The Rise of Agent Banking in Bangladesh

Agent banking is a way of providing limited-scale, formal banking service to the doorsteps of the underserved population. For banks, it works as a substitute for branch expansion in rural areas. Therefore, it bridges the gap between the bank and the unbanked people of Bangladesh. It works on behalf of a full-fledged commercial bank. Banks serve people by appointing agents under a valid agency agreement, rather than a teller/cashier. There are 61 scheduled and 5 non-scheduled banks in Bangladesh as of September 2021. The number of banks in Bangladesh is very high compared to the size of the market, but the reach of banking services to the grassroots level is very insignificant. Bangladesh Bank has come up with a regulation that, if a private bank wants to open a branch in the urban areas, they need to open two branches in the rural areas. High overhead costs, maintenance, and operational cost of a new branch are some factors that made banks reluctant to open new branches. That’s why many of the banks do not have branches even at the district level. As a result, a large portion of the population from rural areas remained unbanked and out of the scope of financial inclusion. They usually keep their savings with NGOs, Grameen Bank, and other non-bank financial institutions. Banks basically targeted that particular market through agent banking services. According to ‘Impact and Policy Research Institute’, financially included adults made up 47% of the population of Bangladesh in 2018, which was only 31.74% in 2011. The contribution of agent banking is considered a significant factor behind the rise of financial inclusion of Bangladesh.

Overview of the Agent Banking Sector in Bangladesh

Agent banking has proved to be very effective in developing countries especially where full-fledged banking services are not robust. Brazil is considered the pioneer of agent banking in the world. Other developing countries including Columbia, Peru, Malaysia, Kenya, India, Pakistan, and the Philippines brought a revolution in the financial system through agent banking. After the launch of Bangladesh’s two leading MFS operators, ‘Rocket’ and ‘bKash’, in 2011, many people started to be included in financial services. But a lot of people still remained unserved by formal banking services. To serve that unbanked population, Bangladesh Bank (BB) issued an initial guideline for agent banking in 2013. According to the guideline of Bangladesh Bank, banks can appoint eligible persons or entities including companies, offices, NGOs, shops, and cooperative societies as their agent banking partner. The system can be compared to giving distributorship of a company. The bank is not liable to cover the operational costs of the agents, but rather provide a commission on the total deposit amount. Following the guideline, Bank Asia introduced the country’s first agent banking services in January 2014. But, full-fledged agent banking was started in Bangladesh in 2016. 10 banks were operating agent banking at that time.

The number of agent bank accounts has grown with a 77.68% CAGR between 2016 and 2020. According to the 1st quarter 2021 report of Bangladesh Bank, currently, 28 Banks have agent banking licenses and 27 banks are operating agent banking in Bangladesh. The number of agents reached 12,345 and the number of outlets reached 16,421 at that time. Among those agents and outlets, more than 85% are from rural areas, and almost 15% are from urban areas. Dutch-Bangla Bank and Bank Asia hold the top positions by having the most number of outlets, comprising 27.20% and 26.79% respectively. Islami Bank Bangladesh, City Bank, and NRB Commercial Bank came in the 3rd, 4th, and 5th positions with 14.15%, 8.62% and 3.60% respectively.

The number of total accounts reached to 11,022,646 as of March 2021. Among those accounts, more than 53% of account holders are male, 46% are female, and less than 1% are institutions. Bank Asia holds the most number of accounts comprising 36.01% of total accounts. Dutch-Bangla Bank holds the 2nd position with 33.67% of total accounts. Islami Bank Bangladesh, Al-Arafah Islami Bank, and Agrani Bank comes in the 3rd, 4th, and 5th positions having 14.83%, 3.40%, and 2.69% of total accounts respectively.

(Graph prepared by quarterly agent bank reports from Bangladesh Bank)

According to the guideline of Bangladesh Bank, agent banks can provide services including ‘Collection of small value cash deposits and withdrawals’, inward foreign remittance disbursement, small value loan disbursement, recovery and follow up of loans, and receive installments, utility bill payment, cash payment of various government aid programs, fund transfers (accounts & cheque), balance inquiry, collection and processing of various bank forms, receiving of clearing cheque, and receiving of insurance premiums.

The total deposit amount by agent banking in Bangladesh reached more than BDT 17 thousand crore in March 2021. About 75% of those deposit amounts came from rural areas, and only 25% came from urban areas. Islami Bank Bangladesh topped with 32.92% of total deposits. Dutch-Bangla Bank, Bank Asia, Al-Arafah Islami Bank, and Agrani Bank ranked 2nd, 3rd, 4th, and 5th with having 16.64%, 14.64%, 13.98%, and 9.55% of total deposit amount respectively.

The amount of disbursed loans through agent banking has reached more than BDT 2.5 thousand crore till March 2021. Among the disbursed loans, rural areas again dominated by contributing more than 64%, while urban areas served nearly 36%. BRAC Bank ranked top in loan disbursement comprising 62.61% of the total share. Bank Asia, City Bank, Dutch-Bangla Bank, and Mutual Trust Bank ranked 2nd, 3rd, 4th, and 5th with 22.05%, 12.25%, 1.85%, and 0.49% respectively.

