Bangladesh needs digital banking, but not more banks

Bangladesh Bank has just given initial approval to five proposed digital banks at a time when the country's banking system is already grappling with too many financial institutions, enormous bad loans and weak governance. 

The central bank's board gave initial approval to new digital banks: Digital Bank of Bhutan, backed by Bhutan's DK Bank; bKash Digital Bank, backed by the shareholders of local MFS provider bKash; Nova Digital Bank, backed by VEON, the parent company of Banglalink, and Square Group; and Boost Digital Bank, backed by Axiata Limited, the parent company of Robi. 

The board also decided to retain the approval of Kori Digital Bank, which was granted during the previous Awami League government, and issue it a letter of intent. Kori Digital Bank was founded by Habibullah N Karim, who is also the CEO of Technohaven and serves as the bank's chairman.

The question is not whether Bangladesh needs digital banking. It plainly does. The question, rather, is whether more bank licences will help address the crisis facing the country's banking sector.

Bangladesh now has 63 scheduled banks. Against an economy worth about Tk61.2 lakh crore, banks hold more than Tk22 lakh crore in deposits and have outstanding loans of about Tk18.5 lakh crore. And Tk6.07 lakh crore of those loans — 32.78% of the total, are classified as non-performing.

So, the banking system's biggest problem is  the quality of the assets they manage. Adding more banks could basically mean more institutions competing for the same depositors, borrowers, businesses and economic opportunities, rather than bringing more money into productive investment.

Of course, Bangladesh's economy will not remain stagnant. It will grow and a growing economy will create demand for more financial services. 

Finance and Planning Adviser Rashed Al Mahmud Titumir said Bangladesh has embarked on a transformation journey to become a trillion-dollar economy by 2034, moving beyond the fragile economy inherited from the deposed regime. That growth will undoubtedly require a more efficient and inclusive financial system.

But economic growth alone does not mean Bangladesh needs more banks; rather, it needs new services, such as digital banking. 

The key question is whether digital banks can bring more people and businesses into the formal financial system, and provide credit more efficiently and lower banking costs. If they simply repeat the weaknesses of conventional banks, the five new licences will only create more banks competing for the same market.

There are, of course, legitimate arguments for digital banks. Bangladesh still has millions of people and businesses that are underserved by formal financial institutions. 

What is digital banking?

A digital bank operates entirely through digital channels, without physical branches, sub-branches, ATMs or cash deposit machines (CDMs), providing its services 24/7 through websites and mobile apps and offering technology-driven products such as virtual cards and QR-based payments. 

Customers can use other banks' ATMs and agent networks for transactions, while everything from opening an account to accessing banking services can be done digitally from virtually anywhere, without visiting a bank.

Under Bangladesh's digital banking guidelines, digital banks cannot lend to large or medium-sized industries or open letters of credit (LCs). But they could help cottage, micro and small businesses move from informal borrowing into the formal financial system by providing institutional credit and other financial services. This could help businesses expand, create jobs and support broader socioeconomic development.

Under Bangladesh's digital banking guidelines, digital banks cannot lend to large or medium-sized industries or open letters of credit (LCs). But they could help cottage, micro and small businesses move from informal borrowing into the formal financial system by providing institutional credit and other financial services. This could help businesses expand, create jobs and support broader socioeconomic development.

Bangladesh is already familiar with digital finance through mobile financial services (MFS) such as bKash, Nagad and Rocket. But MFS is only one piece of the wider digital financial ecosystem; a digital bank would go a step further by functioning as a full-fledged bank, offering a broader range of financial services through digital channels. 

Mohammad Shahriar Siddiqui, assistant spokesperson of Bangladesh Bank, told the media that the high operating costs, capital requirements and physical infrastructure costs of conventional banks make it difficult to extend services to marginalised communities across the country. By operating without branches and relying on technology-driven channels, digital banks could help overcome these constraints and bring banking services to people in remote areas. 

Can existing financial institutions go digital?

When existing banks are already investing in technology and digitalisation mainly to reduce costs and mobile financial services have created a huge digital payments ecosystem, a question naturally arises: why should digital banking necessarily require the creation of entirely new banks? 

Existing banks could have been allowed to enter digital banking through separate digital-banking windows or subsidiaries, while fintech companies, including MFS providers, could also have been given the opportunity to enter the sector, provided they met the same capital, governance, risk-management and other requirements imposed on digital banks.

For example, many existing banks already offer Shariah-compliant Islamic banking through separate windows or streams. Could a similar model not be considered for digital banking?

But creating another category of banks also means creating more boards, management structures, balance sheets and regulatory relationships for the central bank to oversee, ultimately adding to the costs of the overall banking ecosystem. The question, therefore, is simple: does Bangladesh need more digital banking, or simply more digital banks?

What do experts say?

When approached, Professor Shah Md Ahsan Habib of Bangladesh Institute of Bank Management said the number of banks may not itself be the main issue, given Bangladesh's large underserved rural and low-income population and the growing adoption of digital-bank models.

However, the real test lies in rural and SME lending, where repayment often depends on close personal follow-up, as demonstrated by the experience of microfinance institutions, the professor said, adding, "I am not yet convinced that a fully digital model can effectively replace such physical monitoring, especially where legal enforcement remains weak." 

"So, I would remain cautiously supportive. Ultimately, the success of digital banks in Bangladesh will depend heavily on governance, asset quality, effective recovery mechanisms and strong supervision," said Habib.

However, an investment banker has different views. Rafiqul Islam, managing director and CEO of Green Delta Capital Limited, said, "Given the background and foreign investments of the newly licensed digital banks, they will make Bangladesh's financial system more inclusive, competitive and efficient and help bring the unbanked population into the banking system."

The success of digital banking in Bangladesh, though highly promising, will depend on strong regulation, cybersecurity, data privacy, customer protection, interoperability and responsible lending, Islam cautioned also.

Shamim A. Zahedy is a journalist. He can be reached at szahedy@yahoo.com. 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.