Introduction

Financial inclusion or inclusive financing is the delivery of financial services at affordable costs
to sections of disadvantaged and low-income segments of society, in contrast to financial
exclusion where those services are not available or affordable. (Muzigiti & Schmidt, 2013).

Defining financial inclusion is considered crucial from the viewpoint of developing a conceptual
framework and identifying the underlying factors that lead to low level of access to the financial
system. A review of literature suggests that there is no universally accepted definition of
financial inclusion. The definitional emphasis of financial inclusion varies across countries and
geographies, depending on the level of social, economic and financial development; the structure
of stake holding in the financial sector; socio-economic characteristics of the financially
excluded segments; and also the extent of the recognition of the problem by authorities or
governments.

Financial Inclusion is not only the process of ensuring access to financial services or making
available timely and adequate credit when needed by vulnerable groups, such as weaker sections
and low income groups, at an affordable cost, it must also be appropriate, fair and transparent.
What we need to do is first improve access to various financial products and services for the
entire population and ensuring that such access is provided by mainstream institutional players.
Enabling people to get credit from small institutions, money lenders and the like is not financial
inclusion. Access has to be through mainstream institutional players and only then such access
will be fair, transparent and cost effective. (Kochhar, 2009).

Only opening a bank account is not financial inclusion. Of course, the first thing is a check-in
account, what we call a no-frills account. And the next step is immediate credit. Today, what the
poor wants is accessibility to immediate credit. However, in most of the cases, the poor does not
need credit for business or entrepreneurship, but it is for meeting a financial emergency, like
health or urgent domestic needs. This immediate credit stage is followed by the introduction of
various savings products, followed by remittances and payment services. This might be followed
by insurance, especially health insurance, housing loans etc. Entrepreneurship credit comes at the
last. This way, people have to be creditworthy and “financially included”. Therefore, we have to
go through all these stages and we have a long way to cover.

Subbaro (2013) asserts, financial inclusion does not only mean providing financial services. It
also includes “financial literacy”, meaning financial awareness, knowledge about banks and
banking channels, facilities provided by banks, advantages of using banking routes etc. It
involved educating people financially, making them financially literate. Financial inclusion and
financial literacy are integral to each other, they are two elements of an integral strategy. The
disadvantage people need both-access to and awareness of financial services. Financial literacy is
demand side phenomena and financial inclusion is supply side response.

Broadly, financial exclusion is construed as the inability to access necessary financial services in
an appropriate from due to problems associated with access, conditions, prices, marketing or
self-exclusion in response to discouraging experiences or perceptions of individuals/entities.
Over the years, several definitions of financial inclusion/exclusion have evolved. The working or
operational definitions of financial exclusion generally focus on ownership or access to particular
financial products and services. The focus narrows down mainly to the products and services
provided by the mainstream financial service providers. Such financial products may include
money transmission, home insurance, short and long-term credit and savings (Bridgeman, 1999).

The review of literature suggests that the most operational definitions are context-specific,
originating from country-specific problems of financial exclusion and socio-economic
conditions. The operational definition of financial inclusion, based on the access to financial
products or services, also underscores the role of financial institutions or service providers
involved in the process. (Gandhi, 2013)

The term "financial inclusion" has gained importance since the early 2000s, a result of findings
about financial exclusion and its direct correlation to poverty. The United Nations defines the
goals of financial inclusion as follows:

 access at a reasonable cost for all households to a full range of financial services, including
savings or deposit services, payment and transfer services, credit and insurance;
 sound and safe institutions governed by clear regulation and industry performance standards;
 financial and institutional sustainability, to ensure continuity and certainty of investment; and
 competition to ensure choice and affordability for clients.

Former United Nations Secretary-General Kofi Annan, on 29 December 2003, said: “The stark
reality is that most poor people in the world still lack access to sustainable financial services,
whether it is savings, credit or insurance. The great challenge before us is to address the
constraints that exclude people from full participation in the financial sector. Together, we can
and must build inclusive financial sectors that help people improve their lives.” More
recently, Alliance for Financial Inclusion (AFI) Executive Director Alfred Hannig highlighted on
during the IMF-World Bank 2013 Spring Meetings: "Financial inclusion is no longer a fringe
subject. It is now recognized as an important part of the mainstream thinking on economic
development based on country leadership." (Hannig, 2013)

Two billion people -- or 38% of adults in the world -- do not use formal financial services1, and
73% poor people are unbanked because of costs, travel distances and the often-burdensome
requirements involved in opening a financial account. Their ranks include more than half of
adults in the poorest 40% of households in developing countries.

Being financially excluded is linked to income level: The richest 20% of adults in developing
countries are more than twice as likely to have a formal account as the poorest 20%. Yet, while
the poor don't have the same access to financial products as wealthier individuals, their need for
financial services may be even greater. Research shows that access to savings products – and, in
particular, to “commitment” savings, in which individuals restrict their right to withdraw funds
until they have reached a self-specified goal – can have important benefits beyond simply
increasing one’s amount of savings: It can also help empower women, increase productive
investment and consumption, raise productivity and incomes, and increase expenditures on
preventive health.

Who are Excluded and Why?

Access to financial services - financial inclusion - implies an absence of obstacles to the use of
these services, whether the obstacles are price or non-price barriers. It is important to distinguish
between access to - the possibility to use - and actual use of financial services. Exclusion can be
voluntary, where a person or business has access to services but no need to use them, or
involuntary, where price barriers or discrimination, for example, bar access. Failure to make this
distinction can complicate efforts to define and measure access.

For promoting financial inclusion, we have to address the issue of exclusion of people who
desire the use of financial services, but are denied access to the same. There are a variety of
reasons for financial exclusion. From the demand side, lack of awareness, low income/assets,
social exclusion, and illiteracy act as barriers. From the supply side, distance from the branch,
branch timings, cumbersome documentation and procedures, unsuitable products, staff attitudes
are common reasons for exclusion. All these result in higher transaction cost and lower
profitability. On the other hand, the ease of availability of informal credit sources makes these
popular even if costlier.

Over the past several decades, different types of financial-services providers have offered new
possibilities for the financially excluded. Such providers include non-government organizations,
cooperatives, community-based development institutions, commercial and state banks, insurance
and credit-card companies, telecommunications and wire services, post offices, and other
businesses that provide point–of-sale (POS) access. New business models and providers have, in
many cases, become viable due to technological breakthroughs, including the worldwide spread
of mobile phones.

A transaction or deposit account can be the stepping stone to full financial inclusion, providing a
pathway to a broader range of responsible financial services provided through stronger and more
diverse financial institutions. Emerging evidence indicates that access to financial services
through formal accounts can enable individuals and firms to smooth consumption, manage risk,
and invest in education, health and enterprises. (Topic: Financial Inclusion: Overview, 2015)

Inclusive Finance and Poverty Alleviation

Financial Inclusion is an important tool for attacking poverty. There are three dimensions of
attack on poverty (WDR-2000-01):

- Creating opportunities for poor to improve their lives.

- Empowering the poor to demand more responsive state and social institutions.
- Providing the poor security
- to cope with risk.

Financial Inclusion is important on all three dimensions

- Opportunity, empowerment and security.

