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Impact of bank mergers on low to moderate income communities

Posted on by Deepesh Singh

The banking sector has played a crucial role in Bangladesh’s economic development by supporting businesses and fostering growth. The industry has expanded significantly over the past 30 years due to government initiatives that promote financial inclusion through MSME finance, agri-credit, and microcredit.

Despite all these achievements, the banking sector has been facing significant challenges, including irregularities, embezzlement, and a lack of effective governance.

Bangladesh struggles with a high rate of non-performing loans (NPLs) and ranks low on the financial inclusion index even though it has many banks and financial firms. Many people, especially from the low- and moderate-income groups in rural and semi-urban areas, are still unbanked or underbanked.

Bangladesh Bank recently warned that it would no longer provide unlimited liquidity support and expected banks to manage their finances carefully to maintain public trust.

The bank has introduced the Prompt Corrective Action (PCA) framework to address these issues. This framework requires banks to take corrective actions based on indicators, such as Capital-to-Risk Weighted Assets Ratio (CRAR), NPLs, and corporate governance.

Bangladesh Bank has also proposed a roadmap for bank mergers to improve stability and efficiency in the sector. These initiatives are part of the country’s efforts to maintain macroeconomic stability and continue receiving loan disbursements from the IMF.

Capital injection and mergers are viable options for struggling banks. New shareholders can provide additional capital, while mergers can help consolidate resources.

However, these banks must handle mergers carefully, as these can adversely impact low-income customers in rural and urban areas who have recently started to access formal financial services.

Mergers can be troublesome if not handled well. The lack of transparency surrounding their causes and the resulting uncertainty have already led to a loss of depositors’ trust.

Recently, panicked bank depositors withdrew money from their accounts after merger announcements indicated a shift toward holding cash outside the banking system. This erosion of trust and high inflation can further exacerbate the move toward a cashless economy.

This can reduce the local currency’s purchasing power and make financial transactions ineffective.

The acquiring bank’s more conservative lending approach may tighten credit policies and affect borrowers associated with weaker banks. Such changes can limit access to vital funds for low- and moderate-income customers, who often rely on flexible lending terms.

Mergers can disrupt the established relationships between customers and their local branches, especially if the acquiring bank shifts its focus toward larger corporate clients.  Additionally, the amalgamation of different banking software and interfaces can lead to temporary inconvenience.

The integration process can lead to changes in account procedures, branch closures, or service disruptions. These disruptions can be particularly challenging for low-income customers who may lack easy access to alternative financial services. Employment in the MSME sector may suffer if entrepreneurs cannot access funds to continue business as usual.

The following measures will be critical to mitigate the adverse impact of forced mergers on low-income customers:

1. Ensure transparency: Communicate the merger’s processes and objectives to build confidence among depositors.

2. Assess asset quality: Assess the asset quality of weak banks before a merger to protect the interests of strong banks and depositors. This will prevent the transfer of bad assets to healthier banks, which can undermine the entire banking sector.

3. Develop detailed guidelines: Create comprehensive guidelines on mergers and acquisitions based on exemplary international practices. These guidelines should outline a clear roadmap for banks to ensure a smooth merger process.

4. Prioritise low-income customers: Ensure that the merger process does not disproportionately affect low-income customers’ access to financial services. Special measures should be taken to protect their interests and maintain their trust in the banking system.

5. Implement strong corporate governance: Apply robust corporate governance measures to address the root causes of the banking sector’s problems, such as the spike in bad loans and the culture of wilful defaulting. This can help restore confidence in the sector and ensure its long-term stability.

6. Provide policy support and liquidity assistance: Provide policy support and liquidity assistance to help banks integrate smoothly during mergers and maintain stability in the sector.

Well-managed mergers can strengthen the banking sector, contribute to Bangladesh’s development agenda, promote formal banking among MSMEs, and ultimately contribute to long-term economic growth and prosperity.

The new government and leadership at the Bangladesh Bank make now an ideal time to revisit and strengthen banking reforms. These reforms should include effective governance and informed decision-making for a healthy recovery of the financial system.

The article was first published on the TBS News website on 7th November 2024.

