Through Vision-2021, the government formulated the outline of Digital Bangladesh. And the highest excellence of the digital system will be possible only through the construction of the digital economy. In the past, there was a belief in people’s minds that the government is capable of providing daily services through digital services. It is expected that the Honorable Finance Minister announced the introduction of digital banking in the budget speech of the financial year 2023-24 in the National Parliament on June 1.
For the purpose of building a ‘Smart Bangladesh’ announced by the government, digital banking initiatives have been taken to create a cashless Bangladesh by providing IT-based digital banking services to the people. Digital banking enables a bank to provide banking products and services to customers through an electronic or online platform. Aiming to make 75 percent of banking transactions cashless by 2041 is the first step towards implementing a ‘smart economy’. Considering the socio-economic conditions of the country, the legal framework of the existing banking system, the current advantages and disadvantages of technology-based banking, Bangladesh Bank has formulated ‘Guidelines for setting up digital banks’ in Bengali and English languages.
The biggest challenge of the country’s economy is the very low revenue-GDP ratio. Hence digital banking system is necessary for at least one main reason. Digital banking can be the biggest strategy to deal with deficit by increasing revenue collection by closing all avenues of revenue evasion. It is plausible, people trust 100% any government financial involvement. So at the end of the day if everything goes well I hope digital banking will be successful.
At the beginning of the discussion, I am stating how the nature of digital banking will be. As per Central Bank policy, Digital Bank will have a head office which will be non-premises. As a result, it will not have any branch or ATM booth. That is, such banks will not provide any over the counter (OTC) services. It will not have its own sub-branch, CDM or CRM. Naturally, all their services will be app-based which will be operated by mobile phones or other digital devices. As a result customers can receive 24/7 service. Digital Bank can provide services with the help of virtual card, Chaj or any other advanced technology to facilitate transactions, but cannot use plastic card directly. Although these banks can collect expatriate income of expatriate workers, they cannot engage in trade finance in foreign currency.
At present there are 61 traditional banks in Bangladesh. In the conventional banking system, a capital of 500 crore rupees is required to open a bank. But opening each digital bank will require a minimum capital of 125 crore rupees. It will be easier to get partnerships with digital banks as compared to traditional banks as they require less capital. Within 5 years of the central bank license, the bank has to issue an initial public offering (IPO) in the country’s market. As a result, it appears that the accountability of these banks will be confirmed. The amount of IPO should be equal to the minimum amount of the initial contribution of the sponsor. Apart from this, to be a director requires at least 50 lakh rupees. Digital Bank has to maintain Minimum Cash Deposit (CRR) and Statutory Deposit (SLR) prescribed by Bangladesh Bank like conventional banks as per Company Act. In addition, the Advance-to-Deposit Ratio (ADR) is to be maintained as determined by the Central Bank from time to time.
Relevantly, half of the entrepreneurs in setting up digital banks should have education, knowledge and experience in technology-based banking, emerging technologies, cyber laws and regulations. The other half should have adequate knowledge and experience in banking, e-commerce and banking laws and regulations.
Most importantly, a person who has been or has been in default of a financial institution within the last five years or any member of his family cannot apply to be sponsored by Digital Bank. Apart from this, those persons who are in insolvency proceedings will also be considered ineligible. Digital Bank cannot open any Letter of Credit (LC) as per current guidelines. Although loans can be given on a small scale, there is no provision to give loans to large and medium industries. However, the success of digital banking system in the future will surely take into account all types of lending.
Digital banking is one of the ways to implement the government’s goal of building a smart Bangladesh. Conventional banks are time-consuming and require customers to physically visit for services such as taking loans, opening deposits, etc. So digital banking is more attractive than conventional banking to the new generation. In addition, the annual dividend of the bank is often reduced due to meeting the cost of branch banking. Digital banking is progressing with time in many neighboring countries including Singapore, Philippines. Digital banking has also started in many South Asian countries including India. As the risky use of virtual currencies such as cryptocurrencies increases globally, central banks in many countries are showing interest in introducing digital currency versions as alternatives to virtual currencies.
Digital banking is as risky as it is promising. There are many challenges in its implementation. Firstly, whether the digital banking system will be equal and transparent for all, it has to be considered. Secondly, due to lack of technology skills or inadequacy of technology, it will be impossible for many people to avail such banking services. Third, many service providers and receivers are still comfortable with cash transactions, which is the biggest challenge of the system. Fourthly, whether people of all incomes can be brought under this service or not, we have to work with that in mind. Fifth, issues related to cyber security must also be taken into consideration. No doubt, the digital banking system should be made competitive. Besides, ensuring service with special focus on remote areas (Haor region, hilly districts, lowlands etc.) will be prioritized.
I would like to describe the main challenge of digital banking system with an example. Suppose, person ‘A’ made a purchase from a furniture store with 10 thousand rupees. From that money, the shopkeeper deposited 1 thousand taka with him and paid a hospital bill of 9 thousand taka. From there, the owner of the hospital paid another 2 thousand taka and paid his electric bill with 7 thousand taka. Finally, if any organization accepts this money, then there is no problem. If he buys medicine for 7000 rupees without paying the electric bill and later the medicine seller goes to buy green pepper with some money from that money, then the question will come whether the green pepper seller is connected with digital banking or not? If not, cashless transactions will not be possible. Since a large part of our economy is informal, there is room to wonder how far digital banking can be taken.
But hopefully, digital banking will adapt to the economy in the near future even if it faces initial challenges as we have become accustomed to mobile financial services. Transaction through ‘Development’ is our biggest ‘invention’ in modern times. According to statistics, Bikash, Cash and Rocket have 5 crore, 4 crore and 3 crore customers respectively, through which more than 2 thousand crore rupees are transacted on an average daily. There are more than 6 million internet banking customers. Moreover, more than 1.7 million customers are availing agent banking services. Every year these numbers are increasing at a geometric rate. With the passage of time labour-dependent micro floating entrepreneurs, people engaged in marginal professions and small traders are getting involved in these digital services which are the main driving force for the success of digital banking. Initially, digital banking should be initiated in the hands of the IT-dependent population which is currently used to digital transactions which should be extended to all in due course of time. Apart from this, its scope of service should be expanded with the passage of time. For example, foreign trade transactions, lending to large industries etc. should be included.
The most promising thing is that people trust the government 100% when it comes to financial transactions. Since, the entire process will take place under government management (Bangladesh Bank) it will practically not fail. However, the aforementioned challenges have to be addressed in order to transition to a 100% cashless and smart economy. But where is our objection to be optimistic?
Author: Development Economics Researcher
