Bangladesh turned 50 this year. Since gaining independence, the country has outperformed its neighbors on basic development indicators. Per capita income is up, and even more impressive are the leaps forward it has taken on infant mortality, women’s participation in the labor force and educational attainment. All this has happened alongside many years of large-scale financial inclusion, which begs the question:
There are good reasons to observe that Bangladesh’s progress has been largely driven by factors other than financial inclusion. For example, nationwide drives to teach oral rehydration have helped bring down infant mortality. And a multitude of investments in informal and formal primary education have helped gradually increase levels of educational attainment for both boys and girls. The garment industry is rightly viewed as a major driver of the country’s economic growth.
When it comes to the role of financial services, the conventional wisdom is driven by more than a decade of randomized control trials (RCTs) on microfinance and more recent RCTs on digital finance. These studies have generally concluded that microfinance loans help some borrowers but hardly help other individuals at all. More recent RCTs (including this one in Bangladesh) generally suggest that digital payments have made positive contributions to Bangladesh’s development, though digital financial services have been nationwide only in the past decade (large-scale microfinance has a 40-year history).
RCTs measure specific effects over fairly short periods of time (usually 12 to 18 months). But what Bangladesh’s story compels us to ask is how the country’s financial system has cumulatively, over decades, contributed to progress. At its birth 50 years ago, Bangladesh had few financial institutions and weak capacity, but out of this newly formed nation arose a civil society and government focused on mass-scale development. From this, a world-leading microcredit industry emerged in the 1980s. Today, even a casual visitor to rural Bangladesh will notice the presence of microfinance branches and mobile financial services agents. Financial diaries, such as those from Hrishipara, illustrate the intensity with which Bangladeshis use informal as well as formal financial services. It would be difficult to argue against the idea that many Bangladeshis have used these tools over the years in ways they see as helpful to achieving their goals. In this context, it is notable that some of the most popular products in Bangladesh are commitment savings products that have tenures of 1 to 10 years. Many of these products have maturity dates well beyond what RCTs normally try to measure.
It is also worth reflecting more deeply on whether and how people learn to use financial services more effectively over time. In Bangladesh, financial services have been widespread for so long that many have likely learned to more acutely determine when and how services are useful (and when they aren't). One sign of this is that Bangladeshis often stay away from microcredit loans. Despite continued efforts to grow microcredit loans in Bangladesh, loan customers plateaued by the early 2000s having met the aggregate limits of demand, settling in at around 15 – 20 million borrowers at any given time. Household interviews CGAP undertook back in 2013 showed that quite a few Bangladeshi households were reluctant to take loans, having struggled with over-indebtedness in the past or having seen neighbors deal with such difficulties. Such learning comes with time (experience) and scale, and suggests people are more careful about borrowing when it suits them but can also stay away if they do not expect a positive outcome.
Bangladesh’s progress on development challenges us to look beyond the short timeframes we often limit ourselves to and think more broadly about financial inclusion.
It compels us to consider how poor people may learn to use services more productively and safely over a long period of time.
This post kicks off a blog series on Bangladesh’s 50 years of progress. Over the next several weeks, guest bloggers who know Bangladesh well will highlight some of the less well-known narratives about Bangladesh’s history and financial inclusion.
Stuart Rutherford, a pioneer in the development of financial diaries and promoter of the Hrishipara diaries, will draw on decades of work to explore the under-appreciated role that commitment-based savings products have played in financial inclusion.
Working with Anik Chowdhury and Samveet Sahoo, Graham Wright of MSC will reflect on his many years of experience and explain what has helped Bangladeshi microfinance institutions remain resilient in the face of crises, including the COVID-19 pandemic.
Nusrat Jahan of BRAC University will discuss some of the ways financial services have (and have not) enabled women to do better in Bangladesh than in many neighboring countries.
Finally, Snigdha Ali and Maria May of the Gates Foundation highlight how thoughtful policy reform may be helping develop pro-poor, incremental, continuous and smart policy improvements that enable low-income people to benefit from new digital financial services, especially during the COVID-19 response.
We hope this blog series will help celebrate Bangladesh’s 50th year and serve as a means to advance our understanding of how financial inclusion connects to wider development.
Stay tuned over the next several weeks.