COVID-19 has accelerated the use of digital financial services around the world. For many low-income households, the ability to tap into financial resources from social networks and receive cash transfers has determined whether there is food on the table.
Bangladesh’s well-developed digital financial services ecosystem, particularly its grassroots network of mobile money agents, has enabled millions of financial transfers at times when physical movement has been difficult. Rough estimates show that in April 2020, early in the COVID-19 pandemic, Bangladeshis opened close to 300,000 mobile financial services (MFS) accounts. Women opened more than two-thirds of the accounts created between March and August 2020, helping close the country’s considerable gender gap. Many of the transfers early in the pandemic were also conducted by people with limited digital capability. One study found that 50% of users relied on agents for support in completing a transaction.
Not only has the digital system helped people during the pandemic, but Bangladesh also emerged from the early days of COVID-19 with higher levels of financial inclusion and a marked reduction in the gender gap. This outcome is less the result of a magic ingredient than of policy that has evolved over time. We believe smart policies have contributed in at least two ways to the resilience and growth of Bangladesh’s financial system during COVID-19.
1. Economic stimulus was designed to incentivize digital payments
When COVID-19 hit, Bangladesh integrated payments into several of its economic responses. One of the government’s earliest responses to the pandemic was a stimulus package for the garment industry, which was devastated by a dip in global demand. This program enabled factories to access low-interest loans from the government to cover worker wages. To qualify for the loans, however, the government required companies to disburse wages digitally. Prior to this policy, an estimated 25% of garment workers — or 1 million workers — received wages digitally, and within two weeks of Bangladesh Bank mandating readymade garment factory (RMG) workers get paid digitally, 1.9 million workers had opened accounts to receive their wages. There are about 4 million RMG workers, more than half of whom are women.
The government also rolled out an emergency cash transfer program for 5 million informal workers and vulnerable households. The government had already been gradually digitizing existing social protection programs before COVID-19. But this was the first time it mandated digital payments from a program’s inception, and it gave many employers and workers a compelling reason to adopt digital payments.
2. Central bank policies made it easier for the unbanked to open and use accounts
Implementing digital payments for garment workers and government-to-person (G2P) beneficiaries presented formidable challenges that the central bank addressed through various policies.
Among the biggest challenges was opening accounts for millions of unbanked people. Those with smartphones were able to open accounts remotely, but most people did not have this technology. Moreover, garment workers had largely returned to their villages and could not easily open accounts at their factories. Policy makers addressed this issue by adopting pragmatic know-your-customer (KYC) policies. These policies facilitated mass account enrollment by enabling garment factories to directly share workers’ identification information with financial services providers. Workers who lacked a national ID were allowed to open accounts through this process. Between March and May 2020, more than 2 million garment workers opened new financial accounts.
At the same time, over a million digital bank accounts were opened for other social safety net or G2P recipients, and US$80 million was delivered digitally to these beneficiaries. G2P beneficiaries represent some of the most vulnerable groups of Bangladesh’s rural population, including elderly, disabled, widowed and impoverished groups, making these payments all the more critical.
Another challenge policy makers had to confront was the fact that the initial national lockdowns momentarily paralyzed Bangladesh’s robust network of mobile money agents, who most customers rely on to send and withdraw funds from their accounts. Not only were agent shops often under lockdown, but there was a national liquidity shortage and shortened banking hours. By some estimates, at the height of the pandemic, about 30% of agents closed at one point or another, particularly in the country’s most remote areas.
Bangladesh’s central bank and the other regulatory bodies moved quickly to declare mobile financial service workers as essential service providers, enabling them to reopen quickly and continue serving customers. Surveys of government transfer program recipients found very high rates of satisfaction with mobile money agents (4.6 out of 5). Beneficiaries also reported travel times of less than 30 minutes to agents (68%), service time of under 10 minutes (67%) and only minor incidence of extra fees (2.5%).
A broader shift to digital payments among private and non-profit sectors
As it became evident that Bangladesh’s digital financial services infrastructure could weather the crisis, even in rural areas, individuals and other institutions began to leverage this infrastructure more intensively. The country’s largest non-profit, BRAC, shifted to digital payments. It digitized salaries for its network of 23,000 teachers, who have reached over 177,000 low-income students through mobile-based lessons during school closures; digitally returned savings deposits to over 400,000 microfinance clients; and digitized support for 50,000 ultra-poor households in its graduation program. The BRAC Health Programme has a network of 50,000 community health workers, out of which 43,000 workers began receiving digital payments in 2020. Of these, 35,000 are new bKash users, all women.
Since July 2020, monthly merchant payments through mobile financial services have exceeded the BDT 1,000 crore mark (about US$1.2 million). It demonstrates that customers are increasingly doing fewer cash-out transactions.
The benefits of digitization go beyond crisis management
The digitization of wages and payments during COVID-19 has done more than increase account ownership and facilitate crisis management in Bangladesh. There seem to be other benefits to people’s lives, some immediate and some longer lasting. For example, a BSR study finds that wage digitization had led to a 21 percentage point increase in RMG workers saving regularly in their accounts. The same study finds a 19 percentage point increase in women expressing greater confidence in their ability to tackle unexpected financial shocks.
Weekly interviews with garment workers found that those who were paid digitally before COVID had more food security during the pandemic than those who were onboarded after the pandemic struck or who continued to be paid in cash. This may be because these workers were more familiar with how to use digital financial services and had accumulated more savings.
Findings like these indicate that more work needs to be done in pandemic preparedness to enable households to maximize the benefits of financial services when they need it most.
Digital transactions have shot up in other segments of the financial ecosystem as well. Utility payments through mobile financial services increased by 234% from April to August 2020 alone, compared with a 37% increase during the same period in 2019. Continuation of the 2% cash incentive by the Bangladesh Bank for sending remittances through legal channels has motivated migrant workers to send more money digitally; there was an unprecedented cumulative increase of 419% in monthly inward remittances in 2020.
Bangladesh’s digitization has not only helped the country cope with the pandemic. It has also set a trend that is aligned with the government’s "Digital Bangladesh" plan and aspiration to include the country’s unbanked, vulnerable population in the financial system in near future.
Snigdha Ali is a program officer at the Gates Foundation, where she manages initiatives for advancing financial inclusion in Bangladesh. Maria May leads the Gates Foundation's efforts to accelerate impactful usage of digital financial services by unbanked and low-income people globally. This is the final post in CGAP's "Bangladesh at 50: Reflections on Financial Inclusion" blog series. To learn more, see other posts in the series contributed by experts who know the country well.