Contribution of the $30-billion readymade garments (RMG) sector, employing nearly four million workers, mostly women, to Bangladesh economy is undeniable. The industry has been growing at an average rate of 17 per cent annually since 1980s. The issues of minimum wages for RMG workers have been on front pages of most leading newspapers recently. While an acceptable solution to the wage-related problems is wished by all, there is another issue that is further downstream and is related to efficiency in salary payments. It has been shown in research studies that paying salary to the garments workers through mobile money can yield substantial efficiency gain for the factories. However, the current limits on amount of transactions have been identified as a challenge for mobile money to become a norm for the sector. After the increase in minimum wage, there will most likely be a need for revisiting the current regulations of transaction limits for the sector to benefit the efficiency of digital payments.
Wages in the garment factories are usually disbursed cash-in-hand, a mechanism that tends to be both cost and time-intensive. Most of these workers are financially precluded from formal institutions due to systematic biases such as being unable to meet the requisite documentation requirements. Furthermore, low financial literacy results in not being able to take advantage of the various services provided. The money they receive typically follows a few common paths -they are transmitted to their families living in peri-urban or rural areas, invested in assets or informal financial. Very little cash is typically kept in person as it is susceptible to theft or robbery. Also, the patriarchal cultural norms often reduce effective control of women over the money when paid in cash and leaves the women in weaker position to exert full control over their financial assets.
In order for women to take greater control over their earnings, it requires accessing formal financial institutions, adequate financial literacy and accurate and uninterrupted flow of information. From that point of view, digital payments are promising, not only in terms of being faster and scalable, but also offers privacy and control, and encourages financial inclusion of a largely excluded cohort.
Bangladesh initiated mobile banking through Mobile Financial Services (MFS) services in 2011 with a primary goal to financially include those who were unable to access standard banking services and has been growing ever since, exponentially. It provides services like fund transfer between persons (P2P), savings, insurance products, paying utility bills and receiving payments. Since the inception of Mobile financial services, the number of average money transaction has been soaring. The reason behind widespread use of the MFS is that it requires very basic infrastructure- to be more precise, a classic (non-smart) mobile handset- that are typically owned by the average garments' worker. Until now, more than 200 garment factories have, and many are considering adopting digital wage payment. As of September 2018, around Tk 39,860 million in salaries have been disbursed through mobile financial services.
However, due to the recent increase in RMG minimum wage, the maximum cash-out and P2P transfer limit (Tk. 10,000) will be within the range of salaries that RMG workers will be receiving monthly. Now the question that merits attention is whether the RMG factories adopting wage digitisation will be discouraged in terms of adopting further digitisation. As in addition to the challenges that individual workers may face in accessing their salaries, there is also the possibility that factories will delay digitisation because of worker dissatisfaction and protest related to these issues. If so, then at what cost?
Industry experts have identified the current transaction limit as a barrier for more factories to digitise their payments. The wage increase of garment workers will make it a binding constraint for more factories. Using 12-months of transaction data for 1,963 RMG workers who receive salary through bKash, it was seen that almost all workers cashed out a portion of their salary and/or conducted at least one P2P transfer monthly, and 20 per cent of them made a merchant (P2B) payment. Among these workers, on average 10 per cent reach the daily and more than 80 per cent reach the monthly cash-out limit and six per cent reach the daily P2P transfer limit. According to the newly declared gazette, salary will increase by an average of 43 per cent across the seven pay-grades of RMG workers, resulting in workers earning to increase by more than Tk 10,000. A simulation suggested that the existing levels of withdrawal (considering the withdrawal rate holds constant) can be maintained if the daily withdrawal limit be increased to Tk 15,000 at least. Increasing this to Tk 20,000 will allow 95 per cent of the workers to extract their funds in a single transaction while increasing it to Tk 25,000 will allow almost all workers to do the same.
In terms of the industry level effects, earlier evidence suggests that efficiency gain by digitisation of salary payment is approximately US$0.44 per month per worker. Well, in an extreme scenario, all factories may remain un-digitised for paying their workers. Now if two scenarios can be assumed-optimistic and pessimistic-25 per cent and 75 per cent of wage payments for RMG workers remain un-digitised respectively across a three-year period. Using the efficiency gain (per worker per month) the financial opportunity cost of delay in digitisation for up to three years, calculated in the optimistic and pessimistic scenario will be USD 11.6 million and USD35.9 million, respectively.
Going back to the initial cash-out limit from 2011, that is Tk 25,000, adjusting for inflation it measures to Tk 36,184. The primary concern for reducing the daily transaction limits was the misuse of MFSs for illegal purposes. But multiple steps have been taken since then by Bangladesh Bank, MFS providers and account-holders to offset the various problems. This includes stricter documentation, one national id (NID)- one account rule, proper training of agents, etc.
Considering the importance of these measures, the withdrawal of daily cash-out and P2P transfer ceiling should be raised to maintain the existing pattern of transactions.
The digitisation of these factories did not happen overnight. Convincing both the owners and workers, given multiple impediments, was challenging. Mobile Financial Services in Bangladesh has huge potential given its reach, accessibility and ease of use. Like any new technology or product, there is always a "trial and error" period along with the provision of time for adaptability. The potential risk of any disruption in MFS might end up losing the workers' interest in MFS thereby dampening the level of interest. This not only ends up harming the MFS providers but also result in higher cost and loss of productivity for the garment factories. Hence it is imperative that a smooth transaction is ensured for the RMG sector as well as for all MFS users, in order to reap its benefits.
The article draws from BRAC Institute of Governance and Development (BIGD) Policy Note titled 'Increase in RMG wages: Implications for Mobile Financial Services (MFS)'.
Farzana Misha is a development researcher, currently working at the Brac Institute of Governance and Development (BIGD), BRAC University.
Munshi Sulaiman is a Research Advisor, BRAC Institution of Governance and Development (BIGD), BRAC University, Dhaka, Bangladesh.