Fazle Kabir: The unconventional route to financial inclusion

In 2015, Bangladesh reached lower middle-income status, a milestone for a country of 160 million population. At more than 6% for 15 years, now more than 7%, economic growth has been relatively high, steady, and, more importantly, inclusive, despite persistent natural shocks. It has also defied pundits’ gloomy predictions. Over the past four decades, average life expectancy in Bangladesh increased by about 30 years to more than 70 years of age, and less than 25% of the population now lives in poverty, a figure that stood at more than 80% 40 years ago. The economy has also passed the $200bn mark, so the macro story has clearly been impressive.

Bangladesh's micro story is even more heartening: ours has been a bottom-up, broad-based and labour-intensive growth that has both empowered and relied on women, be it in garments manufacturing, agriculture or other non-farm rural activities. Together, these transformations have enabled impressive gains in gender equality, health, education and other human development indicators. Thanks also to home-grown social innovations, these transformations have also taken place at a much lower per-capita income than witnessed in peer economies.

A tough start

At her birth in 1971, Bangladesh was a war-ravaged economy, the second poorest in the world, with a per-capita income of only $70. She had to cope with global market turmoil such as the collapse of the Bretton Woods System in 1972 and the oil and food price shocks of 1973 and 1979. Domestic conditions were not easy either: two droughts and several floods complicated food security. But these challenges strengthened the country’s resolve to focus on ensuring social empowerment and cohesion, and gave policy consistency across regimes.

In that spirit, the government prioritised food security, population control and human development from an early stage. Both the private and public sectors, with support from development partners, worked together to experiment and devise low-cost solutions, be it in microfinance, health, sanitation or disaster management. Non-governmental organisations initially played a key role in providing financial services to the marginalised and excluded, which were later mainstreamed through deliberate policy support from the Bangladesh Bank, the country's central bank. This led to a burst of social innovations of low-cost solutions in the 1970s and the 1980s, which were further scaled up in the 1990s. 

These innovations allowed Bangladesh to translate some of our erstwhile challenges into assets. For example, population density eased the delivery of microfinance, immunisation and vaccination programmes, and the rise of farm and non-farm rural economies. Against the then-conventional local norms, these social innovations crucially relied on women, which led to greater social inclusion and transformation.

Close collaboration between the private sector, the public sector and development partners helped Bangladesh become a cradle of social innovation. We are happy that Bangladesh has been able to share these innovations with other countries.

The Bangladesh Bank’s monetary and financial policies have proactively supported these social innovations wherever necessary, with due caution against impairing financial and macroeconomic stability. Bangladesh Bank has remained mindful that alongside economic and social transformations, the economy’s financing needs and policy transmission channels have been evolving too. For example, those using microfinance to escape poverty need financing to start small and medium-sized enterprises (SMEs); fundraising for large projects needs market infrastructure to support corporate bonds. 

Financial inclusion

The Bangladesh Bank has kept itself proactively engaged in devising financial inclusion initiatives and other policy initiatives supporting the ongoing social innovations. For example, we have tried to think through how monetary policy can most effectively support equitable inclusive growth in our local context, with market gaps and market failures typical of lower income developing economies.

The Bangladesh Bank remains cognisant of what conventional monetary policies can and cannot deliver. True, innovation can defy conventions to solve problems, but unconventional policies may not be as effective as hoped for unless properly structured. In Bangladesh, our strategic focus has been on devising policies to create a stronger base for the pyramid.

Furthermore, given our population density and exposure to weather shocks, we have made environmental sustainability a central part of the national growth strategy. Green growth, therefore, is an urgent priority, rather than a lofty target to be achieved after a certain income threshold. Green initiatives can also be new growth opportunities in developing economies, less subject to obstructing influence from the vested interests of existing industries than in the advanced economies.

Painful lessons

But these are challenging tasks. Given market frictions, monetary policy by itself does not guarantee socially optimal outcomes, as many economies painfully learned in the run-up to the global financial crisis of 2008, and in its aftermath. Monetary support through policies such as quantitative easing have been more effective in boosting asset prices, which have not necessarily translated into more and better jobs, let alone green growth. In fact, one nagging concern has been that such asset price-focused monetary support may not provide sustainable recovery and can in fact aggravate inequality and widen social fault lines, creating backlashes against globalisation.

Bangladesh Bank, particularly in the aftermath of the financial crisis, has maintained financial initiatives in the financial sector aimed at ingraining a socially responsible financing ethos and mainstreaming financial inclusion initiatives. We are incentivising lending to job- and equity-rich sectors such as SMEs through a combination of policy support and indicative performance targets. We are widening both lending and deposits bases of the lenders through various inclusion initiatives, diversifying both funding and portfolios and minimising stability risks. We have learned that financial inclusion accompanied by prudent supervision can promote financial stability.

Bangladesh Bank's unconventional monetary policies are thus targeted directly towards meeting the financing needs of the underserved segments of the real economy, rather than towards asset markets and lenders’ balance sheets as in advanced economies. As Andy Haldane of the Bank of England eloquently articulated in a recent speech, the recovery supported by the unconventional monetary policies in advanced economies such as the UK has not been broad-based. “A recovery for the too few rather than for the too many, a recovery delivering a little too little rather than far too much,” he said.

A mobile pioneer

Our unconventional monetary policy works mainly through the supply side, making finance available to the capital-hungry but credit-constrained sectors, individuals and enterprises. With the massive modernisation of Bangladesh’s financial sector IT infrastructure, we have enabled the rapid growth of cost-efficient off-branch financial service delivery through mobile phones and smartcards. Bangladesh is a pioneer in mobile phone-based financial services, now with well over 30 million accounts.

These initiatives have contributed to upholding strong domestic demand-driven employment, income and output that helped us weather the external shocks during and in the aftermath of the financial crisis. These unconventional monetary policy-based initiatives have also helped improve the quality of growth and supported macro-financial stability strengthening the economy’s resilience, evidenced by low growth volatility even in periods of shock.

To ensure that economic take-off does not jeopardise the environment, we have also promoted financing to green projects. Green growth is particularly important in Bangladesh, given that ours is a manufacturing-led growth in one of the most crowded countries in the world. Manufacturing is an energy-intensive industry and therefore can be quite taxing for the environment. The Bangladesh Bank is working with the financial ecosystem to push this long-term agenda.

Looking ahead, the Bangladesh Bank will continue its tradition of an active, participatory and learning-by-doing approach towards policy innovation. This approach has been bottom-up and iterative, with a focus on maximising the impact, including the excluded and empowering the vulnerable. We have also increased monitoring of asset quality to ensure that macro-financial stability is not compromised and inflation expectation remains well anchored. We are hopeful this strategy can help growth with equity, making financial growth more sustainable. 

Fazle Kabir is Bangladesh's central bank governor.