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Financial Inclusion Bolstering Inclusive Economic Growth in Bangladesh

Atiur Rahman, PhD

Governor, Bangladesh Bank

16 February, 2015

1

Content

o Financial inclusion as a tool for bolstering inclusive growth

o Bangladesh Bank (BB) initiatives for inclusive financing

o Financial inclusion status in Bangladesh

o Growth and stability outcomes

o Concluding remarks

2

Financial Inclusion: how does it accelerate inclusive growth?

o Financial inclusion:

a key element of social inclusion

necessary to foster inclusive growth

combats poverty by opening up blocked opportunities

o Inclusive financing of farm/non-farm output initiatives generatenew employment on the demand side

matching new domestic output on the supply side

3

Why do we need inclusive financing

o Conventional monetary and financial policies do not address inclusivity concerns, liquidity flows into profit seeking from speculative pursuits.

o Bangladesh Bank therefore stepped in with financial policies steering initiatives financing away from speculative uses towards socially responsible productive pursuits.

o BB initiatives include interalia motivational efforts, creation of necessary enabling environment, and policy support.

4

A glimpse of financial inclusion programs in Bangladesh

5

Three broad pillars of inclusive financing in BD

o BB’s inclusive financing thrusts are on output initiatives in

Agriculture supporting food security and food price stability

SME financing promoting output, employment and income generation

green financing supporting environmental sustainability

o Widening advancement opportunities for the poorer population segments

6

Agriculture contributing about a fifth of GDP gets less than 6% share of total bank credits

o Policy initiatives of ensuring adequate financing for agriculture include:

Mandatory minimum 25% agricultural lending target for all banks

Government interest subsidy on loans for specified higher value exotic crops and spices

Banks with inadequate rural branch presence can lend through local MFIs

Credit needs of tenant farmers supported by lending through a large reputed MFI

Bank accounts for farmers available at nominal deposits; 10 million accounts opened so far

7

Small and medium enterprises (SMEs)

o Contributes to 22.5% of GDP and 40% of employment.

o SME financing supported by refinance lines funded partly by development partners (IDA, ADB and JICA) and partly by BB.

o Taka 3.45 billion disbursed from refinance window

o 21.9% of the SME credit distributed to women entrepreneurs

o ‘New Entrepreneurs Fund’ and ‘Jute Sector Fund’ launched in 2014

8

SME credit rose sharply in recent years

Source: Bangladesh Bank

19.4317.61

20.60

22.88

27.27

24.74 24.6225.70

10.81

10.47

13.38

16.05

20.58

18.8219.58 20.27

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13

% s

hare

Aggriculture and SME Credit as % of Total Domestic Credit SME % of Domestic Credit

9

Green financing

o Macro prudential policy support for green financing includes:

Banks & financial institutions must allocate ≥5% of loanportfolio to green finance by 2016.

Better supervisory (CAMELS) rating for good performers

Differential equity margin and loan pricing requirementaccording to environmental risk grading

o Green financing supported by refinance lines funded by BB & ADB

o Refinance line covers 47 green products.

10

o Taka 112.57 billion invested so far as green finance.

Green financing..(cont’d)

Amount (million Taka) Number

Solar home system 154 4,867

Irrigation pumps 68 12

Solar PV module plants 421 3*

Biogas plants 524 1,578

* Total capacity of 53 MW/year

Refinance supported green financing covered:

Source: Bangladesh Bank

11

Inclusive financing delivery supported by major modernization of financial sector IT infrastructure

o Multifarious initiatives launched to digitize the financial sector:

Bangladesh Automated Clearing House (BACH)

National Payment Switch (NPSB)

Online credit information and supervisory reporting

Mobile financial services (MFS)

Enterprise Data Warehouse

Online Bond Trading

Anti-Money Laundering Monitoring (goAML)

12

Mobile Financial Services (MFS)

o Why MFS in Bangladesh?

Agro-based livelihood

Cash based economy

Significant domestic remittance flows

Growing urbanization

Omnipresent mobile telephone network

o Guidelines on MFS and agent banking issued to facilitate inclusive financing

o 25.2 million mobile bank accounts opened so far, employing 0.5 millionagents

13

Regulatory Structure for MFS

o Stakeholders Banks Mobile Network Operators Technology Providers Distributors Agents Involvement of other Regulator (i.e. BTRC)

o Bank-led Model

Regulated by Bangladesh Bank

Financial institutions provide the service

MNOs provide mobile connectivity for fees

Customers and agents use their handsets

Guidelines issued in September 2011

28 banks were permitted; now over 20 million accounts

14

Common people transferring money from urban to ruralBA

GER

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ANJ

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GAI

L

Cash In Count Cash Out Count

$1 billion transaction per month

Source: Bangladesh Bank

15

Other financial inclusion programs

o Bank accounts for school children

itinerant wage labourers

street children

o 850 thousand school bank accounts opened so far

o 5 million ‘10 Taka’ accounts opened to distribute financial aid to:

social security program beneficiaries

hardcore poor, freedom fighters

destitute beneficiaries under Hindu Welfare Trust

16

Status of financial inclusion in Bangladesh

17

2009 2014 % Change

Total number of bank branches 7,187 8,821 23%

a) Urban 3,051 3,787 24%

b) Rural 4,136 5,034 22%

o Banks are obliged to maintain 1:1 ratio in rural-urban areas for opening of new bank branches.