Financial inclusion is good for all the stakeholders

- Good for the poor: Opportunity to improve their incomes and their quality of life.
- Good for the banks: Steady low cost savings, portfolio diversification etc.
- Good for the government: Powerful tool of poverty reduction, it also cuts down leakage.
- Good for the economy: savings of the poor into the formal financial sector.

It is win-win for the poor, banks, government and economy. It is not just a public good but a
merit good.

International Perspective

There has been over a decade of engagement by international standard setting bodies (SSBs) on
the relevance of financial inclusion objectives to banking regulation and supervision. Initially,
the focus was on microfinance activities conducted by banks and other deposit-taking
institutions. In 2008 and 2009, the International Liaison Group of the Basel Committee on
Banking Supervision (BCBS) conducted a survey to identify the range of practice in both BCBS
member and non-member jurisdictions with significant experience in regulating and supervising
microfinance activities by such institutions (2008- 2009 Survey). The 2008-2009 Survey targeted
the most significant risks in microfinance and the systems and processes used to manage and
supervise these risks, using the 2006 version of the Core Principles for Effective Banking
Supervision (Core Principles) as the framework of analysis. The results of the 2008- 2009
Survey informed the 2010 Microfinance Activities and the Core Principles for Effective Banking
Supervision (2010 Guidance), the first set of guidelines issued by the Basel Committee related to
financial inclusion.

Over the past decade, the focus of providers and others interested in financial inclusion has
broadened to include the full range of financial products and services that low-income and poor
households may use to manage typically uneven income and expenses; accumulate assets; and
mitigate economic shocks. This period has also been marked by a growing recognition that
financial inclusion raises issues that are relevant not only to the Basel Committee, but to other
global SSBs. Further, innovations that serve the needs of excluded or underserved low-income
households now have potential to extend the reach and nature of financial services provided by
banks and non-banks. These developments are, in turn, changing the nature of risks that are
relevant to banking supervision, and triggering issues of relevance to multiple SSBs. In parallel
to these significant developments, the global financial crisis has prompted new thinking about
the relationships among the core safety and soundness objective of banking supervision and the
objectives of financial inclusion, financial integrity and financial consumer protection.
Awareness of the risks of financial exclusion has also increased. (Basel Committee on Banking
Supervision, 2015)

The problem of financial exclusion varies widely across countries and is especially pronounced
between developed and developing countries. In developed countries, the nature of the problem
is to include small percentages of people who are outside the banking net and to improve access
to people who suffer due to switching of banks from branch banking to internet banking. In
developing and underdeveloped countries such as India, South Africa and other African
countries, the nature of exclusion is very different because majority of the population in these
countries do not have access to basic financial services at an affordable cost.

A variety of schemes have been designed and implemented across the world to tackle financial
exclusion. The United States passed the Community Reinvestment act in 1977 that prohibits
banks from targeting rich neighborhoods alone. The law of exclusion in France makes holding
bank account as a right. Credit unions in the US and the UK offered flexibility in providing
affordable credit to customers. South Africa has “MZANSI” account which is a low cost card-
based savings account with easy accessibility. Mexico has a microfinance program called
“PATMIR” where savings take precedence over credit. Canada has free encashment of
government cheques even for non-customers. The UK has set up a separate independent financial
inclusion task force which mainly looks at three priority areas namely access to banking, access
to affordable credit and access to free face to face money advice. The government also allotted
120 million pounds to the fund for financial inclusion over three years.

Banks in various countries have extended basic savings accounts similar to “no frills” account,
though with different names, with a view to making financial services accessible to the common
man. Access to safe, easy and affordable credit and other financial services by the poor and
vulnerable groups, disadvantaged areas and lagging sectors is recognized (RBI, 2008) as a pre-
condition for accelerating growth and reducing income disparities and poverty. Access to a well-
functioning financial system, by creating equal opportunities, enables economically and socially
excluded people to integrate better into the economy and actively contribute to development and
protects themselves against economic shocks. Despite the board international consensus
regarding the importance of access to finance as a crucial poverty alleviation tool, it is estimated
that globally over tow billion people are currently excluded from access to financial services
(United Nations, 2006). In most developing countries, a large segment of society, particularly
low-income people, has very little access to financial services, both formal and semi-formal. As
a consequence, many of them have to necessarily depend either on their own or informal sources
of finance and generally at an unreasonably high cost. The situation is worse in least developed
countries (LDCs), where more than 90 per cent of the population is excluded from access to the
formal financial system.

The extent of financial exclusion in India is found to be higher compared with many developed
and some major emerging economies, as seen in Table II. This table clearly depicts the wide
extent of financial exclusion in India is visible in the form of high population per bank branch
and low proportion of the population having access to basic financial services like savings
accounts, credit facilities, and credit and debit cards. (Gandhi, 2013)

Addressing financial inclusion involves casting a very wide net across its various elements:
channels and modes of access, deposits, credit, and insurance. The examples below highlight
how countries are tackling trade-offs with financial stability and promoting both access and use
of financial services.
Promoting Safe Financial Inclusion: Country Examples:

India: priority sector lending and universal access. The Reserve Bank of India’s long-
standing policy on priority sector lending (PSL) requires banks to set aside 40 percent of their
assets to priority sectors. Most public sector banks meet this requirement, but end up with high
nonperforming loans and concentrated credit risk. The Reserve Bank of India (2014) report
offers the following recommendations, among others: (1) creating wholesale consumer and
investment banks that do not take retail deposits and would, therefore, be subject to lower capital
requirements; (2) engaging in relationship-based lending so that loan officers would have more
“soft” information on their client; and (3) purchasing protection against rainfall and commodity-
price risks. It would be mandatory to report loans to credit bureaus and disclose concentration
levels in their financial statements. Recently, the Pradhan Mantri Jan Dhan Yojana, a financial
inclusion initiative, was launched with the goal of opening a bank account for every household.
By offering incentives such as zero balances, overdraft facilities, and free life insurance, the
enrollment figures shot up, with close to 170 million accounts opened by early July 2015. The
program has relied heavily on state-owned banks, accounting for 97 percent of enrollment. It
remains to be seen how much the accounts are actually used. The push toward financial literacy
by the National Center for Financial Education (http://www.ncfeindia.org/financial-education) is
a welcome step (see also Government of India, 2009).

The Netherlands: financial literacy. In 2006 the national strategy for financial education
brought together some 40 partners from the financial sector, government, information and
consumer organization, and academia to empower consumers on financial services. Chaired by
the Ministry of Finance, the national strategy (the Money Wise Action Plan) concentrates on
increasing the financial literacy of households through the education of consumers and the
regulation of financial markets. The 2014–18 revised Action Plan focuses on managing money,
engaging in financial planning, and making well-informed decisions on financial products.

Nigeria: a multi-pronged approach. The comprehensive Financial Inclusion Strategy in 2012

aims to reduce the exclusion rate from 46 percent of the adult population (in 2010) to 20 percent
by 2020. Working across key stakeholders, the strategy seeks to address five major barriers to
financial inclusion: (1) income; (2) physical access; (3) financial literacy; (4) affordability; and
(5) eligibility. Key elements include the introduction of a tiered KnowYour-Customer approach
that balances barriers to entry with the need to ensure the integrity of the financial sector; an
active financial literacy program; strengthened consumer protection framework; enhanced
mobile payment system; and efforts to improve access to credit for small and medium-size
enterprises (SMEs), such as the introduction of a movable collateral register. (IMF, 2015b).