Digital platforms: Catalysts for growth and sustainability among Bangladesh’s microentrepreneurs: Part 2

Posted on by Saumya Dixit

Our earlier blog explored how microenterprises use digital platforms in Bangladesh. In this part, we dive deeper into the factors that influence platform adoption, female microentrepreneurs’ unique motivation to onboard digital platforms, the broader social and economic impact of these digital platforms, and the way ahead for these small businesses.

Factors that influence platform adoption

Various factors influence microentrepreneurs’ decision to adopt digital platforms, which differ across sectors. An understanding of these factors can help stakeholders design targeted interventions to increase platform adoption among microentrepreneurs.

Retail trade: Microentrepreneurs in retail trade prefer the convenience of having goods delivered directly to their shops and being able to access goods affordably. Additionally, comparing prices between suppliers is crucial for making informed purchasing decisions. Moreover, user-friendly interfaces play a significant role as they enable entrepreneurs to navigate the platform efficiently without requiring extensive technical expertise.

Transport and logistics: The adoption of digital platforms hinges on specific factors essential for operational efficiency. Microentrepreneurs in the transport and logistics sector prioritize ease of finding customers, fair treatment of drivers, and reliable tracking and reporting systems. Platforms that facilitate quick connections between drivers and customers, ensure transparent policies for drivers, and provide real-time tracking information are highly sought after, as they enhance operational efficiency and foster trust among users.

Social selling: Microentrepreneurs engaged in social selling consider certain features indispensable for success, which include robust marketing tools, secure payment processing mechanisms, and effective customer support services. These enabling factors help microentrepreneurs promote their products effectively, reach a wider audience, ensure secure transactions, and address customer inquiries and concerns promptly.

Additionally, perceptions of digital platforms’ usefulness vary. A slightly higher percentage of women, especially in rural areas, believe the platforms are not helpful. Notably, women in rural areas are motivated to join digital platforms for networking, safety, and visibility, while both genders value market access benefits.

If providers understand and address each sector’s unique needs, they can create targeted strategies to increase microentrepreneurs’ use of digital platforms. This is crucial for the growth of microenterprises across various industries, alongside economic development and empowerment.

Women microentrepreneurs’ perception and motivation to join and onboard digital platforms

Female microentrepreneurs are motivated to embrace digital platforms when they find networking opportunities, enhanced safety and security, and amplified visibility for their businesses. This need for connection and exposure is crucial to influencing women entrepreneurs, empowering them to expand their presence and engage with a broader audience.

Both male and female microentrepreneurs perceive access to the market as the primary benefit for women who participate in digital platforms. However, a difference emerges based on location. Rural female microentrepreneurs prioritize access to peer networks as the most crucial benefit, while both male and female urban entrepreneurs emphasize market access.

Interestingly, when they joined a digital platform, most women in both urban and rural settings did not encounter significant challenges or barriers related to cultural norms, societal biases, or other social factors. This suggests that women in both settings quickly embrace digital platforms for business purposes, despite potential societal constraints.

Broader economic and social impacts of using digital platforms

The broader economic and social implications of digital platforms extend far beyond mere financial gains for microentrepreneurs. While the increase in income and profits is undoubtedly significant, we must also recognize these platforms’ non-monetary advantages.

One key benefit of digital platforms is the access to training facilities provided by digital platforms. These resources empower microentrepreneurs, especially women, by equipping them with the skills and knowledge needed to succeed in their businesses. Microentrepreneurs can enhance their capabilities and drive business growth with access to training on marketing strategies, financial management, and customer relations.

Furthermore, digital platforms increase safety for microentrepreneurs, particularly women, who may face unique challenges and risks in their business operations. These platforms facilitate secure transactions and provide safety measures, such as real-time tracking and reporting, to create a safer environment for conducting business and thus promote confidence and peace of mind among microentrepreneurs.

Another significant advantage digital platforms offer is visibility. Microentrepreneurs can reach a broader audience beyond their local communities when they showcase products and services on online platforms. This increased visibility expands market opportunities and enhances the reputation and credibility of microentrepreneurs, which ultimately contributes to their long-term business success.

Moreover, digital platforms enable microentrepreneurs to make informed business decisions. The platforms provide reliable financial insights and analytics that empower entrepreneurs to assess performance, identify trends, and strategize for the future. This data-driven approach fosters better decision-making and improves business outcomes and long-term sustainability.

