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In Bangladesh access to finance is low: why?
Published : Saturday, 07 September 2013
In Bangladesh access to finance is low: why? :: Financial Express :: Financial Newspaper of Bangladesh
Chowdhury Mohidul Haque
Researchers used to mention that access to finance is low in Bangladesh. Some people say only 13 per cent of the household has access to finance either formal or informal. Some other people say that the situation is changing rapidly due to introduction of technology in the financial industry and the access to finance has increased up to 17 per cent now. Unfortunately, neither the central bank nor the department concerned of the government made any attempt to undertake a study or survey to determine the actual position of the financial access in Bangladesh. There are some think-tank organisations that provide lots of information on economic policy and politics. But they seem not very interested in doing such a very fundamental survey on access to finance. BIDS which is a government-owned research and study organisation also could take initiative to study this fundamental issue of financial access.
Everybody will agree that estimating and measuring financial access is difficult due to its complexity and non-availability of statistical data. Now, access to finance is measured by using the number of deposits and loan accounts. This kind of simple measurement of financial access is incorrect and imperfect.
Once, the central bank issued instructions to all banks to open bank accounts by taking deposit of Taka ten only and over 100,000 accounts were opened rapidly within a year. The central bank claimed it as a 'success' towards enhancing financial inclusion. But some commercial bank officials expressed their anguish and unhappiness because of undue pressure from the central bank to open such accounts at Taka ten only where the average cost of account opening comes to Tk 100 and termed it as a 'stunt'. Though we do not have a specific survey and information, there is no doubt that the financial access situation is low in Bangladesh.
What is meant by
'access to finance'?
Access to finance is a situation where individual, business or enterprise can access financial services which include deposit, savings, loan, payment, trade, insurance and other financial services. Individuals who have no access to financial service are called 'unbanked' and individuals who have limited access called 'under banked'. Access to financial services is important for the growth of business, employment generation and overall growth of the economy. Therefore, the government should pay attention to the financial access situation of the country for the purpose of economic growth.
What are the barriers to enhance access to finance in Bangladesh?
There are a number of barriers towards access to finance. These are economic, social, institutional and regulatory. Conventionally, commercial banks are the dominant providers of financial services. Then come the licensed non-bank financial institutions, micro finance institutions, NGOs, co-operative societies regulated by the central bank or the government. In addition, though not licensed, money lenders also play a very important role towards informal financial services in rural areas. The availability of financial services is a constraint, for example, due to physical access, affordability or eligibility.
In Bangladesh, over 50 commercial banks having about 8,000 branches do operate in urban and rural areas. Over 1,000 microfinance institutions and NGOs and over 500 co-operative societies also operate in accepting savings and providing loan services mostly in rural areas. Due to introduction of mobile financial services and installation of ATMs, the financial services have expanded further. Along with the growth of the economy and economic activities, the expectation of the people for financial services has also grown. In spite of all these initiatives, access to financial services is still considered low in Bangladesh.
What are the reasons
for low access?
Poor people living in the rural areas or slums do not get access to formal financial services. They are unable to reach the doors of the bank branches. Poor people of physical labour do not get access to banks. Ethnic minority living in the hills or plains also find difficulties to get access to formal financial services. So, these people are excluded from formal and sometimes from informal financial service. It is generally believed that commercial banks are interested to serve the rich people and corporate business houses. Private commercial banks prefer corporate and financially rich clients. They have retail business, but they put less importance on retail business. They do corporate social responsibility activities but they do not usually serve the low income people. On the contrary, state-owned commercial banks and specialised banks are mandated to provide financial services to the low income and rural people. Surprisingly, most of the defaulter corporate businesses are the clients of the state-owned banks. When the question of big project financing arises, these people will go to the state-owned banks, not to private banks. The current crisis in the banking sector was created by some unscrupulous business corporates. No doubt the officials concerned of those banks, in some cases the boards, are also responsible for these kinds of corrupt transactions. Formal or informal financial institutions always intend to serve economically strong sect of the population.
Why new comers do not
get easy access?
High rate of interest on lending and imposition of various charges by banks discourage new entrepreneurs to borrow from the banks. The complexity and difficulty in opening a bank account act as a deterrent to go to a bank. KYC standard also proved counter productive. Further, easy access to bank account information by some agencies like, ACC, NSI and NBR also discourage individuals to put their money in their banks. It is presumed that both the regulator and the banks failed to protect confidentiality of bank account information. The trust on the banking system has been shaken due to such undue intervention.