Peru: e-money. The authorities have taken various measures to expand access and usage of
financial services. In 2014 the “financial inclusion opportunities map,” an interactive tool, was
launched. It promotes an innovative “Peruvian model” based on the 2012 electronic e-money
legislation and a new unified mobile payments platform that links various providers of financial
services with customers. The goal is to leverage the high penetration of mobile telephone in Peru
(more than 75 percent) and create a system of mobile payments based on electronic money that
can become an access point for other financial services. The platform is expected to become
operational in 2015 (IMF, 2015c).

The United States: consumer protection and financial literacy. The recently completed
Financial Sector Assessment Program (FSAP) (IMF, 2015d) calls for financial inclusion to
feature more prominently on the U.S. policy agenda. The Global Findex survey ranks the United
States 27th out of 147 countries in terms of the percentage of adults with a bank account in a
formal financial institution, and a 2013 Federal Deposit Insurance Corporation (FDIC) survey
finds that 20 percent of U.S. households are “underbanked” and 8 percent are “unbanked.” More
work is needed to identify barriers to inclusion, especially for households and small enterprises.
The enhanced focus on consumer protection, including the setting up of the Consumer Financial
Protection Bureau, is an important part of the crisis response, and is beneficial for both financial
stability and financial inclusion. The activities of the Financial Literacy and Education
Commission are welcome steps toward improvements in households’ financial capability.
(Sahay, Čihák, N’Diaye, & Barajas, 2015)

Practices in Bangladesh

Bangladesh is a developing country in South Asia with a population of about 155 million and a
GDP of USD 115.60 billion in 2012. In spite of global financial volatility Bangladesh has
achieved commendable success in maintaining a steady growth rate of around 6% per annum in
the last decade and reducing absolute poverty in head count ratio from almost 49% in 2000 to
31.50% in 2010. The current target is to reduce poverty in the country from 31.50% at present to
29% by 2015. Bangladesh’s performance has also been impressive according to almost every
macroeconomic and social development indicator during the period. Table 1 below, which
features selected indicators, shows strong growth in Bangladesh’s economy over 2007-2012.

Financial inclusion activities in Bangladesh can be said to have started even before the
independence of the country in 1971 with the establishment of the Bangladesh Academy for
Rural Development (BARD), via the cooperative agricultural development model. After
independence, the process of including the poor into different financial benefit programs
continued under the central bank (Bangladesh Bank), various government safety net programs
and the activities of the Bangladesh Rural Advancement Committee (BRAC) - a leading NGO.
The establishment of Grameen Bank in 1983 by government legislation further paved the way
for increased robustness of the microfinance sector in the country.

Bangladesh is a pioneer in empowering the poor by broadening the base of financial access
through several types of financial institutions. Along with the formal banking sector, there are
non-banking financial institutions, cooperatives, microfinance institutions and other government
and nongovernment financial institutions providing different financial services to the poor
population.

The following table depicts the scenario of overall financial inclusion in Bangladesh of people
above 15 years in 2011.
Several financial and non-financial institutions are working to reduce the bottlenecks of the
financial system and expand financial inclusion through pro-poor development and poverty
alleviation programs. An indication of this is the diversity of lender institutions, from both
government and private sector. The table below presents the size contribution by different types
of institutions to financial inclusion in Bangladesh. (Bangladesh, 2014)

There are a variety of reasons for financial exclusion. From the demand side, lack of awareness, low
income/assets, social exclusion, and illiteracy act as barriers to accessing financial services. From the
supply side, distance from the branch, branch timings, cumbersome documentation and other
procedures, unsuitable products, staff attitudes are common reasons for exclusion. These result in
higher transaction cost and lower profitability. On the other hand, flexibility, ease of availability, and
other attractive features of informal credit make such credit popular and survive over time despite the
fact that informal credit is costlier than other sources of credit.

It is likely that the factors which determine whether or not an individual or enterprise has access to
finance will change over time. In such an event, it may be useful to group the banked and unbanked into
segments that reflect their current and possible future status as users or non-users of financial services.
One approach to such market segmentation is the ‘access frontier’ which helps to analyze the
development of financial markets over time. The access frontier gives the maximum share of the
population that has access to a financial service at a given point in time. The frontier may shift over time
due, for example, to technological and competitive changes in the market. The access frontier approach
distinguishes between users and non-users of a financial service. Further, the segment of non-users may
be divided into four groups:

 Those who are able to use the service but choose not to do so (voluntary non-users)
 Those who can currently access the service but do not as yet use it (non-users, lying within
current access frontier)
 Those who should be able to use the service in future based on likely changes in the features of
the service and the market (non-users, lying inside the future access frontier)
 Those beyond the reach of accessing the service in the near future (the supra-market group,
lying beyond the future access frontier).

For policy purposes, it would be important to identify the reasons and take appropriate actions for those
who can currently access the services but do not as yet use the services. On the other hand, the policy
needs to be focused more on two major groups of non-users: groups who are lying inside the future
asset frontier and groups lying beyond the future asset frontier.

The Policy Framework

Bangladesh’s development strategies treat financial inclusion as a powerful accelerator of economic

progress and development and an effective means for achieving the goals of reducing poverty and
building shared prosperity. During the 7th Five Year Plan, the government’s strategy should aim at
broadening the reach of the digital payment systems, particularly for the poor and in the rural areas,
and expanding the range of suitable services for the poor available in the digital systems. The approach
should involve three mutually reinforcing objectives:

(i) Reduce the amount of time and money that the poor people spend to conduct financial
transactions;
(ii) Increase capacity of the poor people to weather financial shocks and avail income-
generating opportunities;
(iii) Generate macro-level efficiency by digitally connecting the poor people, financial
institutions, government service providers, businesses, private sector and other
stakeholders.

The government effort should focus on expanding innovative ways of increasing the poor’s access to
financial services and motivating and encouraging the financial institutions to offer these services. Since
these interventions often involve technologies that need to be adapted to the targeted clients, the
strategy should support, to address this demand-side challenge, product design experiments to specify
required design and other features that will encourage the poor people to adopt and actively use digital
financial services. The government should also develop policies and regulations that facilitate these
developments.

One of the major challenges of serving the poor especially the small and marginal households is a lack of
adequate information on the kinds of financial services they need. While progress has been made on
understanding the needs of different farmer groups, particularly those with easier access to financial
markets, relatively little is known about the financial service needs of harder-to-reach segments
including the small and marginal farmers. A detailed understanding of their needs requires
comprehensive analysis of the lives of these farmers as both agricultural producers along with
participation in other informal sources of income. It is important to understand how the poor farmers
manage their cash flows, their preferences, attitudes and behaviors to determine the scope of
diversifying income sources as an effective path out of poverty. The financial service providers must also
take an active interest in serving these marginalized populations, understand how they access
information and adapt existing technologies to make that information available and, in doing so,
become productive users of financial services.

Digital Financial Services

Since the digital payment systems have already taken hold in the rural communities, the government
should work with banks, insurance companies, and other financial service providers to increase the
range of financial services that the poor people, especially the small and marginal farmers and women,
can access in digital form. As a reasonable degree of connectivity in the rural areas of the country is
already established, the efforts should be to extend the reach of digital payment systems into rural
communities and encourage the poor people to adopt these systems through digital interface.

