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Bangladesh is experiencing unprecedented growth and success in all sectors. Year after year, per capita income is rising, millions of people are being lifted out of poverty, government services are becoming more digitized, and the country is one of the global leaders in RMG exports. [1] In this ongoing journey of becoming a developed nation, Government-to-Person (G2P) payment has played a critical role in alleviating poverty and improving the standard of living of the citizens. The G2P payment approach is a way of transferring cash assistance like social benefits, pensions, government wages, stipends to students, and unemployment benefits to improve the welfare of the poorest. The Government of Bangladesh (GoB) and governments worldwide are seeking ways to respond to the economic and social consequences of the COVID-19 pandemic, and the G2P payment is an example of one such attempt.
Bangladesh’s social safety net initiatives have helped to alleviate poverty and vulnerability by providing different types of assistance to a variety of demographic categories. These include providing financial security for the elderly, widows, and people with disabilities, and also for creating temporary jobs for men and women of working age, and promoting the healthy development of young mothers and children. For the fiscal year 2021-22, the GoB has set aside 17.83% of the overall budget for Social Safety Net Programs (SSNPs).[2] These programs have been designed in the form of cash allowances, public work, education, and health incentives for poor and vulnerable households, all with the goal of combating poverty, ensuring economic inclusion, and strengthening human capital. The table below outlines notable SSNPs in Bangladesh.
According to the National Social Security Strategy (NSSS), the GoB is systemically targeting reforms in the social security sector to digitize this crucial government service. NSSS aims to strengthen the G2P payment system as it is one of its key mandates. The traditional way of transferring G2P payments was through cash and checks. However, in recent times, the government is transitioning from a cash-based system to a digitized G2P payment system. As we deep dive into the article, we will be looking into the evolving G2P payment landscape in Bangladesh.
G2P payments play a significant role in Bangladesh’s poverty alleviation and resilience-building efforts. Since the early 1990s, the ‘cash-in-hand’ method has been popular for transferring assistance to beneficiaries due to its feasibility within the current operating environment. Stakeholders reported it to be the quickest and most efficient method in terms of cost, human resources, and time. However, over time this traditional method has lost its popularity and is shifting toward a digital mode of cash transferring through Financial Service Providers (FSPs). The fundamental distinction between these new systems and traditional techniques is that they provide beneficiaries with more options for receiving government payments.
In general, cash grants can be classified into two categories: Conditional and Unconditional cash grants, both depending on the objectives of the cash transfers.
Conditional cash transfer programs give money to households on the condition that they comply with certain predefined requirements. These conditions may include, for example, up-to-date vaccinations, regular visits to a healthcare facility, regular school attendance by children, and complying with health and nutrition promotion activities, such as attending education sessions, taking nutritional supplements, etc. Conditional cash transfer programs attempt to reduce poverty and break the poverty cycle for future generations by investing in the development of human capital.[7] Whereas, unconditional cash transfers are cash payments provided to financially disadvantaged people without requiring anything in return. Governments in low- and middle-income countries increasingly use these to reduce poverty or other vulnerabilities, such as those related to health.[8] Both the programs are quite popular among beneficiaries however, the government and development agencies are stepping out of the traditional methods of transferring cash via cash-in-hand methods and shifting toward an integrated digital payment system through Financial Service Providers.[9] This is mostly due to the fact that cash-based G2P transfers are more vulnerable to fraud, corruption, other forms of crime, and these risks are termed as leakages in the systems.
