Agent banking has been a catalyst in financial inclusion in Bangladesh. Unbanked populations are availing financial services at the agent outlets throughout the country resulting in accessing them into the formal financial activities which gear up the national economy especially in rural areas. Within a short span of time since its inception in 2013, this service has already gained massive popularity among the banking community due to its rapid growth and inclusive development.
Agent banking is defined as the banking service provided outside of regular bank branches by engaged agents under a valid agency agreement. It was first introduced in Bangladesh by Bangladesh Bank (BB) in 2013. The aim is to provide financial services to the underserved and poor segments of the population, especially those from the geographically dispersed locations. According to a report by the Bill & Melinda Gates Foundation, participation in financial services in the country has increased to reach an all-time high of 47 per cent in 2018 as a result of a 5 percentage-point surge (20 to 25 per cent) in registered bank users. The aggressive growth of agent banking has been credited for this surge. The latest data from Bangladesh Bank show there are 8.2 million accounts associated with agent banking in September 2020 representing year-over-year growth of 116 per cent.
As per the Global Findex Database 2017 of the World Bank, only 40 per cent of people above 15 years of age in rural areas in Bangladesh have an account at a bank or a financial institution. Agent banking has led to a huge segment of this excluded population to create accounts and access financial services. Most of the agents (86 per cent of total) and outlets (88 per cent of the total) associated are located in rural areas.
High proliferation in rural areas have led to rural agent banking subscribers outnumber those in urban areas. Growth is higher as the number of bank accounts in rural areas grew by 145 per cent from September 2019 to September 2020 compared to only 60 per cent in the urban areas, according to the BB report. The higher growth of rural accounts shows that agent banking is providing banking services to the major group of the population that has been deprived of these services previously. It is observed that some factors work for such high adoption of agent banking services by unbanked population in Bangladesh, especially in rural areas.
Firstly, commercial banks try to select locally known and acceptable individuals/institutions from these eligible entities as agents. The familiarity of the selected agents among the local population helps convince the latter to form bank accounts. Popularity and good reputation of the concerned banks also work for attracting the targeted populations to the banking services.
Secondly, the formal physical environment of a typical bank branch is often perceived as alien by a prospective rural bank account holder. On the other hand, an agent bank outlet is located in a prospective customer's known environment and conducted by someone known to them. These features make the outlet environment accommodating to the customer so that he/she is comfortable going to the outlet and carrying out banking activities. Sometimes the agent's representatives or employees go to provide door-to-door services to the customers at their convenience.
Finally, all agent banking outlets are equipped with IT devices like point of sale (POS) devices with biometric features, barcode scanner to scan bills for bill payment transactions, and Personal Identification Number (PIN) pads. Typical banking operations would require identification cards, numbers, and codes to make transactions. Most people in rural areas do not maintain all of these documents. But with the help of the aforementioned devices, agent banking customers can easily carry out activities using only the customer's fingerprint or mobile number.
During the peak Covid period that ended on May 30, the government limited commercial banking operations to control the spread of the virus. Agents, being third-party entities, were not bound by the restrictions. They were still given the freedom to choose whether to carry out operations. Most agents decided to carry out operations during the pandemic situation. A newspaper report shows that around 80 per cent of agents decided to continue work. The continuation allowed customers to carry out transactions at the agent outlets. Disbursements of foreign remittance witness record surge in agent outlets during the Covid period.
In spite of the rising number of deposits, loan/investment disbursements by agent banking are still very meager. In September 2020, for example, deposits amounted to BDT 130.40 billion while loan disbursements amounted to only BDT 1086.95 million. This low loan to deposit ratio suggests agent banking is missing out on providing credit to rural areas especially in Cottage, Micro, Small and Medium Enterprises (CMSME). The use of formal finance by CMSMEs in Bangladesh is quite limited and the finance gap is estimated to be worth BDT 237 billion or USD 2.8 billion. Agent banking is in a great position to reduce the gap.
But there are bottlenecks to unlocking this huge opportunity. CMSMEs in Bangladesh face financial constraints including poor quality of the collateral, inadequate documentation, and ill-defined business plans. As a result, banks take time to process loan applications. The turnaround time for loan applications is thus 7 to 10 days. The higher turnaround time makes agent banking unattractive to SMEs for financing as they can access credit from Microfinance Institutions (MFI) at a faster rate. On the other hand, banks also find it unattractive to lend to SMEs. The government capped the lending rate for loans at 9 per cent and deposit rates at 6 per cent and the regulation came into effect in April 2020. The capping of the rates makes lending unprofitable for banks. Since SMEs are riskier due to the aforementioned constraints, banks consider lending to them more non-appealing.
Although agent banks have accelerated financial inclusion in the country, especially in rural areas, more needs to be done. Most of the labour force in Bangladesh is employed in the informal sector where they lack options for savings and obtaining loans. Engaging these huge populations in formal financial services help them save and access credit for entrepreneurial ventures.
Agent banking operations are not out of problems. Sometimes the banks face problems from their agents who often commit violation of existing banking rules and regulations since they lack proper training on banking operations. These acts of violation and irregularities including misappropriation of customers' fund by the agents may smear the bank's image. The agents also face some problems from their respective banks' end. They hardly receive quick and prompt response from the banks when they face problems in providing services to the customers. This may stimulate the customers' dissatisfaction towards the agent banking activity.
Despite some pitfalls, the agent banking service has witnessed tremendous success in customer enrolment and deposit collection. According the latest BB report up to September 2020, 24 banks in Bangladesh have undertaken agent banking operations through 10,163 numbers of agents and 14,016 numbers of outlets. The number of agents has grown by 15.96 per cent and the number of outlets has grown by 12.59 per cent. A cumulative 8,221,893 accounts have been opened through agent banking of which 3,749,087 (46 per cent) accounts belong to female customers and 7,111,887 (86 per cent) accounts belong to rural masses. Now the concerned banks should give utmost concentration on credit or investment disbursement through their agent outlets across the country. If the banks can make investment in CMSMEs successfully, the rural economy will gear up with significant improvement.
Policymakers and Bangladesh Bank should closely watch agent banking so that commercial banks can't drain the rural deposits to the urban areas instead of deploying those in underprivileged areas.
Khairul Hasan Munna is a banker.
