Digital credit is the future in the lending market of Bangladesh, especially in the case of Small and Medium Sized Enterprises (MSMEs). The Covid-19 pandemic has shown us that to keep the lending in an accelerating manner the lending institutions must focus on digital lending, most importantly in the case of MSMEs, because the MSMEs are affected badly during the time of the pandemic. It is observed that before the pandemic started Tanzania, Kenya and Turkey did really well in the case of digital lending. In Bangladesh, the Non-Performing Loans (NPL) rate of the total banking sector is increasing during the last couple of years. In that case, digital lending through Mobile Financial Service (MFS) providers can help the lending institutions in reducing the NPL rate. At present, in Bangladesh digital onboarding, digital lending, as well as digital repayment of MSME loans, are imperative as they will reduce the lending cost which will ultimately increase the MSME lending in Bangladesh. To make it more successful, a holistic approach is needed from Bangladesh Bank, Bangladesh Telecommunication Regulatory Commission (BTRC), Mobile Network Operators (MNOs), MFS providers, Banks, etc while each of the stakeholders needs to equip themselves with appropriate infrastructure. It is to be mentioned that while doing Alternative Credit Scoring (ACS) which is a pre-requisite of digital lending, all the stakeholders must be careful about data privacy and data security. Digital credit in the case of MSMEs through MFS providers is going to be a revolutionary move from the lending institutions in Bangladesh which will eventually boost up the investment as well as employment in Bangladesh.
Mobile Financial Services started its journey in Bangladesh in 2011 and at present, 15 MFS providers are providing their services in the Bangladeshi MFS market. People from different parts of the country can transfer and receive money from one corner to another within seconds in a secured manner. Banking practices are changing so fast and the needs of people are also changing. Now people want easy, secure, comfortable banking and, of course, at their doorsteps. MFS is the best example of that kind of banking. It is the banking in the palm of people’s hands with ultimate comfort and expected security. MFS is a revolution in the banking industry which enables the service providers to include unbanked and underprivileged people into the formal banking system. Initially, there were a few numbers of MFS providers in Bangladesh. Dutch-Bangla Mobile Banking (currently known as “Rocket”) was the first to launch their MFS services in Bangladesh. After that “bKash” which is a subsidiary of Brac Bank Limited started their journey of MFS in Bangladesh. At present, major market players of MFS providers in Bangladesh are bKash, Rocket, MyCash, tap, SureCash, OK Wallet, Meghna Bank Tap n Pay, etc among which bKash is in the leading position with the majority of the market share according to transaction volume and number of customers. The Covid-19 has compelled people to use Alternative Delivery Channels (ADCs) to a greater extent. According to the data of Bangladesh Bank, the total transaction in BDT through MFS has increased tremendously from May 2019 to May 2021 which clearly shows that people are using MFS for a number of purposes like cash in, cash out, send and receive money, different types of bill payment, transfer money, mobile recharge, tuition fee payment, etc.
The column chart below shows the total SME loan disbursement in Bangladesh from the year 2010 to 2019:
It is high time to put more focus on the MSME sector as the total loan disbursement trend is increasing except the year 2018. It is obvious that if the lending institutions consider digital lending through MFS, the MSME loan disbursement will reach a new high which is really needed for the sustainable economic growth of Bangladesh while the MSME sector has been badly affected by the pandemic. The GDP growth of Bangladesh for FY 2019-2020 is 3.51% which is the lowest in three decades. Thousands of people have lost their jobs due to Covid-19 in Bangladesh. So, we are in need of generating employment which will ultimately boost up the economic growth.
MSMEs in Bangladesh are facing a lot of hurdles in case of getting loans from Banks and NBFIs. Some of the problems are as follows:
• In most of the cases MSMEs lack transactional history as well as credit history.
• MSMEs lack proper documentation while doing business and they do not maintain proper books of accounts.
• As most of the MSMEs do not have the access to formal credit market for that reason they are taking loans from the informal credit market at an extremely high interest rate.
• In some cases, the lending institutions are reluctant to provide loans to the MSMEs due to the huge costs involved in MSME lending. At the same time, it requires more human resources for this kind of small ticket loans.