Digital platforms hold great transformative potential for Bangladesh’s microentrepreneurs. The platforms provide microentrepreneurs access to new markets, formal financial services, and valuable business insights, which empower them to grow their businesses and improve their livelihoods. However, to maximize their impact, stakeholders must address barriers to adoption, such as increasing platform awareness and ensuring user comfort. This can create a difference between traditional ways of doing business and the adoption of digital methods.

Targeted interventions, such as collateral-free credit, alongside supportive policies, such as faster registration, can help bridge these gaps to ensure more microentrepreneurs can benefit from the digital revolution. As we continue to explore the transformative potential of digital platforms, it is clear they hold the key to unlock new opportunities for Bangladesh’s microentrepreneurs, drive inclusive and sustainable economic growth, and capitalize on the opportunities of the digital age.

Digital platforms: Catalysts for growth and sustainability among Bangladesh’s microentrepreneurs: Part 1

Posted on by Saumya Dixit

Around 9 million microenterprises form the backbone of the informal economic sector in Bangladesh’s vibrant and rapidly growing economy. These small-scale businesses are vital to the country’s economic landscape and span diverse economic activities, such as agribusiness, food processing, retail trade, social selling, and transport and logistics. They constitute 56% of total employment and contribute 25% to the GDP.

The advent of digital platforms has ushered in new avenues for these entrepreneurs. Platforms, such as Truck Lagbe, Women and E-commerce (WE), Chaldal, Pandamart, and ShopUp, among others, provide tools and resources that can enhance their livelihoods. In this two-part blog series, we delve into digital platforms’ impact on Bangladesh’s largely informal microentrepreneur segment and highlight their role in improving profitability, access to financial services, and overall business growth and resilience.

Digital platforms provide easier access to new markets, customers, and essential business tools to empower Bangladeshi microentrepreneurs and enhance their profitability and resilience. Furthermore, digital tools can significantly improve microentrepreneurs’ efficiency, reduce operational costs, and facilitate access to broader markets, which helps increase income and overall business performance.

We engaged with 400 microentrepreneurs from retail trade, social selling, and transport and logistics sectors. These conversations uncovered the status of microenterprises that participate in digital platforms, the impact of exclusion from these platforms, and the support required to fill the gaps in the platforms to help microenterprises make their businesses more resilient. We met microentrepreneurs from urban centers, such as Dhaka, Khulna, and Chattogram, alongside rural areas, including Manikganj, Munshiganj, Pabna, and Sirajganj. We also connected with female microentrepreneurs to understand how digital platforms affect various types of microenterprises.

Financial benefits and increased profitability and sustainability

The study findings suggest microentrepreneurs who use digital platforms experience significant financial benefits compared to their non-platformed counterparts. On average, platformed microentrepreneurs see their incomes rise from USD 592 to USD 993, and their profits increase from USD 296 to USD 334. While platformed microentrepreneurs incur higher operating expenses, the substantial increase in revenue compensates for these expenses and leads to improved profitability and sustainability.

The study also showed notable gender and regional dissimilarities in earnings and expenditures. Male microentrepreneurs who use digital platforms tend to report higher expenses and earn higher profits than the unplatformed. Interestingly, the same trend was not seen for female microentrepreneurs, which indicates that being platformed does not correlate strongly with improved financial outcomes for women. Urban platformed microentrepreneurs exhibit higher expenditures and profits than their rural counterparts, which indicates that urban areas have higher business value.

Overall, digital platforms benefit users by improving business performance. More attention is needed to address barriers that hinder female micro entrepreneurs’ profitability. If digital platforms can help women overcome these obstacles, they can make these entrepreneurs’ business models more sustainable and inclusive, ultimately contributing to greater economic empowerment for all.

Access to formal financial services

Credit preferences among microentrepreneurs in Bangladesh vary based on their gender and platform usage. Women (56%) on digital platforms often prefer formal financial institutions like banks. In contrast, men (45%) explore a broader range of credit sources, which include informal sources, such as suppliers and mobile moneylenders. On the other hand, unplatformed women enterprises (68%) rely heavily on informal credit sources. In urban areas, platformed entrepreneurs (57%) prioritize formal banking, while their rural counterparts (69%) lean toward informal sources. Interestingly, unplatformed urban (61%) and rural entrepreneurs (47%) rely similarly on informal credit. Bridging these gaps can empower microentrepreneurs and foster inclusive economic growth.