In Bangladesh, digital finance holds an enormous opportunity for greater financial inclusion and
expansion of basic services. At present, around 115 million people own a mobile phone. As such digital
finance can be used as a powerful means to expand access beyond financial services to other sectors,
including agriculture, transportation, water, health, education, and clean energy. Obviously, digital
solutions and new technologies will offer great potential to overcome the massive challenge of
providing access to financial services to the poor and will contribute towards achieving the goal of
universal access to financial services by 2021.

It is also likely that the benefits of digital finance will extend well beyond the conventional financial
services: This will also emerge as a powerful tool and an engine for job creation in Bangladesh. The
innovations by bKash and other institutions should be further expanded during the 7th Plan for tackling
financial access and other major development challenges through adopting various innovative
approaches to digital finance. During the Plan period, delivering financial services through technological
innovations should act as a catalyst for the provision and use of a diverse set of financial services
including credit, insurance, savings, and financial education. The excluded people would come under the
purview of expanded access to money transfer services, microloans, insurance and other services.

Digital finance can also play an important role for small businesses. This will provide them with access to
finance along with electronic payment systems, secure financial products and a chance to build a
financial history. The potential of digital finance is huge especially in developing the rural areas. For
example, the government’s plan should be to use post offices, most of which are located in the rural
areas, in enhancing financial inclusion. These post offices can play an important role in effectively
delivering a variety of financial services, including banking, insurance, and remittances even in the most
remote areas of the country. The government should encourage close public-private cooperation which
will be a key factor in removing such barriers as cost, distance, and regulatory complexities.

Providing Efficient Financial Services and Products

For ensuring productive use of financial services, the government should strive for generating more
effective synthesized knowledge about the products that exist for the poor households, institutions that
provide these products, understanding the ground level realities for adopting successful and innovative
models, and what factors ensure the success of promising ideas, and why some were embraced outside
the intended target population. This will involve both development and piloting of more tailored
products and services for the poor households. The government should encourage relevant
organizations to explore ways to work with mobile network operators (MNOs) and other private-sector
actors to identify not only how technology can help drive down costs to more effectively reach poor
families, but also how different types of providers can collectively reach these households in an effective
manner.

Some recent evidence in digital financial services (DFS) for small and marginal farmers suggests that it is
important to

(i) identify pain points in serving small farmers such as the cost and risk of making payments to
the farmers and delivering subsidized credit;
(ii) (ii) discuss how DFS are being used to overcome these pain points; and
(iii) (iii) highlight the initial obstacles and successes. Given the rapidly developing state of DFS
for the small farmers, it is important to realize that while DFS via mobile channels offer great
promise for improving the lives of small farmers and their families, significant challenges still
remain.

One key obstacle is the limited penetration of mobile phone among the small and marginal farmers
suggesting the need to adopt different forms of technology. Moreover, receptiveness to DFS via mobile
channels among the small farmers would vary depending on their experience with mobile phones in
general and with mobile money services in particular. This indicates that the success of mobile-enabled
DFS would depend in large part on factors such as extent of mobile money adoption and experience of
small farmers in using mobile phones for services such as messaging and agricultural information. In
addition, there is also a need to complement current DFS innovations with other innovations that are
based more solidly on financial needs, behaviours and aspirations of small and marginal farming
households.

The fact remains that the specific characteristics of different groups of rural households and their
demand for financial services are still not well understood and the risk of extending credit to these
groups is perceived to be higher due in part to the inherent risks of agricultural operations. The small
size of most of their transactions have also made it very difficult to capture savings, channel
remittances, build money transfer systems, and offer individual micro-insurance products. On the other
hand, significant opportunities of improving access to financial services do exist, as shown by positive
experiences across a wide range of delivery channels, products, and financial service providers. Financial
service providers have learned a great deal about how to manage microloans to poor households and
get regular repayments. With enhanced effectiveness and profitability, the private sector institutions
have also been steadily expanding their role in providing financial services to the poor along with
embedding credit within a bundle of other goods and services (e.g. seeds, inputs, weather information,
insurance) to secure sustainable agricultural production.

It also needs to be recognized that the challenges of providing financial services that provide effective
support to the multiple goals of poor rural households are complex. In view of such complexities, it may
be useful to characterize, as precisely as possible, the demand for financial services of the small farmers
related to both farm and nonfarm operations within a segmented framework. Now-a-days smart phones
and other devices provide useful resources made available by the Internet which are yet to be tapped by
the poor and rural agricultural communities. Effective use of these resources can open up tremendous
opportunities to increase farm-level efficiency and empower the poor farmers to better use and share
data that are critical to their economic and social welfare. More importantly, mobilizing such
technologies will facilitate the provision of financial services to the small and marginal farmers.

Developing a broader range of quality, transparent, and affordable financial services, based on informed
needs of different poor groups, is an imperative of financial inclusion in Bangladesh society. The
government strongly believes that all people should have access to: savings, payments, credit, insurance
and other financial services as required by them. Ensuring the availability of a broader range of services
and products will benefit both the recipients and the financial service providers. Through effectively
responding to the needs of the people with the right range of products, the providers would also be able
to deepen their relationships with the service recipients, broaden their market share, expand their
business in a socially responsible manner and reduce their own risks. The need for a diverse range of
products is not new and the financial institutions in Bangladesh have already started exploring ways to
offer a full set of services that the recipients would find useful over time. While the government should
encourage such efforts, new ways of thinking about diverse offering of financial services to the low
income people should be given priority. In this respect, the relevant strategies should highlight three
core requirements for unleashing innovations in product development: (i) incentives: encourage the
management to invest in research and development for innovation and risk appetite; (ii) organizational
capacity: provide necessary support for integrating systematic ways to interact and learn from the poor
groups of their product development needs and management buy-in; and (iii) regulatory environment:
bring about required changes, as necessary, in the regulatory environment so that it allows for, and
encourages, the development of new products and approaches to financial inclusion and for product
innovation to flourish.

Barriers and policies to increase access

Like in most other developing countries, the access to financial services is still limited in Bangladesh. It is
estimated that about 46 million of the country’s adult population still remain excluded from accessing
financial services who are mostly the poor individuals. The lack of financial access for the poor has been
addressed, to a large extent, by rapid developments in the microcredit sector and speedy expansion of
the microfinance institutions over the past few decades in Bangladesh. These institutions have managed
to provide financial services to a significant number of the country’s poor including the poorest along
with achieving good repayments. However, still significant efforts are needed to build inclusive financial
systems in the country. This includes, among others, taking full advantage of the technological advances
in developing financial infrastructure and architecture to lower transaction costs, encouraging
transparency, openness and competition to encourage the financial institutions to expand service
coverage to the excluded groups, and enforcing prudential regulations to provide the financial
institutions with the right incentives to move towards developing an inclusive financial sector.

Mechanisms of microfinance

Microfinance supplies small loans and other basic financial services to the poor in recognition of the fact
that the poor people need these services (e.g. loans, savings, insurance and money transfer services) for
improving their socioeconomic conditions and moving out of poverty. In Bangladesh, a country which is
the mother of microcredit and the land for its successful innovation, microfinance has proven to be a
powerful instrument for sustainable poverty reduction, enabling the poor to accumulate assets, boost
their incomes, and reduce their economic vulnerability.

