With the vision of “Digital Bangladesh” at the centre of sustainable development, Bangladesh has undergone a significant digital transformation since 2008. The exponential increase in internet users in Bangladesh from 1.5 million in 2006 to nearly 67 million in 2023, according to DataReportal, is proof of the unprecedented expansion of digital connectivity. The demand for digital services during the COVID-19 pandemic has fueled the growth of mobile financial services (MFS) and the thriving e-commerce industry, with traditional banks also adopting digital solutions and transactional tools.
The transition to a cashless society has become the top priority for public and financial sectors to keep in line with the “SMART Bangladesh Vision 2041.” As a result, some banks and MFS providers are deciding to become digital banks. According to media reports, around 52 local and foreign companies in the country have applied to Bangladesh Bank for licenses to set up digital banks. This includes well-known MFS providers bKash and Nagad and four state-owned banks – Sonali, Agrani, Janata, and Rupali. These digital banks will perform under rules approved by the central bank and governed by the Bank Company Act. Two banks, Nagad Digital Bank and Kori Digital of ACI, have already received their licenses. Three other applicants, with the support of a conglomerate of traditional banks, were permitted to establish digital banking windows. Another three applicants, with the support of the fintech firms and other companies, are likely to receive digital licenses after a six-month monitoring period to evaluate the performance of Nagad and Kori.
While all this may seem like good news, authorities must pause and reflect on whether the necessary infrastructure and plans are in place to support the upcoming digital banks. With 61 scheduled banks and 5 non-scheduled banks operating in a nation with an economy worth $460 billion, the problem of oversaturation in the banking sector has become blatantly obvious. The growth of banks has led to unhealthy competition and inefficiencies because political factors are frequently more important than strict financial viability.
Their asset management has also remained stagnant over time, resulting in a massive increase in non-performing loans (NPLs), which amounted to Tk 120,649 crore at the end of 2022. According to the central bank’s Financial Stability Report 2022, total risky loans amounted to Tk 377,922 crore. The growth of NPLs calls for increasing provisions, which several banks failed to maintain. According to Bangladesh Bank data, the number of required provisions in June 2022 was Tk 86,270 crore, of which Tk 73,050 crore was maintained. This resulted in a provision maintenance ratio of over 85%.
Furthermore, the decline in asset quality requires an increase in equity capital, as set by the Basel Accords. While banks are expected to hold at least 12.5% of their risk-weighted assets in wealth, the capital adequacy ratio for all banks was 11.2% as of June 2022. Foreign commercial banks had a ratio of 26.4%, which was more than twice the required amount. State-owned commercial banks (SCBs) could only maintain 6.4%, half the required rate. However, specialised banks (SBs) had the worst scenario, with a capital adequacy ratio of –35.8%. Non-performing assets hindered bank profitability since provisions must be deducted from profits. According to Bangladesh Bank’s June 2022 report, this reduced profit, resulting in an average return on assets (ROA) of only 0.5% and a return on equity (ROE) of 9.4%. SCBs, on the other hand, had ROA and ROE of only 0.2% and 5.4%, respectively. The rates for SBs were –3.3 and – 13.7%, respectively. Some banks with substantial NPLs have also struggled to attract fresh deposits. As a result, banks sometimes could not honour small-denomination cheques, let alone issue new loans, leading to a credit bottleneck.
According to the concept, a digital bank will use artificial intelligence (AI), machine learning, blockchain, and other Fourth Industrial Revolution (4IR) advanced technologies to provide efficient, affordable, and innovative digital financial products and services via an online end-to-end tech-based digital ecosystem. There will be no need to provide over-the-counter (OTC) service, and will not have any branches; this includes ATMs, CDMs, and CRMs. To facilitate customer transactions, digital banks may issue a virtual card, QR Code, or any other advanced technology-based product. However, it is not permitted to issue physical instruments for transactions to add an extra layer of protection. Besides collecting remittances from wage earners, digital banks will be prohibited from transacting in foreign currency or engaging in trade finance. It must adhere to Corporate Social Responsibility (CSR) activities guided by the Bangladesh Bank’s CSR policy or as directed occasionally.
According to the Bank Company Act, Digital Bank must maintain the minimum Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) specified by the Bangladesh Bank occasionally. A digital bank must keep the Advance-to-Deposit Ratio (ADR) at the percentage set by the central bank. It will also be required to maintain a Capital to Risk-Weighted Assets Ratio (CRAR) and liquidity ratios (Liquidity Coverage Ratio and Net Stable Funding Ratio) at all times in accordance with BASEL III standards and directives issued by the Bangladesh Bank from time to time.