Microentrepreneurs are more inclined to use cash

Microentrepreneurs exhibit diverse payment preferences influenced by their digital platform usage. Those who have reduced their use of digital platforms tend to rely on cash for business transactions. In contrast, microentrepreneurs who have increased their use of digital platforms or remained consistent in their platform usage generally prefer mobile money services, such as bKash or Rocket, for their payments.

This trend varies by location and gender. Rural microentrepreneurs tend to use cash, while their urban counterparts often favor mobile money. Gender also plays a role, as female microentrepreneurs typically prefer mobile money, whereas male microentrepreneurs lean toward cash. An important reason for the preference for mobile money among female microentrepreneurs is their involvement in social selling, where customers often make payments through mobile money.

Cash remains the dominant choice for transactions for microentrepreneurs who do not use digital platforms, regardless of gender or location. However, urban microentrepreneurs have a slightly higher preference for cash over their rural peers. Given these insights, stakeholders have a significant opportunity to enhance the adoption of digital payments among microentrepreneurs and aid their inclusion in a more formal economy.

In the next part of this two-part blog series, we will look at the factors that influence platform adoption for different sectors of microentrepreneurs, women-owned microentrepreneurs’ unique motivation to onboard digital platforms, the social and economic impact of digital platforms on microentrepreneurs, and ways to increase digital platform adoption for them. Read the next part here.

From gig work to financial empowerment: Embedded finance for women in the platform economy

Posted on by Saumya Dixit

Sari, a 32-year-old woman and a mother of two children in Jakarta, starts her day early. She handles household chores and prepares her children for school. By mid-morning, she logs into her ride-hailing platform, ready to start another work day. Like many women in Indonesia, Sari depends on the flexibility of gig work to support her family. Whether she picks up passengers or makes deliveries, her earnings are vital for the household.

Sari is one of many individuals who rely on platforms for their income. In 2022, digital platforms onboarded around 20 million MSMEs, feeding into Indonesia’s MSME Go Digital vision. Gojek and Grab, the two leading ride-hailing platforms, each supported around 2 million drivers. In Indonesia, when women make up 66% of the country’s 84 million informal workers, they play a vital role in driving small-scale enterprises and supporting their families through casual labor and self-employment.

A recent study by MSC, in collaboration with the Ministry of Women Empowerment and Child Protection (MoWECP), highlights that despite existing challenges, the platform economy has improved women’s access to digital financial services (DFS). The study reveals that around 52% of female informal workers started to use m-banking or digital payments specifically for work requirements. This is significantly higher than the national average of 15%. It highlights digital platforms’ potential to improve financial inclusion among women in the informal sector.

This blog looks into the suitability of embedded finance as an approach to improve women’s financial inclusion and recommends ways for stakeholders to design embedded finance for female informal workers.

The promising opportunities of embedded finance

Embedded finance can boost DFS adoption among female informal workers. It integrates financial services directly into the platforms these workers already use. It can provide productive financial products and generate leads for previously unbankable communities that lacked financial data footprints.

Embedded finance offers convenience as it does not require informal workers to access separate or new applications. Moreover, since the financial services and products are integrated into the platforms they access daily, these workers also have a sense of trust and familiarity that may increase their likelihood of adoption.

For example, Grab and Gojek offer various embedded finance products for their partners. Grab’s GrabModal Mantul provides eligible food and beverage MSME merchants in its ecosystem with loans specifically designed for their businesses. It offers loans up to IDR 30 million (USD 1,946) with lower interest rates and a quick disbursement process of one to two days.

Similarly, alternative financial services and products help address the gaps in the informal economy through tailored solutions that meet the unique needs and work nature of those who operate within this sector. For instance, Grab offers a driver financing product in collaboration with JULO, a FinTech lending company. This product provides online drivers with working capital to cover emergency expenses, such as vehicle breakdowns, wheel repairs, and other unexpected costs.