In Bangladesh, several high-performing microfinance institutions, including government agencies and

the NGOs, have developed innovative methodologies to extend credit, savings and other services to the
poor clients. Moreover, advances in information technology offer the opportunity to lower the cost and
risk of providing microfinance to the poor. The overwhelming majority of the country’s microfinance
borrowers are women. The microfinance borrowers, however, form a diverse group which includes
female heads of households, self-employed individuals or small businesses, pensioners, displaced
people, retrenched workers and small/marginal farmers and other informal sector participants all of
whom generally remain excluded from the traditional banking system and rely on informal delivery
systems for their financial services.

The role of the government should be to assist in improving the functioning of the microfinance sector
especially through developing institutional and technical capacities especially at the level of retail
microfinance financial institutions (MFIs). This will contribute greatly towards developing the domestic
financial systems that serve the poor. The efforts will encourage the microfinance institutions to take on
risks that traditional financial institutions would not usually share. Such efforts would enable the poor to
push the frontier of poverty outreach away and extend the supply of financial services to people in
remote areas. Such efforts would also include mechanisms for adopting digital technologies for
improving service delivery and payment systems and further improve the microfinance environment
having a sound legal and regulatory framework at the macro level.

Information on Best Practices

Regulatory authorities in the financial sector should document best practices in mobilizing financial
resources and providing credit and other financial services especially to the poor and under-served or
un-served regions or households. Disclosure of such information among the financial and lending
institutions will encourage other institutions to participate in the process.

Financial Literacy

Although intensity of access to financial services is relatively high in the country, it does not necessarily
indicate that all households, especially the poor, have complete information and knowledge about
financial services. In many cases, they may not be aware of the available services or how to access these
services. For instance, literacy level is quite low in the case of insurance services. Awareness about
financial services needs to be raised through different programmes including advertisement and
campaign.

Partnership between Formal and Quasi-Formal Institutions

In the present situation, formal banks and financial institutions have significant limitations in extending
financial services to the unbanked areas and un-served or under-served households due to the
dominant production technology they use and the cultural orientation they possess. In this respect, the
quasi-formal financial institutions have advantages and they have achieved commendable progress.
Thus the formal financial institutions have more resources while the quasi-formal institutions have
higher level of capability and efficiency. Developing partnerships between the formal and the quasi-
formal financial institutions can create an effective mechanism to reach out to the poor and un-served
regions, households and enterprises.

Transaction Cost of Borrowing

Transaction cost is one of the major determinants of access to finance. Transaction cost of borrowing
matters in intensity of access to finance and determining the loan size. For the formal financial
institutions, transaction costs may be reduced through adopting a number of supply side actions such as
increasing bank branch density and improving efficiency of their operation through innovation in loan
production technology e.g. minimizing waiting period for loan sanctioning and focusing on better
governance so that efficiency is increased and illegal transaction cost is reduced for the borrowers.

Learnings from MFIs and Informal Market

Experience of the MFIs and the informal market suggests that credit services can be rendered even to
the extreme poor households without any collateral and third party guarantee. The reason is that the
loans are provided under intensive monitoring mechanisms along with appropriate incentive structures.
The experience also suggests that loan products can be diversified in the formal financial sector. The
formal financial institutions (especially the banks) may learn lessons from these experiences to adapt
their activities accordingly. The risk on the part of the lending institutions can be significantly reduced
through strengthening the Credit Information Bureau and decentralising its operation to facilitate quick
generation and dissemination of relevant information.

Promoting a Competitive Financial System

Bangladesh Bank should develop an enabling environment for creating a competitive financial system
with appropriate incentives and governance system so that banks can provide financial services ensuring
a high degree of efficiency. In practice, the non-interest cost of borrowing is seen to be higher for the
public sector banks relative to the private sector ones. In addition, the moral hazard problem is a
dominant issue in the public sector financial institutions especially in the agricultural development banks
(BKB and RAKUB). The government and the BB should take prudent action to fix the problem and create
a congenial environment so that the borrowers are able to receive services at low cost and the
depositors can get a fair return.

In Bangladesh, a number of policies and measures have been taken in recent years for improving the
access to financial services especially for the poor which have significantly improved the situation. The
SCBs and DFIs have already opened a total of about 9 million new Tk. 10 accounts for the farmers. These
accounts will help the government to make direct payments of subsidies or other benefits to the
accounts of the recipients. The operation of these accounts will also encourage these basic bank account
holders to go on to buy other financial products and thus stimulate the demand for other financial
services. It is likely that the opening of farmers’ accounts will facilitate these farmers to move to higher
levels of financial transition leading to greater financial inclusion. For the purpose, just opening the
accounts is not adequate, the challenge is to keep these operational and active.

In addition, several other issues should also be considered during the 7th Plan period for effectively
addressing the challenges for promoting adequate access to financial services by the poor.

The measures adopted so far for enhancing access of the poor to the formal financial system are mostly
driven by regulation by the BB or other institutions. These measures seldom reflect the initiatives of the
banking and other financial institutions. It is important to promote ownership of the initiatives in order
to ensure their sustainability.

 Although the situation has improved significantly, the current measures fall short of
satisfactorily addressing the demand side problems of the financially excluded sections of the
population. It must be recognized that access to financial services has both demand and supply
side dimensions and both need to be recognized.
 The traditional approach of the formal banks and financial institutions under which the clients
come to the institutions rather than financial institutions going to the households and firms
needs to be reversed with pro-active efforts by the banks to expand access to financial services.
 For improving the access to financial services, the present focus on women needs to be further
strengthened along with developing women-friendly financial products and services.
 There is a need to adopt measures to improve financial literacy and establish credit counseling
centres especially targeting excluded population groups and regions. Similarly, relevant
 authorities should organize regular and extensive training and skill development programmes on
different aspects of financial inclusion for the financial service providers.
 The relevant authorities (e.g. BB) should develop financial inclusion programme similar to the
mandatory agriculture/rural finance programmes. All banks operating in the country would be
required to participate in the programme and each bank should be assigned specific under-
banked districts/areas where promoting financial inclusion will be its responsibility which would
be monitored by the BB using rational and measurable indicators.
 For promoting access to financial services at the required pace and breadth, BB should develop
and adopt a comprehensive and detailed guideline for creating inclusive financial system
involving the formal banks and financial institutions.
 New strategies and efforts are needed to enhance the role of the postal banking system as a
viable and efficient alternative financial service provider especially in the rural areas of the
country.
 A strengthened insurance sector can play an important role in providing financial services to the
population including the poor for which huge potential exists. Although more than 60 insurance
companies operate in the country, their outreach is quite limited. Efforts are needed to
transform the insurance sector into a dynamic one through introducing poor-friendly products
and proper monitoring of its operations by strengthening the Insurance Regulatory Authority
(IRA).
 For improving the access to financial services in remote and disadvantaged locations including
char and haor areas, a number of policy initiatives are needed such as exploring more viable
solutions to the problems in char and haor areas, enhancing capacity of the formal financial
institutions to serve these areas in a flexible and cost-effective manner, creating partnership
between formal and quasi-formal institutions and developing customized financial products to
meet the specific needs of the char/haor dwellers based on the experience of the MFIs.