Status of financial inclusion in Bangladesh

Source: Bangladesh Bank

18

6.98 7.19 7.44 7.65 7.848.19

0.82 1.

25

2.05

3.61

4.89

6.33

0

1

2

3

4

5

6

7

8

9

2008 2009 2010 2011 2012 2013

Commercial bank branches per 100,000 adults

ATMs per 100,000 adults

Demographic Penetration of Bank Services

816 12

67

2121

3797

5248

6797

69027244

76418009

83788742

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2008 2009 2010 2011 2012 2013

Number of Automated Teller Machines

Commercial banks: Number of Branches

Number of Bank Branches & ATMs

Status of financial inclusion...(cont’d)

Source: Financial Access Survey (Sept. 2014), IMF

19

Growth and stability outcomes of financial inclusion programs

20

o Sustained 6% plus economic growth over the last decade with:

sound macroeconomic fundamentals

downward edging inflation

moderate fiscal deficits

o Incremental domestic output stabilizing domestic prices

o Inclusive financing stabilizing the financial sector by bringing large and diverse bases of small loans and deposits

o Inclusive growth strategy generating strong internal demand

Growth and stability outcomes

21

-2

0

2

4

6

8

10

12Bangladesh India Pakistan Sri Lanka

Projection

Perc

ent

Highest growth prospect in the region

Source: World Economic Outlook (Sept. 2014), IMF

22

6.77

5.49

4.29

5.73

2.132.61

1.95

0.57

0

1

2

3

4

5

6

7

8

India Sri Lanka Pakistan BangladeshAverage Rate of GDP Growth Growth Volatility

Perc

ent

2nd highest growth and lowest volatility in the region: 1995-2014

Source: World Economic Outlook (Sept. 2014), IMF

23

0%

2%

4%

6%

8%

10%

12%Ju

n-01

Dec

-01

Jun-

02D

ec-0

2Ju

n-03

Dec

-03

Jun-

04D

ec-0

4Ju

n-05

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-05

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06D

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6Ju

n-07

Dec

-07

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08D

ec-0

8Ju

n-09

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-09

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0Ju

n-11

Dec

-11

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n-13

Dec

-13

Jun-

14D

ec-1

4

Non-Food Food General

Inflation is falling since the end of 2011

Source: Bangladesh Bank

24

02468

1012141618202224

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Perc

ent

Bangladesh India Pakistan Sri Lanka

Projection

Projected inflation shows a downward trend

Source: World Economic Outlook (Sept. 2014), IMF

25

9.458.57

7.316.45

4.523.84

2.872.44

0123456789

10

Sri Lanka Pakistan India BangladeshAverage Rate of inflation Inflation Volatility

In P

erce

ntLowest inflation and volatility in the region:1995-2014

Source: World Economic Outlook (Sept. 2014), IMF

26

10

15

20

25

30

35

40

India Pakistan Sri Lanka Bangladesh

Investment as share of GDP is steadily rising

Source: World Economic Outlook (Sept. 2014), IMF

27

0

10

20

30

40

50

60India Pakistan Bangladesh

Liberalization

Trade-GDP Ratio: Bangladesh is opening up gradually

Source: World Economic Outlook (Sept. 2014), IMF

28

100

300

500

700

900

1100

1300

1500Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

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l-06

Jan-

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l-07

Jan-

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l-08

Jan-

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l-09

Jan-

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l-10

Jan-

11Ju

l-11

Jan-

12Ju

l-12

Jan-

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l-13

Jan-

14Ju

l-14

Mill

ion

USD

Worker's remittances are on the rise

Source: Bangladesh Bank

29

0102030405060708090

100110120

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Bangladesh India Pakistan Sri Lanka

Lowest Debt-GDP Ratio in the region

Source: World Economic Outlook (Sept. 2014), IMF

30

0.0115

0.0120

0.0125

0.0130

0.0135

0.0140

0.0145

0.0150Ju

n-07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

US

D p

er T

aka

Stability

Depreciation

Stability

Appreciation

Exchange rate is stable since June 2013

Source: Bangladesh Bank

31

o Inclusive and environmentally responsible financing is of highurgency for low income climate-change threatened economieslike Bangladesh.

o Inclusive financing has served Bangladesh well to retain real andfinancial sector stability amid the global financial crisis.

o Bangladesh’s approach of internalizing inclusive, green financingwithin the framework of traditional stability focused monetaryand financial policies have started attracting external attention.

Concluding remarks