While some leading digital platforms offer embedded finance and continue to innovate to meet the unique needs of informal workers, many platforms have yet to offer it. As a result, the adoption of embedded finance remains limited, especially in terms of access to credit.

Our study shows that while banks remain the preferred source of formal credit (63%), friends and family (50%) and savings groups, such as credit unions and cooperatives, are popular choices among female informal workers who seek informal credit (41%).

Designing embedded finance for female informal workers

A gender-intentional approach can increase the adoption of DFS among female informal workers through embedded finance. Women face unique challenges, such as sociocultural norms and institutional barriers. Therefore, the design of “platform-enabled financial services” must prioritize gender-specific outcomes.

Our previous experience and research indicate that women’s agency, control, and privacy are fundamental aspects of gendered financial behavior. The design of gender-sensitive financial services must consider these elements as these highlight the distinct behavioral differences between women and men.

Let us take Sari’s case. She has been an app-based driver for four years and is familiar with the ride-hailing platform’s many embedded payment options, such as digital wallets and bank transfers. After years of working in the sector, she wishes to upgrade her vehicle but needs credit. For the platform to onboard Sari to other products beyond payment, such as loans, it should offer a unique way to increase access and usage of the embedded credit products.

The following is a list of recommendations that use MSC’s Financial Services Space Framework to provide ways to develop trigger points for Sari to improve her financial behavior and acceptance of platform-enabled financial services. Platforms and policymakers can use these recommendations to design gender-intentional and targeted financial services and solutions.

Volume and frequency: Sari should have a more regular and larger cash flow after she is integrated into the platform. These enhanced inflows are likely to encourage her to use various financial services and products regularly. As Sari becomes fluent in the use of payment products, she has a regular financial data footprint that can be used to build her credit score. This score provides data-driven information for a platform to determine her eligibility for loans and other financial products.

Convenience: Despite her familiarity with the platform, Sari must experience “felt convenience” when she uses the new product. These can include clear and transparent information on loan options, interest rates, payback schedules, and procedures to make her feel safe and comfortable with onboarding. A seamless product design and interface can also help her use the application without confusion or misunderstanding. Our research also captures the fact that the ease of use and accessibility of financial products are vital. Female platform workers frequently struggle to use various features and buttons in the apps due to continuous upgrades and development.

Influence and motivation: Social factors play a significant role in influencing Sari’s choice to explore DFS on the platform. When more coworkers in the Women Drivers Association use the loan product, Sari gets motivated and influenced to try the new loan product on the platform. Furthermore, support from her husband also encourages her to make more independent financial decisions. Social influence and encouragement can drive adoption and confidence in financial decision-making.

Building inclusivity in embedded finance

Sari’s story shows that embedded finance platforms present an opportunity to enhance women’s digital financial inclusion. However, much work and intentionality are required to make this opportunity truly inclusive.

For instance, algorithmic bias in digital financial services can significantly affect women in several ways, particularly in credit scoring and lending decisions. The requirement of asset ownership to access credit can disadvantage women as cultural and legal barriers make it less likely for women to own assets. Therefore, financial products should be “inclusive by design,” specifically for women, considering their unique needs.

Financial platforms must create inclusive access using gender-sensitive credit metrics, such as alternative income data and more flexible collateral requirements. Additionally, digital platforms can provide targeted financial literacy programs in accessible language to help women navigate these financial systems.

Finally, partnerships with women-centric organizations can bridge the gap between financial service providers and women. Community leaders and influencers can advocate for the use of products, which can help shift social norms and increase the acceptance of digital financial services within the community.

Ultimately, women’s empowerment through embedded finance goes beyond women’s digital financial inclusion. It also drives broader social and economic transformation across Indonesia’s informal sector.

Women entrepreneurs’ credit access much less than desired

Posted on by Saumya Dixit

MicroSave Consulting (MSC), with support from the Bill & Melinda Gates Foundation, hosted a bankers’ roundtable titled ‘Bridging the Gap: Regulation and Practices for Better Credit Access to Women Entrepreneurs’ at a Dhaka city hotel on Sunday. The event featured a fireside chat moderated by Snigdha Ali (On the left), Bangladesh Country Lead for Financial Services for the Poor at the foundation. From second left, Sohail RK Hussain, president and managing director of Bank Asia PLC; and Syed Abdul Momen, deputy managing director and head of SME at BRAC Bank PLC; and Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank PLC, attended and spoke at the event.