Overall, a wide variety of policy initiatives are needed for scaling up the delivery of formal and quasi-
formal financial services to the population. This will help improve the access of the poor and low income
families to financial services and prevent serious problems related to non-availability of credit such as
falling into debt traps or losing one’s productive assets. In this respect, the private sector has an
important role to play in better serving the poor households. For example, bank accounts tailored to the
needs of the poor households (e.g. low fees, no minimum balance) will expand the poor’s use of formal
financial services. A greater presence of formal financial institutions in rural areas and low-income
neighbourhoods may also be important. Currently quasi-formal and informal financial service providers
outnumber bank branches in these areas.

Of course, the public sector can do many things to increase savings and greater use of formal financial
services among the poor households. A key public sector role should be to work closely with the private
sector encouraging and incentivizing financial institutions to serve the poor and lower-income
populations. Greater financial education for these households is a priority. The government and the BB
can also play an important regulatory role, which includes overseeing financial providers to ensure that
they provide a range of poor-friendly financial services and implement better protections for the poor
financial service receivers. The public sector could also encourage saving by low-income families through
implementing different incentive mechanisms and matched savings plans. It must also be recognized
that the country’s formal financial institutions are not well designed to encourage access to financial
services by the poor and low-income households. To the extent the relevant policies want the poor
households to have the access to financial services to ensure their economic empowerment and better
livelihoods, the need would be to create their access to banking, credit, and savings institutions that are
available to the rest of the society. (Mujeri, 2015)

Financial development

Bangladesh’s financial system has undergone two decades of reform, enabling marked progress in the
mobilization of savings and the growth of credit to the private sector (see Figure 2). Bangladesh’s
financial system is bank-dominated, with 56 banks with assets totalling 8 trillion Taka (US$100 billion),
including 4.2 trillion Taka of loans and advances. 62% of assets are held by private commercial banks,
26% by state-owned commercial banks and 6% each by state-owned development finance institutions,
and 6% by foreign commercial banks. The sector has been strengthened through diversification and
greater market orientation. While financial reforms have strengthened the performance of the banks,
they remain constrained by tradition and risk aversion, and are focused mainly on providing loans based
on collateral or for working capital. Non-banking financial institutions such as leasing companies also
play an increasingly important part in the financial system. There have also been institutional and
regulatory changes in the capital market, with two stock exchanges. However the bond market remains
dominated by fixed income government debt instruments and the corporate bond market is at a
nascent stage. This lack of long-term savings and investment vehicles impacts on infrastructure
financing, especially investments in power and housing.
Notable progress has been made in promoting greater financial inclusion. Bangladesh has been a leading
innovator in the development of microfinance and these loans are now equal to 3% of GDP. Currently,
four out of five households in Bangladesh have access to financial services mainly because of the
improvements in the networks of banks and microfinance institutions as well as a booming mobile
banking segment. Access to financial services, including insurance, stood at over 79% in 2014 and
continues to grow.

Policies to advance financial inclusion in Bangladesh

Bangladesh has been at the heart of the development of microfinance over several decades with
many small and large players involved. However, financial inclusion of its largely rural
population remains a key challenge. In 2013, the Bangladesh Bank implemented several policies
to promote access to finance by vulnerable populations, small farmers and SMEs. This included
requiring all banks to provide rural credit and ‘10 Taka’ accounts available with a minimum
initial deposit equivalent to US$0.12 and to open one rural branch for every new urban branch.
These requirements were backed up by provision of concessional refinancing. Technology has
played a key role in broadening access to finance, including through the development of online
access to the Credit Information Bureau (CIB) and national automated payment clearing system.
One private sector-led initiative for financial inclusion is bKash the country’s fastest growing
mobile money provider.9 It is a joint venture of BRAC Bank and Money in Motion LLC, USA
with investment from the Bill & Melinda Gates Foundation and the IFC. The Bangladesh Bank
played a role by allowing bKash sufficient regulatory space to create a new line of business
while still remaining within the broader umbrella of the BRAC Bank. (Halle & Silva, 2015)
Regulatory Initiatives for Financial Inclusion in Bangladesh

The approach to Financial Inclusion in developing countries such as Bangladesh is somewhat

different from the developed countries. In case of developed countries, the focus is on the
relatively small share of population not having access to banks or the formal payment system.
Whereas in Bangladesh, we are looking at the majority who are excluded. Dr. Atiur Rahman,
Governor, Bangladesh Bank reiterated, “Financial Inclusion is a high Policy Priority in
Bangladesh, for faster and more inclusive growth.” According to the Governor, in view of no
widely adopted uniform definition, financial inclusion is reckoned in Bangladesh as access to
financial services from:

 Officially regulated and supervised entities (banks and financial institutions licensed by
Bangladesh Bank, MFIs licensed by the Micro-credit Regulatory Authority, registered
co-operatives), and
 Official entities themselves (post offices offering savings, money transfer and insurance
services, national savings bureaus).

In terms of above guideline, despite substantial bank branch expansion and increase of
membership of MFIs and other institutions, about 25 percent of adult population is still
financially excluded. In terms of banking credit related indicators also, the state of financial
inclusion is not encouraging. For example, in Bangladesh, the access of people involved in
agriculture who mostly live in rural areas to banking services is not sufficient with respect to
their contribution to GDP. In FY13 the share of agriculture sector in GDP was around 19 percent
whereas the share of advances in total advances to this sector stood at only 6 percent. A
substantial proportion of the households, especially in rural areas, is still outside the coverage of
the formal banking system and is therefore, unable to access mainstream financial products such
as bank accounts and low cost loans. In terms of opening bank branches, it has been made
mandatory that for one urban branch must be accompanied by one branch in rural areas to
encourage bank business there. In spite of the existence of 58 percent of total bank branches in
rural area, the shares of rural bank branches in total deposits and advances were 18 percent and 10
percent respectively as of June 2013 which indicates a very low exposure of rural people to the formal
banking system.

Institute of Microfinance (InM) conducted a survey on “Access to Finance” in 2011, which shows:

 About 77% of the households have access to any kind of financial services;
 Access to formal financial services in only 37%;
 Nationally, 54% of the households have access to any credit;
 Only 8% have access to formal credit;
 In terms of savings, only around 57% household have access to any savings;
 Access to formal savings is shared by only around 28% households

BB has taken strong initiatives in the last few years to widen the coverage of banking services,
especially by including the disadvantaged section of the society in the formal financial system.
Along with moral suasion, a number of policy measures covering opening of bank branches,
deposit and credit products, some of which are very innovative for our banking system, have
been taken in this regard. These include: changing of branch opening rules from 5:1 to 1:1 (for
opening 1 urban branch, 1 rural branch is to be opened), availability of highest quality banking
services to farmers by allowing them to open banks account with minimum initial deposit (Tk.
10 only); issuing branch licenses to all SME/Agriculture service centers; easy and effective
access to banking services for physically incapable people, hard core poor, unemployed youth,
freedom fighters etc.; relaxing conditions of loan repayment and providing fresh facilities to
natural calamity affected farmers; mandatory participation in agriculture/rural credit for all banks
including PCBs and FCBs; provision of agriculture credit to sharecroppers; formulation and
implementation of Agriculture and SME Credit Policies and targets; putting emphasis on
financing women entrepreneurs; arranging refinancing schemes for banks; developing ICT
solutions (mobile banking, smart card etc.) for inclusive banking; encouraging creative
partnership between banks and MFIs; Agent Banking, policy guidelines for Green Banking and
introduction of financial inclusion oriented CSR, School banking, arranging cross country
banking road show etc.

