What can mobile financial services do for small businesses in Bangladesh?
In this blog post, Business Finance for the Poor in Bangladesh Policy Coordinator Tanzila Tajreen highlights the potential of mobile financial services for the country's small businesses. We also explore specific policy-related recommendations that government can undertake to help small businesses harness that potential.
Worldwide, small businesses are among the main drivers of economic growth. In Bangladesh, 8 million small businesses contribute a quarter of GDP and employ near half of the country’s formal workforce. However, nearly three-quarters of these small businesses do not have access to finance from any formal financial service providers.
As part of our research, we encounter women entrepreneurs who simply do not have time to travel several miles to the bank to make deposits because they are engaged in farming, household work, and childcare during bank opening hours. We meet small business owners who do not have the documentation or other means to open formal bank accounts, purchase insurance, or maintain transaction records.
However, technology such as mobile phones and the internet are creating economic opportunities for citizens and businesses worldwide. We are seeing this in Bangladesh, too.
In light of Bangladesh’s own rapid adoption of mobile phones in recent years, the Bangladesh Bank issued 2011 guidelines for mobile financial services that will increase access to financial services for ‘the unbanked’. Since then, adoption of mobile financial services in Bangladesh has been impressive.
Indeed, bKash is regularly cited among technology case studies globally as a success that has fundamentally changed the way that Bangladeshi citizens send and receive money. Currently, 24 million customers use bKash mobile wallet, while 20 million in Kenya use the renowned M-Pesa, the world's first mobile financial service.
Major mobile money adoption: the stage is set?
For small businesses, mobile financial services reduce the time and effort needed to engage financial service providers. These services can increase productivity, revenues and transaction speeds, and they can reduce outstanding credit times. Meanwhile, small business can expand their customer pool and sell goods and services more widely by enabling customers to pay with mobile money.
However, though the stage appears set for massive uptake of mobile financial services among small business owners, the market is not fully catering to entrepreneurs’ demand, despite dramatic increases in use of mobile money.
Major missed opportunities in Bangladesh
The BFP-B project recently commissioned a landmark policy research study of mobile financial services for small business in Bangladesh to understand prospects and challenges. Conducted by international financial inclusion consulting firm MicroSave, the study included in-depth interviews, focus group discussions, and surveys involving small business owners, mobile financial services providers, policymakers, and other industry players.
Overall, the market is missing some incredible opportunities. Less than half of small businesses with mobile money accounts use them for business purposes. Bangladesh Bank data from 2017 suggests that cash-in and cash-out contributed to 81% of the total value of transactions conducted through mobile financial service accounts.
Some providers, collaborating with partners such as ready-made garment factory owners and microfinance institutions, now offer services that include salary disbursements, loan disbursements, and loan repayment, though such initiatives are run mostly on a limited scale.
Read our mobile financial services policy study on our website 'knowledge hub'
How small businesses in Bangladesh see mobile financial services
Among entrepreneurs, there is a general lack of awareness of the value of mobile financial service accounts. There are also perceived issues with security, robbery, and fraud. Transaction costs are high, and transaction limits are low. Merchant payments can be cumbersome.
The low ceilings on mobile wallet balances mean that businesses must cash out frequently, rather than conduct most B2B transactions digitally. Consequently, they must make many payments and withdrawals, which is expensive because of flat-rate transaction fees and cash-out fees.
Meanwhile, low transaction limits stop small businesses from making and receiving larger payments than individuals.
On the supply side, many mobile financial service providers and banks hold an arguably short-term view of the future. Many see mobile financial services as only a product (just like a savings bank account or a debit card), and not as a full-fledged, revenue-earning business. To some extent, this viewpoint has limited the willingness of providers to invest more in mobile financial services.
recommendations from our recent policy research study
The research study, available here on this website, offers a roadmap with key action points that finance sector actors can undertake together to enable a more conducive digital ecosystem. Specifically, it lists policy-level recommendations that can promote the uptake of mobile financial services among small businesses.
Detail operational guidelines on MFS business accounts and B2B transactions.
Clearer policies and simplified registration processes could encourage an estimated 2.73 million registered small businesses to open mobile financial service accounts. These guidelines should be designed to bring clarity to market players regarding opening of business accounts, B2B transaction limits, and business account balance limit. It is expected that transaction fees may reduce because of detailed MFS operation guidelines.
Tiered and/or e-know your customer (KYC) based MFS accounts to open merchant mobile wallet accounts
Flexibility in opening business MFS account for merchants based on their needs and requirements will increase B2B transactions using merchant accounts. Depending on business requirements, an MFS provider will seek required documents for verification from small businesses during registration of a business MFS account. The type of KYC will determine the transaction limit for the merchant or the MSE. This will also ensure that financially excluded merchants or the MSEs can open MFS accounts with ease.
