Digital Banking in Bangladesh: A Path to Financial Inclusion

Yasser Arafar

Sr. Analyst – Bangladesh Lead

In December 2022, Bangladesh’s prime minister, Sheikh Hasina, announced an initiative called Smart Bangladesh, whose goal is to implement four key bases: smart citizens, smart government, smart economy and smart society.

A couple of key factors could drive the success of this initiative, starting with the economy: Bangladesh represents a frontier market economy with a robust GDP growth rate of 7.1. But the real driver could be the recent rapid expansion of digital penetration among the country’s 170-million populace, which includes:

• 186 million mobile connections
• 129 million Internet users
• 93 million smartphone users

While these digital fundamentals are in place, Bangladesh’s digital banking sector faces a largely untapped market with vast potential, as 60 million adults—more than the whole population of Colombia or Kenya— in Bangladesh remain unbanked. According to the World Bank Global Findex Database 2021, while there’s a 53% penetration of financial services accounts, only 38% are affiliated with 62 traditional banks, placing Bangladesh in the bottom 40% globally for financial inclusion in digital banking.

Digital banking is the transmission of banking services through digital channels, such as the internet and mobile phones. It allows customers to establish and access their bank accounts, make payments, transfer funds, access credits, and utilize card facilities without visiting a branch. Digital banking has the potential to close financial inclusion gaps and transform how financial services are accessed and utilized in countries with large and diverse populations.

This article investigates the dynamic world of digital banking in Bangladesh, including its necessity, regulatory framework, market participants, technological foundations, challenges, and far-reaching effects on financial inclusion.

Current Status of Digital Banking in Bangladesh

After many years of review, in June 2023 Bangladesh Bank (the country’s central bank) approved a digital banking guideline. This could not come soon enough considering huge supply-side demand: already, 52 domestic and foreign entities have applied for licenses to start digital banks, even though Bangladesh Bank had originally planned to only give licenses to two or three entities. Many different types of businesses have registered for the license, including consortium scheduled commercial or traditional banks such as City Bank, Mutual Trust Bank (MTB), Eastern Bank Limited (EBL), Dutch Bangla Bank Limited (DBBL), National Credit and Commerce Bank (NCCB), Mercantile Bank and Midland Bank, and others, mobile financial services (MFS) companies Bkash & Nagad, ride-sharing companies  Pathao, financial institutes, micro credit companies, e-commerce & food delivery platform Daraz, Telecom Operator Banglaling, IT service providers, and even pharmaceutical companies. Bangladesh Bank has set the minimum capital requirement at BDT 1.25 billion or US$11.3 million.

Once licenses are approved for applicant to serve as digital banks, they will provide their core services through an online platform, such as quick digital on-boarding, payments, loan sanctioning and mortgage approval. Given their online nature, these banks will have only one physical branch or headoffice.

However, despite the high number of applicants, it is anticipated that only two or three will receive licenses at the outset. As a result, to compete despite not having a license, the market may see increasing partnerships between banks and fintechs—the fintech benefitting from the bank’s license and the bank benefitting from the fintech’s reach and capabilities. As the market stands today, banks serve upper segments, and MFS serve lower segments. There is a large grey area in between these segments where digital players can play.

Major Obstacles to Digital Banking Growth in Bangladesh

Because digital banking is technology-driven and branchless, it will be available 24 hours a day, seven days a week, and extremely handy. So, with the proper technology, inventive and skilled human resources, and the right guidelines, it will serve many people from all over the country.

However, there are a few potential roadblocks that may prevent digital banking from expanding in Bangladesh:

• The unbanked population’s lack of digital literacy and consumer know-how

• Cybersecurity to ensure safety of funds and guard against fraud

• Reliable technology for core banking systems, big data analysis, machine learning, artificial intelligence, and credit underwriting, which will require software imports

• Staffing. Despite being fully digital, digital banks may still require the use of a physical channel, such as a cash-in/cash-out network and a channel for onboarding and document validation. Since digital banks do not own their own networks or employ agents, they may need to rely instead on traditional banking channels or a mobile financial services (MFS) agent network

• Finding CEOs for digital banks that have at least 15 years of banking experience

• Smart phone penetration will be another obstacle against the growth of digital banks as customers required smartphones to avail services digitally.

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