Agent banking is a method of bringing formal banking to the doorsteps of the underserved community on a small scale.[10] For banks, it serves as a substitute for branch expansion in rural areas and aims to bridge the gap between the bank and the unbanked citizens of Bangladesh. In the year 2013, Bangladesh Bank (BB) first introduced agent banking in Bangladesh where commercial banks serve the rural population by engaging agents under a valid agency agreement.[11] As of September 2021, there are 61 scheduled and 5 non-scheduled banks but the reach of banking services is quite limited at the grass-root levels. To combat this situation Bangladesh Bank came up with a mandate that if a private bank wishes to create a branch in the urban regions, it must first open two branches in the rural areas.[12]
At present, 28 Banks have agent banking licenses, and 27 banks are operating agent banking in Bangladesh.[14] The number of total accounts reached 12,911,541 as of September 2021. Among those accounts, more than 52% of account holders are male, 47% are female, and less than 1% are institutions.[13]
Under the purview of 20 stimulus packages, the government has declared few cash transfer programs, and the resource allocation for these stimuli is predominantly through banking channels such as agent banking and Mobile Financial Services (MFS). The government and relevant stakeholders are equally promoting agent banking accounts, bank accounts, and MFS since there are cost variances among these channels.[15] However, MFS is gaining immense popularity among government stakeholders and development organizations due to the reduced crowding that is still happening at banks. Additionally, experts also believe that overall efficiency will increase if beneficiaries are brought under the MFS umbrella.
Although all types of digital payments are on the rise in Bangladesh, the MFS business stands out for its rapid growth. In addition, the increase in the number of MFS available is also signaling a trend in changing consumer behavior regarding digital payments.[16] This contactless platform for cash transfers allows customers to pay utility bills, withdraw cash, make deposits, mobile recharge, transfer remittances, and purchase goods and services under reasonable charge rates through their ‘mobile wallets’. Furthermore, customers can easily access the formal banking system without going through the hassle of moving to banks physically. From May 2020, the use of MFS grew sharply as the country hit the Coronavirus pandemic and people were obliged to conduct transactions on mobile phones to acquire items, services, and make payments. According to Bangladesh Bank, currently, 13 banks are operating MFS with 1,162,000 MFS agents across the country.[17]
Previously when the government resolved transactions manually, the government had to shell out a 25% fee for each disbursement. However, now no cost is involved in the transfer of funds since it is carried through banks.[18] From the beneficiary’s point of view, poor and vulnerable people can select their preferred means of receiving cash transfers from banks, mobile financial service providers, or agent banking/village kiosks via digitized G2P payment systems. Millions of maternity, old age, and widow allowance recipients, as well as student scholarship recipients, now have more control over their money and the opportunity to access their funds quickly and without having to travel significant distances.[19] The table below lists notable projects implemented through MFS.
According to the Government’s Programs, 2 Million beneficiaries in 24 districts will receive allowance through bKash and they can easily cash out the money from any location in the country through bKash’s extensive network without any additional cost. The government will bear BDT 7 of each Cash Out charge and bKash will bear the rest for SSNPs under the MSW.[21] However, the cash-out charges vary from program to program. As a result, MFS is flourishing in the country and aiming to develop a competitive, commercially viable, and secure payment system to facilitate overall financial inclusion, benefitting beneficiaries, and FSPs.
Both Agent Banking and MFS play a significant role in promoting financial inclusion and economic development in Bangladesh. These two services might work together to give clients a more convenient service experience. They can extend their offerings to customers at a lower cost, and it will also allow them to tap into each other’s customer base. As a result, the collaboration will ensure a win-win situation for all. In addition, the Bangladesh government is also laying the groundwork through regulatory measures and the FSPs are spearheading the transition from cash to digital. Furthermore, giving recipients a choice will encourage FSPs to compete for them as customers. For FSPs to secure a part of the country’s $150 Million annual G2P transfer volumes[24], they should concentrate on winning and maintaining customers’ trust and interest. Therefore, access to finance for the poor and marginalized will be crucial, and digitizing G2P further will act as a catalyst for the financial inclusion of millions of those previously underserved by traditional banks.
This article was authored by Samiha Anwar, a Business Consultant at LightCastle Partners. Advisory and editorial support was provided by Farah Hamud Khan, Senior Business Consultant and Project Manager at LightCastle Partners. For further clarifications, contact here: [email protected]
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