced costs associated with physical branches, these banks can channel resources into offering more competitive interest rates and services. Tailoring financial products through data analytics enhances customer satisfaction and loyalty, catalysing economic growth,” B.M. Zahid-ul Haque, a CISO (chief information security officer) and cyber digital transformation strategist, wrote in an October 29 piece for The Business Standard. “Digital banks offer a transformative opportunity to enhance financial inclusion. They can bridge geographical barriers and provide access to banking services to those who were previously excluded. This is crucial in a country where rural communities often lack access to traditional bank branches. The digital platform allows individuals to conveniently manage their finances and engage in transactions, promoting financial literacy and inclusion.”
But some also believe that to fully capitalise on the benefits that digital banking can bring, an honest assessment of the nation’s financial development is first needed, particularly regarding the level of banking-sector security it can offer customers at present. This matter particularly resonates in Bangladesh, where $81 million was lost from its central bank account with the Federal Reserve Bank of New York (New York Fed) in 2016 via a massive cyberattack. Only a fraction of the money has been recovered from the heist.
“There are some risks,” a former Bangladesh Bank governor, Salehuddin Ahmed, recently acknowledged, adding that authorities must prioritise digital-banking security. Ahmed also warned that if thieves were to target digital banks, “we would not be able to recover [the funds] because we don’t have that much expertise or required manpower in the IT industry”. To that end, the central bank requires at least half of the board members of a digital bank to have knowledge and experience in technology-based banking, emerging technologies and cyber laws and regulations. They must also have AI-enabled dispute-resolution mechanisms.
A dramatic improvement in the financial literacy of ordinary Bangladeshis is widely deemed another key priority, such that new digital-banking tools can be readily absorbed by everyone without apprehension. This need was no more clearly exemplified than by the recent scam perpetrated by the Dubai-based investment platform MTFE (short for Metaverse Foreign Exchange Group), which convinced ordinary citizens of Bangladesh, Nigeria and Sri Lanka to invest in supposedly “Shariah-compliant” cryptocurrencies, foreign exchange, stocks and commodities.
The scam offered unusually large gains on investments and enticing bonuses for bringing others to the platform as a way to extend what was essentially a Ponzi scheme but eventually saw hundreds of thousands of customers lose access to their balances—and, in some cases, life savings—when the app went under on August 17. In response, many have advocated introducing financial-literacy programmes before new digital lenders are granted access to unbanked, potentially vulnerable communities.
Digital banks will have to contend with the reality that, while they are expected to grow exponentially over the next few years, internet and smartphone usage in Bangladesh in 2023 remains modest. Figures from DataReportal, a research firm focused on global internet-usage trends, found that of the nation’s approximately 170 million people, there were 66.94 million internet users in January 2023, equating to an internet penetration rate of just 38.9 percent. What’s more, smartphone penetration was only 47 percent in 2022.
That said, the country ranks as the fastest-growing economy in the Asia-Pacific (APAC) region and across all frontier markets, with a 10-year gross domestic product (GDP) compound annual growth rate (CAGR) of 9.1 percent, a July 2023 report by World Economics found. With a July 2022 report from the Global System for Mobile Communications Association (GSMA) projecting that Bangladesh’s smartphone penetration will rise to 63 percent by 2025, digital lenders can reasonably expect the total addressable market (TAM) they serve to balloon over the coming years.