The government has put emphasis on SME financing. The central bank took active steps to implement the government policy of SME financing seriously. During the last few years both SME financing and agricultural credit disbursement targets said to have reached up to expectation. But it was observed critically that real disbursement and recovery position are not reflected in the statements sent to the central bank. As a matter of practice in agricultural credit, due and overdue accounts are adjusted by providing new loans and shown as recovery and disbursement. Similarly, all trading and commercial loans including working capital loans are shown as SME loan disbursement. It is also observed from the field level transaction that SME branches of some banks charge very high rate of interest and commission. Some banks deduct the first instalment at the time of disbursement of the loan which is irregular. The press conferences and press releases by the institutions concerned to the media frequently hide the real picture and propagate false information to the people and provide incorrect economic index.
What are the barriers to access?
Small and medium business enterprises face a lot of barriers from formal financial institutions. Banks ask excessively high collateral for loan and undervalue the price of the security also. Under the circumstances, new initiatives like auto brick manufacturing, bio-gas, solar energy etc under the 'Green Banking' scheme of the government could not get expected support from the banks and financial institutions. The refinance fund at the central bank are underutilised due to low performance because of lack of knowledge, lack of interest and absence of efficient officials at the branch level of many banks and financial institutions. A lot of promising entrepreneurs of new generation could not convince the banks about their inherent capability and failed to avail financial support. The refinance funds provided by ADB, World Bank, JICA for SME and Green Banking at the Bangladesh Bank could not be utilised properly.
Why do banks and financial institutions not emphasise financial access?
Generally, banks and financial institutions do not take adequate steps towards enhancing access to finance in Bangladesh. It occurs due to lack of specific strategic instruction for access from the regulator and the government. Banks and financial institutions are giving special importance to risk management of assets and liabilities. The impact of risk management mechanism puts the access again in a trouble. Putting excessive risk measures hampers the growth of loan and opportunity of the new enterprises shrinks.
On the other hand, willful bad investment could not be stopped despite strict risk mitigation measures. The government and the regulator should come up with certain strategic policy instructions for enhancing financial access in a specific period of time. Access to finance is a matter of right of the people.
Constraints and barriers of physical access, affordability and eligibility must be removed for enhancing access to finance to individual households, SME enterprises and businesses. An appropriate policy guideline must be formulated to increase savings and deposits and credit as well. Enhancing access to finance shall contribute to increased income, job creation and eventually national economic growth. Officials of banks and financial institutions require motivation and training about access to finance.
.............................................................
The writer is former Executive Director, Bangladesh Bank and CEO, BCFInAS. Email: edcmhbb@**********
Published : Saturday, 07 September 2013
In Bangladesh access to finance is low: why? :: Financial Express :: Financial Newspaper of Bangladesh
Chowdhury Mohidul Haque
Researchers used to mention that access to finance is low in Bangladesh. Some people say only 13 per cent of the household has access to finance either formal or informal. Some other people say that the situation is changing rapidly due to introduction of technology in the financial industry and the access to finance has increased up to 17 per cent now. Unfortunately, neither the central bank nor the department concerned of the government made any attempt to undertake a study or survey to determine the actual position of the financial access in Bangladesh. There are some think-tank organisations that provide lots of information on economic policy and politics. But they seem not very interested in doing such a very fundamental survey on access to finance. BIDS which is a government-owned research and study organisation also could take initiative to study this fundamental issue of financial access.
Everybody will agree that estimating and measuring financial access is difficult due to its complexity and non-availability of statistical data. Now, access to finance is measured by using the number of deposits and loan accounts. This kind of simple measurement of financial access is incorrect and imperfect.
Once, the central bank issued instructions to all banks to open bank accounts by taking deposit of Taka ten only and over 100,000 accounts were opened rapidly within a year. The central bank claimed it as a 'success' towards enhancing financial inclusion. But some commercial bank officials expressed their anguish and unhappiness because of undue pressure from the central bank to open such accounts at Taka ten only where the average cost of account opening comes to Tk 100 and termed it as a 'stunt'. Though we do not have a specific survey and information, there is no doubt that the financial access situation is low in Bangladesh.
What is meant by
'access to finance'?
Access to finance is a situation where individual, business or enterprise can access financial services which include deposit, savings, loan, payment, trade, insurance and other financial services. Individuals who have no access to financial service are called 'unbanked' and individuals who have limited access called 'under banked'. Access to financial services is important for the growth of business, employment generation and overall growth of the economy. Therefore, the government should pay attention to the financial access situation of the country for the purpose of economic growth.
What are the barriers to enhance access to finance in Bangladesh?
There are a number of barriers towards access to finance. These are economic, social, institutional and regulatory. Conventionally, commercial banks are the dominant providers of financial services. Then come the licensed non-bank financial institutions, micro finance institutions, NGOs, co-operative societies regulated by the central bank or the government. In addition, though not licensed, money lenders also play a very important role towards informal financial services in rural areas. The availability of financial services is a constraint, for example, due to physical access, affordability or eligibility.