• One of the important problem the MSMEs are facing in Bangladesh is they really lack collateral security in getting loans.
There is a need for credit support for the MSMEs to survive in the market. MSMEs are facing problem like access to formal credit because of non-availability of transactional data, credit scoring, etc. Due to the pandemic, we may lose a huge number of promising entrepreneurs which can be harmful for the overall economy of Bangladesh in the long run. In that case credit is needed for them to survive during this pandemic situation. And digital credit can play essentially important role in that case. In Bangladesh, majority of the micro loans are provided by MFIs (Micro Finance Institutions) in compared to Banks, whereas Banks and other lending institutions termed this kind of lending very costly for them. Digital credit will remarkably reduce the lending costs for Banks and NBFIs. And if the lending institutions do it through MFS, they will have huge transactional data which will help them to complete the ACS successfully. In addition to that, a financial ecosystem needs to be created for smooth functioning of digital credit. Bangladesh Bank, BTRC, Banks, MNOs, MFS providers can work together in making all these things possible.
While providing digital credit through MFS, the lenders have to do alternative credit scoring by analysing MNO data, CIB (Credit Information Bureau) data, customer behavioural data, purchase data, economic data, FMCG data, bill payment data, existing loan repayment data, ATM transactions, etc. In that case, they may use Artificial Intelligence, Machine Learning, Big data analysing tools, etc. This way, the move for financial inclusion will be accelerated tremendously because a huge number of previously unbanked people will have utmost interest in getting digital credit through MFS, and the customer onboarding will be faster than before.
It seems to be a matter of noteworthy possibility of digital credit through MFS because from the below line chart we can see that MFS accounts have increased from 214.46 lac in May, 2017 to 396.50 lac in May, 2021 which is a tremendous growth over the time. To explore the market of digital credit, it is a pre-requisite to increase the number of MFS accounts. From the chart, it is apparent that during the pandemic customers are highly interested to use the Mobile Financial Services as it is hassle free. For that reason, it can be said that the demand side is ready for new market products of MFS and now it is the time for the service providers to come up with excellent piece of time needed product which can serve the need of customers in getting digital credit through MFS.
There are some risks involved while lending digitally through MFS providers which are given below:
• There may be some risks of hacking as Alternative Credit Scoring will be done and that gateway will be connected to the MFS providers’ server.
• If the defaulter in the case of digital lending increased, it may create turmoil in the overall credit market.
• Though the ticket size of the loans will be small, in the case of increased number of defaulted loans the overall revenue of any particular MFS provider will be negatively impacted.
At this moment, digital credit can help the MSMEs in getting loans in a faster and easier way which can tremendously accelerate the overall economic activities. Banks need to equip themselves with appropriate infrastructure, equipment and skilled human resources to implement digital credit programme successfully. A concrete guideline is needed from the regulatory body to boost the digital credit through MFS in Bangladesh within a shortest possible time. Alternative Credit Scoring authorities must have a published policy regarding what kind of data they will collect, sources of data collection, with whom the data will be shared, etc. There needs to be an OTP (One Time Password) or other kind of verification system while the data is being accessed by the employees of ACS authorities, MFS providers and other related parties involved. Before providing the digital credit to any customer, Banks need to check customers previous loan repayment data (if any), CIB status, transaction history like e-commerce transaction, MFS Wallet transaction, savings account transaction, ATM transactions, different bill payment transactions, insurance premium transactions, etc. Digital credit is the future which can explore a lot of opportunities for the overall credit market in Bangladesh. Due to the pandemic, free movement of people have been restricted and for that reason it will be better for the Banks to go for digital credit through MFS as soon as possible. As Bangladesh has to achieve SDGs by the year 2030, digital credit can help the country achieve the SDGs while we know that as on 2020 private sector credit growth is only 8.37%. So, the market is ready and it is the turn for the Banks and other stakeholders to build a better infrastructure to serve the economy in a positive way. It is the high time to come forward by the Banks, Regulators, MNOs to implement digital credit effectively to move forward Bangladesh to a developed country as per the mandate of the Government by 2041.
The writer is a Deputy Director, Bangladesh Bank
[The views expressed in this article are that of writer and do not reflect those of Bangladesh Bank]