Digital channels like websites and mobile applications are where most digital banks conduct their operations because they are convenient and practical. By lowering banking costs and facilitating easy access to banking services, digital banks would likely provide financial assistance to the masses. The promise might not be wholly realised due to the absence of digital infrastructure, poor internet penetration, low financial literacy, lack of information technology (IT) understanding, and high cybersecurity concerns. If cybersecurity cannot be maintained, digital banking could be a tragedy.
Metaversal Nightmare
MTFE, which stands for Metaverse Foreign Exchange Group, enticed people in Nigeria, Sri Lanka and Bangladesh by presenting itself as a Shariah-compliant platform for Forex, commodities, indices, stocks and cryptocurrencies such as Bitcoin, Ethereum, Litecoin, Dogecoin, Polkadot, Bitcoin Cash and BNB with abnormally high returns on investments. The app’s claims of making money were so alluring that thousands of Bangladeshis invested crores into it, all the way down to the upazila level. But on August 17 of this year, the Android app went under and froze out all the balances of hundreds of thousands of people. Since the disappearance of MTFE, it has been discovered that in addition to dealing in virtual assets, they were also running a multi-level marketing (MLM) scheme by providing its users with attractive referral benefits and monthly returns for logging on to the platform. MTFE had claimed to be registered in Ontario, Canada, with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). It was later established that MTFE was not registered with OSC and was running its business illegally from Dubai.
One cyberattack on a nation’s banking system can destroy its entire economic structure. While some cybercriminals and hacktivists commit their lives to stealing money, many hack not for financial gain but because they find it challenging. But what is sport to hackers is undoubtedly disastrous for customers of banks. Therefore, Digital banks must use high encryption to protect data from internal and external threats. Customers must be informed about the security elements of digital banking and should have a basic understanding of finance. Digital banks must collaborate with other organisations whose standards must also be on par to deliver a streamlined service. However, there must be a means to quickly detect security system breaches and mitigate the resulting information and financial losses.
Digital banks must use strong encryption to protect data from both internal and external threats. Bankers should also be consistently trained on how the system works and troubleshooting, at least for basic errors. Customers should have some level of financial literacy and should be educated on the security features of digital banking. To provide a streamlined experience, banks need to collaborate with institutions that have high regard for standard. Still, in the event of a security breach, there must be a way to identify it quickly and minimise the loss – both financial and informational.
Besides, we must think about the bigger picture of the digital banking ecosystem, including how to assist the unbanked and promote deposits and borrowings. We are well aware that unchecked inflation is consuming our money. At 12.54%, food inflation is at a 12-year high, while overall inflation has increased to 10%. According to central bank data, bank deposits decreased from Tk 14,89,169 crore in December 2022 to Tk 14,88,447 crore in January 2023. Given this scenario, how do the potential digital banks propose to encourage deposits, especially from people living paycheck to paycheck?
The unbanked population must now be brought inside the formal financial system, but if the target community needs more knowledge of digital security and transactions, this drive could backfire. The devastating revelation of the MTFE fraud, which stole the life savings of its numerous helpless, unwary “clients,” should be a powerful reminder of the importance of digital literacy before people are introduced to new tools.
Digital banks launched in a favourable environment can be an excellent opportunity for people to utilise this service. A 2018 IMF study suggested that the size of our underground economy is around 30%, and the Centre for Policy Dialogue said that Bangladesh’s tax loss was Tk 84,200 crore in 2021 due to this shadow economy. The main reason is that the banking sector has been unable to penetrate or create a formal payment channel for the underprivileged, usually involved in informal jobs. This is where digital banks can come in and form a lasting impact. But for digital banks to operate efficiently and effectively, strategic directions and guidance from Bangladesh Bank are essential. Adequate policy support from lawmakers, cyber security, and support for digital literacy are vital factors that will help transform the digital banking landscape.
In terms of the broader digital banking ecosystem, several key affairs arise. To encourage deposits, especially from individuals in marginalised communities earning daily wages, digital banks must formulate effective strategies, considering the looming effects of rising inflation and declining bank deposits. Additionally, if digital banks primarily target small and medium enterprises (SMEs) for lending, this could impact conventional SME-focused banks. Furthermore, ensuring the collection of loans provided to the unbanked is a challenge that needs careful consideration.
To make digital banks a catalyst for inclusive growth, robust strategic direction and guidance from Bangladesh Bank, proper governance, effective policymaking, strong cybersecurity measures, and comprehensive digital literacy support are essential. Digital banks have the potential to create a formal payment channel for the underprivileged population engaged in the informal economy, thereby reducing tax losses and boosting the nation’s economy. Launching digital banks is a milestone that requires meticulous planning and investment in creating a healthy ecosystem. It has the potential to be a tremendous asset for the nation, but without adequate readiness, it could turn into a digital nightmare. Proceeding with caution is essential to ensure the success and security of digital banking in Bangladesh.
Author- Amar Chowdhury