In Bangladesh, over 50 commercial banks having about 8,000 branches do operate in urban and rural areas. Over 1,000 microfinance institutions and NGOs and over 500 co-operative societies also operate in accepting savings and providing loan services mostly in rural areas. Due to introduction of mobile financial services and installation of ATMs, the financial services have expanded further. Along with the growth of the economy and economic activities, the expectation of the people for financial services has also grown. In spite of all these initiatives, access to financial services is still considered low in Bangladesh.
What are the reasons
for low access?
Poor people living in the rural areas or slums do not get access to formal financial services. They are unable to reach the doors of the bank branches. Poor people of physical labour do not get access to banks. Ethnic minority living in the hills or plains also find difficulties to get access to formal financial services. So, these people are excluded from formal and sometimes from informal financial service. It is generally believed that commercial banks are interested to serve the rich people and corporate business houses. Private commercial banks prefer corporate and financially rich clients. They have retail business, but they put less importance on retail business. They do corporate social responsibility activities but they do not usually serve the low income people. On the contrary, state-owned commercial banks and specialised banks are mandated to provide financial services to the low income and rural people. Surprisingly, most of the defaulter corporate businesses are the clients of the state-owned banks. When the question of big project financing arises, these people will go to the state-owned banks, not to private banks. The current crisis in the banking sector was created by some unscrupulous business corporates. No doubt the officials concerned of those banks, in some cases the boards, are also responsible for these kinds of corrupt transactions. Formal or informal financial institutions always intend to serve economically strong sect of the population.
Why new comers do not
get easy access?
High rate of interest on lending and imposition of various charges by banks discourage new entrepreneurs to borrow from the banks. The complexity and difficulty in opening a bank account act as a deterrent to go to a bank. KYC standard also proved counter productive. Further, easy access to bank account information by some agencies like, ACC, NSI and NBR also discourage individuals to put their money in their banks. It is presumed that both the regulator and the banks failed to protect confidentiality of bank account information. The trust on the banking system has been shaken due to such undue intervention.
The government has put emphasis on SME financing. The central bank took active steps to implement the government policy of SME financing seriously. During the last few years both SME financing and agricultural credit disbursement targets said to have reached up to expectation. But it was observed critically that real disbursement and recovery position are not reflected in the statements sent to the central bank. As a matter of practice in agricultural credit, due and overdue accounts are adjusted by providing new loans and shown as recovery and disbursement. Similarly, all trading and commercial loans including working capital loans are shown as SME loan disbursement. It is also observed from the field level transaction that SME branches of some banks charge very high rate of interest and commission. Some banks deduct the first instalment at the time of disbursement of the loan which is irregular. The press conferences and press releases by the institutions concerned to the media frequently hide the real picture and propagate false information to the people and provide incorrect economic index.
What are the barriers to access?
Small and medium business enterprises face a lot of barriers from formal financial institutions. Banks ask excessively high collateral for loan and undervalue the price of the security also. Under the circumstances, new initiatives like auto brick manufacturing, bio-gas, solar energy etc under the 'Green Banking' scheme of the government could not get expected support from the banks and financial institutions. The refinance fund at the central bank are underutilised due to low performance because of lack of knowledge, lack of interest and absence of efficient officials at the branch level of many banks and financial institutions. A lot of promising entrepreneurs of new generation could not convince the banks about their inherent capability and failed to avail financial support. The refinance funds provided by ADB, World Bank, JICA for SME and Green Banking at the Bangladesh Bank could not be utilised properly.
Why do banks and financial institutions not emphasise financial access?
Generally, banks and financial institutions do not take adequate steps towards enhancing access to finance in Bangladesh. It occurs due to lack of specific strategic instruction for access from the regulator and the government. Banks and financial institutions are giving special importance to risk management of assets and liabilities. The impact of risk management mechanism puts the access again in a trouble. Putting excessive risk measures hampers the growth of loan and opportunity of the new enterprises shrinks.
On the other hand, willful bad investment could not be stopped despite strict risk mitigation measures. The government and the regulator should come up with certain strategic policy instructions for enhancing financial access in a specific period of time. Access to finance is a matter of right of the people.
Constraints and barriers of physical access, affordability and eligibility must be removed for enhancing access to finance to individual households, SME enterprises and businesses. An appropriate policy guideline must be formulated to increase savings and deposits and credit as well. Enhancing access to finance shall contribute to increased income, job creation and eventually national economic growth. Officials of banks and financial institutions require motivation and training about access to finance.
.............................................................
The writer is former Executive Director, Bangladesh Bank and CEO, BCFInAS. Email: edcmhbb@**********
