Although the fintech ecosystem in Bangladesh has been growing — and is expected to grow in the coming years — the country seems to be lagging behind its global counterparts, according to the Global Fintech Index 2021.
Bangladesh ranked 78th among 83 countries on the index, indicating that the country is falling behind in terms of using technology to automate and digitalize financial activities.
The country declined 17 points in the global ranking, released on June 23, compared to the last index.
Bangladesh ranked the lowest out of 16 countries in the Asia Pacific region. Dhaka ranked 225th out of 264 cities globally, while New Delhi became the only South Asian city to secure a place in the top 20.
According to Syed Almas Kabir, the president of the Bangladesh Association of Software and Information Services (BASIS), the country ranked so poorly in fintech due to its low level of financial inclusion and technology penetration.
Although MFS has garnered confidence in the local fintech segment, almost half of the population remains unbanked and technology penetration is approximately less than 40%, he said.
“Our people are still not comfortable with internet banking. Moreover, most of our local internet banking software is not user-friendly,” he added.
The government also needs to incentivize digital financial transactions to continue the momentum gained during the pandemic in regards to dependence on digital financial services (DFS), according to the BASIS president.
“From BASIS, we had proposed the government to remove VAT on digital transactions for a limited period to encourage both merchants and consumers to depend on DFS. We have also proposed the government impose a 5% cash-back incentive on using DFS — 2.5% for the consumer and 2.5% for merchants — which will make stakeholders more eager to use them,” Kabir further said.
The fintech approach in Bangladesh is mainly based on mobile financial services (MFS). The number of transactions through MFS reached a fresh record of Tk63,478.85 crore in April this year amid the enforcement of fresh Covid-19 restrictions, coupled with extended money circulation on the occasion of Eid-ul-Fitr, according to data by the Bangladesh Bank.
Average daily MFS transactions increased by 7% in the third quarter of FY20 from its previous quarter.
Transactions in April hit a fresh high after the Tk62,999 crore transaction value achieved in July last year when the government made salary disbursements through MFS mandatory for export-oriented industries for receiving stimulus funds.
According to LightCastle Partners, the fintech industry in Bangladesh enjoys an unsaturated market bursting with opportunities for cutting-edge and innovative financial services. So far, the MFS platforms have gained the most popularity.
However, despite the increasing adoption of these services, lack of interoperability remains a major concern that obstructs further growth of DFS in Bangladesh.
“We do not have integrated systems for total solutions; instead, we have standalone fintech. Payment integration with the solution is not available. Policy or regulations also do not support the entire ecosystem,” said Kyser Hamid, managing director and CEO of BD Finance.
The crippling absence of MFS interoperability
For the fintech industry to grow at a much faster rate, integrated system solutions or “Wallet Interoperability” is a much-needed step, according to experts.
Mobile wallet interoperability will allow customers to send and receive money from various mobile wallets. Using the facility, you will be able to send your money from one wallet to another with just a few clicks.
However, at present, digital wallets in Bangladesh function in a closed-looped ecosystem, making it impossible, for example, to send money from a bKash wallet to a Nagad or Rocket one.
Speaking to Dhaka Tribune, Post and Telecommunication Minister Mustafa Jabbar said MFS interoperability is much needed with the rising use of fintech in the country.
“The central bank has the final call on that matter. If bank-to-bank transactions are possible, then I do not see the point of having a closed-door in regards to interoperability between MFS,” he added.
The Bangladesh Bank is already taking steps to ensure MFS interoperability by the end of this year.
Following that, users will be able to transfer funds to all operators and banks free of cost. Interoperability will be ensured through two platforms: the Interoperable Digital Transaction Platform (IDTP) and the National Payment Switch Bangladesh (NPSB).
With more than 85 million registered MFS accounts in the whole country, wallet interoperability can create a crucial impact, both in driving financial inclusion and in fulfilling the vision of the digital economy, according to LightCastle Partners.
The local fintech industry
According to Tracxn, a global research partnership of investors, corporations, and government bodies, there are 112 fintech startups in Bangladesh.
The fintech transformation in Bangladesh has been led by banks from the very beginning. Popular MFS offerings include bKash by BRAC Bank, mCash by Islami Bank Bangladesh, Upay by UCB, and Islamic Wallet Al-Arafah Islami Bank.
So far, licences have been granted to 16 leading banks to offer MFS in the country.
Digital Financial Services (DFS) Lab, a joint initiative by Bangladesh Bank and a2i, has also been developed to help foster growth of the industry.
Separate private entities have also been allowed to operate as payment service providers and payment system operators.
Although several financial institutions such as non-bank financial institutions (NBFIs) have been actively trying to develop blockchain-based services, the local acceptance of cryptocurrency is almost non-existent.
Bangladesh is one of the few countries in the world that consider bitcoin and all other types of cryptocurrencies as “hostile”.
Bangladesh Bank considers bitcoin and other cryptocurrencies as illegal under the Foreign Exchange Regulation Act, 1947, and the Money Laundering Prevention Act, 2012.
However, there is much debate on how these laws can be enacted in court since the central bank never correctly defined bitcoin as a currency or commodity.
Regardless, the Bangladeshi authorities are adamant about stopping the use of bitcoin and have issued warnings on and made arrests for bitcoin trading and selling.
What did the GFI 2021 report find?
First published in 2019, the Global Fintech Index now covers 264 cities in 83 countries.
The ranking scores were based on three domains — the quantity of privately-owned fintech companies, the quality of those companies, and the local business environment.
In terms of cities, San Francisco Bay, London, and New York are the top three in the ranking. It is expected as they are the global centers of development.
A country or city must host the headquarters of at least 10 privately-owned fintech companies to enter the list.
Despite the economic slowdown caused by the pandemic, 50 new cities and 20 new countries debuted in the ranking, which is a remarkable milestone to achieve.
The United States, United Kingdom, and Israel are the most active fintech countries globally, while Singapore, Australia, and China topped the Asian ranking. Japan, India, South Korea, Philippines, and Pakistan respectively ranked 4th, 5th, 6th, 11th, and 15th in the region.