Despite many initiatives, speakers at a roundtable observed that women entrepreneurs’ access to credit from formal channels like banks remains much lower than the desired level.

According to them, lack of adequate information, common notion of process complexities, poor cooperation from lenders and unavailability of collateral are some of the reasons behind this.

The roundtable titled ‘Bridging the gap: Regulation and practices for better credit access to women entrepreneurs’ was held at a city hotel on Sunday.

With support from the Bill & Melinda Gates Foundation, an international organisation MicroSave Consulting (MSC) hosted the event participated by leaders from regulatory bodies, the banking sector, policymaking circles, and academia.

The event also marked the culmination of MSC’s Women Business Diaries (WBD) project. This initiative seeks to address the unique financial needs of women entrepreneurs through gender-intentional product design and action research.

The roundtable featured dynamic discussions on policy, innovation, and the role of financial institutions in enhancing women’s access to credit.

Moderated by Abhishek Anand, MSC partner, a panel discussion focused on “Leveraging policy for financial product innovation to accelerate access to financial services for women.”

Panelists included Nawshad Mustafa, director, SMESPD, Bangladesh Bank; Farzana Khan, general manager, SME Foundation; Dr. Chowdhury Saima Ferdous, professor, Department of International Business, University of Dhaka; and Md. Shafquat Hossain, deputy managing Director & Head of Retail Banking, Mutual Trust Bank PLC.

The event also featured a fireside chat moderated by Snigdha Ali, Bangladesh Country Lead for Financial Services for the Poor at the Bill & Melinda Gates Foundation.

The participants of the session were Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank PLC; Sohail RK Hussain, president and managing director of Bank Asia PLC; and Syed Abdul Momen, deputy managing director and head of SME at BRAC Bank PLC.

Sohail RK Hussain emphasised the bankers providing a comfortable feel when women entrepreneurs approach them.

Having more women as bankers and agents on the ground has made a significant difference in reaching female customers, he said.

“It is not just about offering financial products but creating a welcoming and supportive environment that encourages women to engage with formal financial institutions,” he said.

Syed Mahbubur Rahman said collaboration between banks, FinTechs, and development organisations is key to enhancing financial access for women.

“By combining our resources and expertise, we can create innovative solutions that meet the specific needs of women entrepreneurs and ensure they have the tools to succeed,” he said.

A key highlight of the event was the dissemination of findings from MSC’s Women Business Diaries (WBD) project, which monitored the financial and non-financial lives of women entrepreneurs over a 21-month period.

The presentation was shared by Ayushi Misra, project manager at MSC. According to it, only eight per cent of surveyed women entrepreneurs take loans from banks whereas 55 per cent borrow from microfinance institutions (MFI).

The event concluded with a call to stakeholders to continue their efforts to make financial services more inclusive and accessible.

MSC is a consulting firm that has advanced financial, social, and economic inclusion across more than 50 countries including Bangladesh for more than 25 years.

This was also published in The Financial Express, The Business Standards, and The Daily Star on 21st October 2024 

Insights to innovations: Designing financial services for women entrepreneurs

Posted on by Saumya Dixit

Though there has been growth in credit access for women-owned MSMEs in Bangladesh, it remains insufficient in meeting the increasing demand from women entrepreneurs. As of Q4 2023, women own 36.9% of bank accounts and contribute 33.9% of the total deposits in the banking sector. However, when it comes to credit, the disparity is clear. Women own only 17.9% of total loan accounts and hold just 6.5% of the total asset value in banks, despite contributing around 20% to Bangladesh’s GDP.

The number of loans issued to women-owned enterprises rose from 147,102 in 2022 (13% of total CSME loans) to 236,172 in 2023, accounting for 17.9% of the total loans to CSMEs. However, even with this increase in the number of loans, women-owned businesses only held 17.9% of the total loan accounts by number, and their share in the outstanding credit portfolio remains low at just 6.45% by value.

For a comprehensive understanding of the challenges and opportunities in women’s financial inclusion in Bangladesh, please refer to the full report.