New banking system to make MFIs face losses: PRI

The Policy Research Institute (PRI) says microfinance institutions (MFIs) will incur losses in the coming days due to the new banking system, including agent banking.

It says most MFIs will struggle to meet the requirements for efficiency, transparency, and lower lending rates while banks could ensure these through the agent banking model.

Clients will be more aware over time due to digitisation while agents will need more training as they are the prime drivers of marketing banking services and reaching customers in rural communities, said the research organisation at a seminar on Thursday.

The seminar titled “Scope and possibilities of digital financial services in Bangladesh” was organised at the PRI office in the capital.

PRI Executive Director Ahsan H Mansur in his presentation said new models, especially agent banking, are providing safe, accessible, and cost-efficient ways of banking for under-banked communities.

He said the market is expected to get more competitive as more and more banks are coming on the scene and more agent banking outlets are being opened.

The use of technology and enhanced training will be crucial for achieving greater efficiency to remain competitive and retain market share as well, he also said.

Ahsan further said the new banking system would make MFIs lose ground as MFI loans are more expensive and usually come with a 23-24 per cent interest rate.

Speaking about the medium- and long-term agent banking outlooks with regard to the advent of digital banking, he said such banking services are expected to expand significantly in the coming years.

This banking system has scopes for rapid transactions and fast loan processing using big data analysis and machine learning, according to Ahsan.

He noted that agent banking does not require large investments in physical infrastructure and relies on a network of personal and social contacts in remote areas.

“But it still may face challenges in the medium to long term. In the long run, agents can play the role of facilitators, providing digital banking support, upgrading the required skills, and adopting digital banking with sizable investments made by parent banks,” he explained.

Ahsan also said banks are now emphasising agent banking instead of branch-based services as it is cost-effective, adding this has caused banking services to reach from cities to rural areas.

PRI Chairman Zaidi Sattar said the country is seeing a series of revolutions and there has been a revolution in the digital economy as well.

He said mobile phones now dominate many parts of the economy and most transactions across the country will be cashless within the next five years.

If a transaction is done through mobile, it leaves a footprint, which makes it easy to detect irregularities and corruption, he also said.

The Bangladesh Bank data shows deposits collected through agents amounted to Tk 31,083 crore between July and March of FY23, with the majority amount coming from rural people.

On the other hand, loans of Tk 851 crore were disbursed through agent banking while remittances of Tk 2,578 crore came through this channel during this period.

The top five banks have registered more than 70 per cent of the total agents, with the agent banking model reaching more than 18.9 million clients. Roughly 90 per cent of agent banking is located in rural areas.

Agent banking transactions grew by 37 per cent year-on-year to Tk 77,530 crore in FY22. Rural regions have four times more loan accounts, with the number of such accounts opened through agent banking till March this year being 1,79,606.

PRI Director Bazlul Haque Khondker said the majority of the cottage, micro, small and medium enterprises (CMSMEs), 66.74 per cent, uses mobile banking services for daily business transactions while a small segment, 5.76 per cent, uses them to keep records of business savings.

He said enterprises use mobile banking services for taking out business loans (5.97 per cent), repaying such loans (8.96 per cent), and other purposes (12.58 per cent).

Referring to a recent PRI survey, Bazlul said 91 per cent of entrepreneurs across the country started their business with personal or family savings or by borrowing from friends or families, meaning they initiated the ventures without any financial support from formal sources.

“The survey also revealed that for those who took out bank loans, the interest rate varied between 10 per cent and 14 per cent, including service charges and other fees. Moreover, 45 per cent of CMSMEs took out MFI loans at up to 24 per cent interest rate,” he said.

He further said the preferred sources of financing for CMSMEs were borrowing from MFIs (41.95 per cent), government banks (25.53 per cent), and private banks (21.28 per cent).