Bangladesh law permits children aged 14 and over to engage in non-hazardous work, but their
economic activity had been unmatched by services that enable their money to work for them.
Financial exclusion creates a particular paradox for working and street children in that their
resourcefulness and industry may even undermine their security with their wages making them
the target of thieves and cheats.

A scheme pioneered by Bangladesh’s central bank, the Bangladesh Bank (BB), hopes to change
their situation. The bank introduced a service in June that allows children to open a savings
account with participating banks for as little as 10 Taka (7p). Bank governor Atiur Rahman said
the initiative aims to “prevent the derailment of street children through developing their financial
position”.

“Permitting children to open bank accounts will hopefully lead to a higher level of physical
security [for them], and bring relief from the fear of their hard-earned money being taken by
others,” adds Michael McGrath, country director of Save the Children, which had lobbied BB
since 2011 to extend its financial inclusion programme to marginalised children.

The policies and measures which have been undertaken so far in Bangladesh in the context of
inclusive banking are of course essential and in the right directions and have already started
creating positive impacts. For example, by this time, government owned commercial and
specialized banks have so far opened 96 lakh 10 Taka farmers’ accounts. It is obvious that
opening of these accounts will help our government to migrate from paper based payments of
state benefits (which is really very time-consuming and sometimes inhuman on the part of
beneficiaries) to direct payment into accounts. Ultimately, these accounts are expected to play a
key role in stimulating demand for other financial products. In the context of Bangladesh, it is
expected that these farmers account can facilitate a transaction to higher level of financial
transition, which in turn can lead to greater financial inclusion. Moreover, BB has undertaken
one refinancing scheme of Tk. 200 crore for financing Tk. 10 account holders at easy terms with
a view to make rural economy vibrant through keeping Tk. 10 accounts active. Likewise, volume
of SME financing (as a tool of financial inclusion) by the banks has increased manifolds. For
example, in 2009, BB target for SME financing was only around Tk. 24,000 crore and it
increased to around Tk. 75,000 crore in 2013 and moreover, achievement was 115%. Now, SME
loans constitute around 30% of total loans and advances. A lot of entrepreneurs are getting
substantial amount of SME loans and every bank has got SME dedicated and women dedicated
SME desk. One Bangladesh Bank study shows that SME loans have a number of positive
impacts on Bangladesh economy in terms of employment creation, improvement of living
standards, women empowerment, and contribution to GDP etc. For coordinating and reinforcing
the financial inclusion efforts, BB has converted the Agricultural Credit Department into
Agricultural Credit and Financial Inclusion Department and created two new departments
namely, SME and special Programs Department and Green Banking and CSR department.
Finally, all these financial inclusion efforts have direct and indirect effects on the promotion of
financial stability of the country.

Future Challenges

There are some issues which should also be taken into consideration for effectively addressing
the challenges for ensuring sustainable inclusive banking in the country. These are:

i) The inclusive banking measures are bank-led and regulatory driven. These are not
really spontaneous initiatives on the part of banks and financial institutions, without
which sustainability of inclusive banking cannot be established.
ii) The measures so far taken are still not fully able to address the demand side problems
of the financially excluded sections of the population. Financial exclusion is not only
a supply – side problem.
iii) Banking approaches to the financially excluded people are to be changed. Here, banks
should go to the public, rather than customers coming to them.
iv) Women focus of the inclusive banking measures must be maintained.
v) Initiatives in regard to financial literacy and establishment of credit – counseling
centers are very necessary, but these are absent in the Bangladesh context. Not 10
only for excluded people, even the financial service providers should also undergo
extensive and continuous training on financial inclusion. This subject matter
(financial inclusion) should be incorporated as a key segment of the initial training
received by frontline branch and other customer contact staff.
vi) Like mandatory agriculture/rural finance programs, all banks operating in Bangladesh
may be asked to participate in financial inclusion program for which the
responsibility of different unbaked/underbanked districts/areas should be allocated
among the banks on the basis of some rational criteria.
 vii) Finally instead of giving piecemeal directives, the central bank should provide
detailed guidelines of inclusive banking to all formal banks and financial institutions.
(Ahmad, 2014)

Maya Declaration

The AFI network commitment to financial inclusion

Joint commitment made by Bangladesh Bank, Microcredit Regulatory Authority, and Ministry of
Finance of Bangladesh

Bangladesh is committed towards broadening financial inclusion for unserved, underserved and
left out segments of the population. Bangladesh Bank, the central bank of Bangladesh, has been
engaged in financial inclusion initiatives since 2009. Microcredit Regulatory Authority (MRA)
the regulator for the MFIs is also engaged in the financial inclusion agenda. Ministry of Finance
(Banks and Financial Institutions Division) has also joined in the FI initiative. WE all the
member institutions from Bangladesh firmly believe that through accelerated broadening and
deepening of financial inclusion initiatives in the society we can move towards inclusive
economic growth where the growth pie would be shared more equitably.

During the last year Bangladesh has made remarkable progress in financial inclusion indicators
and has almost accomplished the MAYA commitment made in GPF 2013. To step up Financial
Inclusion initiatives in the country Bangladesh further commits to march forward with strategic
focus on financial education, financial consumer protection, mobile financial services and
financial inclusion strategy initiatives.

By the end of 2015, Bangladeshi member institutions of AFI further commits achieve the
following landmarks

 Bangladesh Bank
 Draft National Financial Inclusion Strategy will be finalized by 2015;
 Formulate comprehensive consumer protection guidelines by 2015;
 Survey on MSME Financial Inclusion indicators by 2016
  Usage of Mobile accounts in salary disbursement (including RMG workers), inward
remittances and utility bills payment will be increased by 10.00 million transactions from
its current level 50.00 million;
 5000 schools will be brought under the MFS for collection of school fees from the
students through engaging local administration, MFS providers and school authority;
 Direct Green Finance will be increased to 5% of the total funded loan disbursement in the
banking sector from its current level of around 1% on an annual basis;

Micro Credit Regulatory Authority

 925 MFIs will be given capacity building training by MRA

 40 MFIs will be given permission to act as MFS agent by MRA
 Depositors Safety Fund (DSF) and MFI Credit Information Bureau will be made
operational by 2016 by MRA;
 Micro Credit data base will be established by 2015 by MRA
 A survey will be conducted to elucidate usage and quality of financial inclusion of MFI
sector by 2015 by MRA;

Ministry of Finance (Banks and Financial Institutions Division)

 All state owned commercial banks will be brought under national payment switch (NPS)
by 2015;
 All state owned commercial banks will operate under online transaction system by 2016;

Bangladesh Bank

 At least 5 financial services access points per 10,000 adults at the national level;
 90% of adults with at least one type of regulated deposit account;
 30% of adults with at least one type of regulated credit account;
 14% of adults with at least one mobile financial services account; and
 32% share of SME and agriculture financing to total financing by banking sector.
Practices by Banks in Bangladesh

With the directive from BB, SOCBs opened 9.13 million new accounts for rural farmers with a
nominal deposit as low as Tk. 10 for receiving direct transfers of government subsidy and also
for savings and transaction purposes. In 2010, about 81 per cent banks (75 percent SOCBs, 100
percent DFIs, 80 percent PCBs and 78 percent FCBs) have undertaken credit programs for
speeding up financial inclusion. Out of these programs- self-employment credit and SME
lending programs were participated by about 79 percent banks covering 75 percent SOCBs, 75
percent DFIs, 80 percent PCBs and 78 percent FCBs; Installation of biomass processing plants
and effluent treatment plants (ETPs) in manufacturing establishments was financed by 40.42%
banks (25 percent SOCB, 25 percent DFI, 50 percent PCBs and 4.25 percent FCBs); Agricultural
loans to small landholder farmers mainly through their rural branches for diversified production
of crops, oilseeds, spices, vegetables, fruits, etc. were provided by almost all the banks (BB
2011).
Figure-4 shows the composition of urban and rural bank branches in our banking sector. It is
found that number of both the urban and rural bank branches showed increasing trend over time.
Traditionally, share of rural branch is higher than urban branch in our country. It is a positive
sign for financial inclusion without any doubt. But, we observe a slightly declining trend in the
share of rural branch during the last 10 years.