Link MFS accounts with National Identity Database and bank accounts, and introduce e-KYC and tiered KYC
National Identity Database-seeded mobile financial services accounts will help Bangladesh Bank identify individual mobile financial service users, and track multiple accounts used for Over the Counter (OTC) transactions. Similarly, customers’ bank accounts and mobile financial services account should be linked and seeded with National ID numbers. This will enable an interoperable environment, where users can conveniently transact across their bank and mobile financial services account. The linkage will be of significant advantage to the government for all bulk Government-to-person payments, such as social safety net payments. It would also enable the government agencies to uniquely identify a beneficiary, thereby eliminating instances of ‘ghost’ or duplicate beneficiaries. This, in turn, has the potential to prevent leaks and result in savings for the Treasury.
Create a uniform unstructured supplementary service data (USSD) pricing policy for all mobile financial service providers
USSD is a globally used system for mobile phone communication that allows users to send text-based information between a mobile phone and an application programme on a mobile network. As an example of how this works: when users begin a message with an asterisk (*) and ends with a hashtag (#), they are using a USSD system. This system allows data to be sent cheaply from even the most basic mobile phones.
It is assumed that transaction fees would be reduced because of uniform session based USSD pricing. If the transaction cost is reduced, approximately 1.26 million registered MSEs may use MFS for business purposes. A uniform and fair USSD pricing policy, without preferential USSD pricing, will encourage newer, smaller, or less active mobile financial service providers to participate on a more level playing field.
Interoperability among MFS providers and across banks
Interoperability allows small businesses to facilitate transactions among service providers. This means higher volume of transactions. This will also enable transfers from one mobile wallet (m-wallet) to other m-wallets, m-wallet to banks, and banks to m-wallet.
Promote innovations and incubate new products better services specifically for small businesses through a safe space
A safe space or a regulatory sandbox allows businesses to test innovative products, services, business models, and delivery mechanisms without immediately incurring normal regulatory consequences of business.
MFS guidelines for Microfinance institutions to promote partnership among MFIs and MFS providers
Regulators and policy makers must improve coordination among microfinance institutions and mobile financial service players. Better coordination will create opportunities and foster partnerships that will lead to a favourable environment for sustainable partnership and fair competition.
Regulators such as the Bangladesh Bank, Bangladesh Telecommunication Regulatory Commission, and Microcredit Regulatory Authority should prioritise collaboration to develop an environment that creates growth and healthy competition. These actors should develop their own understanding of digital and financial financial service opportunities, explore the challenges that small businesses face in accessing financing opportunities, and learn about what works in other countries.
Bangladesh Bank and Microcredit Regulatory Authority are key players to engage microfinance institutions and mobile financial service providers to build commercial agreement and finalise agreed cost-sharing models. There should also be substantial effort build technical understanding of microfinance and mobile financial service providers among these sectors. This will support in building innovative products and foster investment in building capacity.
Revise MFS guidelines to allow all financial service providers to leverage MFS platform
The market has great potential develop through introduction of innovative products such as digital credit, short-term credit, microinsurance, facilities for loan repayments, opportunities to pay government taxes, and salary disbursements. Providers can partner with banks, non-bank financial institutions, and microfinance institutions for products such as short-term credit and loan repayments.
In addition, providers have an opportunity to build products around specific use cases, such as school and college fee payments and utility bill payments. More awareness of the potential of services will help move the market beyond cash-in, cash-out, and payments. The current MFS guidelines needs to be reviewed so that providers can leverage MFS platforms and improve use cases by providing innovative services.
Images from the research policy study launch in Dhaka in March 2018
BFP-B support to small businesses
Our team is conducting a total of eight studies into economic opportunities for small businesses to assist the Government of Bangladesh and regulators to bring evidence-based policy reforms. Among those studies is support to the Bangladesh Bank in drafting the country’s National Financial Inclusion Strategy.
Other studies include microenterprise lending by microfinance institutions, SME credit-related policies of the Bangladesh Bank, cluster and value chain financing for small businesses, innovative MSE financing products, feasibility study on transformation of microfinance institutions into microfinance banks, and agent banking
In addition, we are also managing a multi-million-pound challenge fund that encourages companies to pitch innovative projects that can create economic opportunities for small businesses. Successfully pitched projects receive co-investment from our challenge fund to help them launch.
Meanwhile, we are also assisting the Microcredit Regulatory Authority to establish the Microfinance Credit Information Bureau.
Financial sector actors that are interested in our policy research, expertise, and our awareness of small business-related investment opportunities can contact us through our website, attend our regular events, and connect with our social media channels.