EBL Perspective

Approach to Sustainability

The principles of sustainability are increasingly getting integrated with business practices of the
bank. Adoption of the triple bottom-line ethos – 'People, Planet and Profit' – thereby is the
essence of competitive advantage and sustainability leadership. We believe that responsible
banking addressing social, environmental and financial conditions are key to long term success
and beneficial for immediate community that includes our clients, employees and the place
where we operate. The following diagram shows our sustainable business priorities.
Contribution to real economy

Obviously, the way of promoting sustainable growth in the real economy is our core business of
banking. Offering ethical and appropriate product to the right customer is the principal
philosophy of our business models. We are working to widen access to finance in our markets
focusing on un-banked and underserved population. We are determined to prevent our products
and services from being used for criminal financing activity, which can erode the positive impact
of banking on the economy. We have started our journey towards sustainable financing by
supporting cleaner and efficient energy projects and programs.

Financial Inclusion

Millions of people across the country remain unbanked or have limited access to banking
services. We continue to explore new ways of increasing financial inclusion. Small and medium-
sized enterprises (SMEs) played crucial role in generating jobs and economic growth in
Bangladesh. In 2012, we continued to demonstrate our support for SMEs, increasing our lending
to the sector by more than 28 percent to BDT 13.39 billion, and enhancing our SME products
and services. We remain committed to agricultural and rural credit (micro finance) as a means of
increasing financial inclusion in the country. Our approach is to support this sector by providing
a range of financial services to microfinance institutions (MFIs) as well as through our own
branch network. During 2012, we have provided a total of BDT 2,347 million to MFIs to serve
financial needs of 81,584 individuals (including pre-finance from Asian Development Bank).
EBL channeled low cost fund from ADB to MFIs for financing farmers and rural population
taking the credit risk on its own. Last year the bank utilized BDT 667 million that reached to
11,592 individuals via different.

Challenges

For policy purposes, it is important to identify the key barriers that prevent the people especially
the poor and the low income and disadvantaged groups from accessing financial services which
is critical for raising their productivity and income. In this respect, in addition to accessibility,
affordability and eligibility are also important considerations which indicate the nature and
significance of the barriers to accessing financial services.

Poor banking infrastructure: Keeping in view the number of financially excluded people, in
Bangladesh, about half of the adult population is unbanked (48.49 percent) in terms of deposit
accounts in the banks. The major barrier is geographical or physical access measuring the
average distance from household to bank branch; however, the branches per 1,000 square
kilometers could be used as crude indicator for providing an initial idea to the barriers of
inclusion. For example, Spain has 96 branches per 100,000 people and 790 branches per 1,000
square kilometer, while Bangladesh has less than 7 branches (or ATM) per 100,000 population
and about 67 branches (or ATM) per 1,000 square kilometer. A large section of the population
who do not have any physical access to the banking services are in rural and remote areas in the
country.

Lack of proper documentation: Another barrier is lack of proper documentation including ID,
proof of domicile and reference letter required to open a checking or savings account in
Bangladesh, where many people do not have such documentation.

Inadequate financial literacy or education: Financial literacy and awareness are very low in the
country, particularly in rural areas; it makes a large segment of household difficult to get
financial services from the banking system in terms of savings, credit and payments.
High requirement of minimum balance: Many institutions have a minimum account balance
requirement or fee for opening checking or savings account; 14 consequently, many lower
income people faces difficulty to maintain such balance enforcing to exclude themselves from
the financial services. Though minimum amount to open a checking or savings account (2.28 and
0.89 percent of GDP per capita respectively) is lower in Bangladesh, it could be free for the poor
people for broadening the extent of financial inclusion.

Poor level of technological infrastructure: As a competitive and cost effective strategy, major
banks focuses on large scale of loans instead of providing services for small size of loan; as a
result, rational business decisions prevent a major portion of people from accessing loan services
including SME and agriculture loan. Promoting technological and institutional innovations as a
means could expand the financial system access and usage; however, less than 4 people per
1,000 populations in the country are using credit cards indentifying the technological and
infrastructural weaknesses.

Low income: There is still a large section of household in the country, particularly in rural areas,
having extremely low level of income; therefore, those people are un-served from any financial
institutions.

Lack of suitable product structure of banks and MFIs: Appropriate financial products need to
develop in reaching the unbanked population to the formal financial system.

High cost of product: The cost of product of MFIs compared to that of banks (interest rate) is still
high indicating another important barrier for financial inclusion.

Absence of credit bureau and insurance of MFI borrowers: Spreading of outreach by MFI is
quite impressive in rural areas. But, there is no credit bureau for identifying overlapping
borrowers and their indebtedness. At the same time, there is no micro insurance for credit
borrowers. (Mujeri M. , 2015)

Recommendations

South Asia‟s population of more than 1.5 billion has a high concentration of poverty-ridden
people including small farmers, micro and small entrepreneurs. Despite there being substantial
expansion of microfinance and SME activities in different parts of the SAARC region, a number
of people are still extremely poor. The central banks of the SAARC region can initiate policies
targeting low income populations by introducing agriculture and rural programs under a
comprehensive monitoring strategy. In this regard, loans to sharecroppers and small enterprises
introduced by the BB has been contributing not only to achieving wider coverage of financial
inclusion in Bangladesh but also to reducing the high dependence of small and marginal farmers
on non-institutional sources. Moreover, the Microcredit Regulatory Authority (MRA), the
regulatory and monitoring body for microfinance institutions in the country, has capped MFI
interest rates.

Recent global financial crisis identifies the weaknesses of financial markets routed in
institutional flaws like absence of good credit appraisal, risk management etc. An efficient and
organized financial sector can contribute to economic growth through savings mobilization and
capital formation. Governments and central banks have an important role to play to avoid
pervasive market failures and financial inclusion could help overcome frictions in the market
mechanism by expanding coverage to poor and underprivileged people. A comprehensive plan
for the financial sector may be undertaken by the monetary authorities of SAARC countries to
provide access to those who are excluded from formal financial systems.

Technology is now playing a key role in the banking services in terms of cost and time
efficiency; moreover, outreach population and credit delivery in rural areas can be addressed
easily through technology. The issue of technological innovation and its infrastructural
development needs to be a priority for the countries in this region for reaching to the mass people
within the inclusive financial system aiming at rapid reduction of poverty in terms of food
security, human development etc.