Similarly, inward remittance through agent banking has reached to more than 58 thousand crore till March 2021. Rural areas have received more than 90% of that inward remittance, while urban areas received less than 10%. Islami Bank Bangladesh received 54.46% of total inward remittance. Dutch-Bangla Bank ranked 2nd by receiving 23.56% of total inward remittance. Bank Asia, Al-Arafah Islami Bank, and Agrani Bank held the 3rd, 4th, and 5th position comprising 11.68%, 5.63%, and 2.78% of share respectively.

However, a lot of remittances enter through non-banking channels known as ‘hundee’. Banks and even the government cannot track it properly. But if this money is somehow transacted through ABS at the grass-root level, then it can be tracked.

However, agent banking has some limitations in its operations including giving final approval for opening a bank account, issuing bank cards or cheques, encashment of cheques, and dealing in foreign currency.

Rise of Agent Banking

There are a couple of reasons behind the extensive growth of agent banking in Bangladesh.

Cost Effectiveness: Opening a branch of a bank is costly and time consuming. Besides that, there are a lot of rules and regulations that need to be followed. Agent banking minimizes the establishment and operational costs of the bank. According to Abul Kashem Md. Shirin, Managing Director & CEO of Dutch-Bangla Bank, “The cost of collecting deposits by agent banking channel is 1%-1.5% lower than traditional banking channels”. Dutch bangla bank provides a 3% fixed commission to its agents, whereas, average operational cost of a branch is 4.5%. Agent banking is cost effective for customers too. MFS cash withdrawal charges range from BDT 10 – 20. Which is very costly for people or businesses that perform daily transactions. But in the case of agent banking, cash withdrawal is free. Although, Bank Asia charges 0.25% for cash withdrawal from other bank’s agent outlets. DBBL charges 0.50% for cash out from territories other than the customer’s account’s home territory, while withdrawal from its own territory is completely free.

Proximity of outlets: Agent banking offers banking services in rural and hard to reach places where a branch cannot reach. Bangladesh’s rural infrastructure often becomes an issue for expanding a branch of a bank. Agent banking is way more convenient for these areas. Bangladesh Bank’s guidelines also encourage banks to provide agents to areas where there is no bank branch or any other formal banking channel as well as maintain a ratio of 3:1 for rural and urban agent banking outlets. That’s why, proximity of agent outlets increased and people can have banking services in places where traditional banking services are pretty much unexpected.

Convenience: Agent bank provides convenience to customers. Many people, especially many rural people, are not comfortable with the formal environment of a bank. They can avoid the hassle of traditional banks by agent banking service. Some of these hassles might be, going to a long distance for a branch, waiting in a long queue, maintaining banking hours, and the hassle of documents/paperworks. Agent banking provides solutions for all those issues. There are no fixed banking hours for agent banking service. Agent banking outlets use IT devices including POS machines with biometric features, PIN pads, and biometric scanners. This way, they can avoid ID cards, account numbers, codes, and other documentation which is required in traditional banking channels. Besides that, technologically challenged people cannot access banking through ATM cards and mobile apps. ABS brings convenient human interactive services for them.

Profitable business for agents: Agents banking opens a profitable business opportunity for the people. Usually, banks provide a fixed commission on the collection of deposited amounts by agents. According to a report in the daily star, monthly commission of agents sometimes reached up to BDT 1 lakh. That’s why more people are becoming interested in joining the agent banking business.

Master agent Banking: According to the ‘Prudential Guidelines for Agent Banking operation in Bangladesh’ published by Bangladesh Bank in 2017, banks can go for a contract with other entities to operate multiple agent banking outlets. As agent banking is becoming profitable nowadays, big corporate houses are becoming interested in master agent banking.

Acceptability of Agents: Banks usually provide agent banking contracts to a locally known person. So that s/he can easily convey the offerings of banks to the local people. On the other hand, people feel much more comfortable while doing banking activity through the agents as well.

Government acceleration: The government of bangladesh is helping banks to accelerate the growth of agent banking service. High speed BTCL internet lines are being provided to agents at a low rate. Union digital center (UDC) is also helping in the process of agent banking, in order to achieve digitalization.

Limitations

Loan Disbursement: Loan disbursement through agent banking is very insignificant in Bangladesh. According to Bangladesh Bank’s latest report, only 9 out of 27 agent operating banks have been able to disburse loans through agent banking service. The rate of disbursed loan is also very low and so far is only 14.03% of the total collected deposit by this banking channel. Banks are also reluctant to provide loans to SMEs. Because of that, SMEs in rural areas cannot borrow money from agent banks. Instead, they rely on Microfinance Institutions (MFIs) to borrow money. Although agent banking mainly serves rural areas, it is lagging behind in this sector. Banks can introduce microfinance lending to cover that segment. Personal small loan recovery will be easier for agents, as s/he is known within the locality.

Mindset of the rural people: People in rural areas are still unaware of the banking system. Some of them are less educated and not comfortable with the agent banks with their monetary savings.

Settlement of complaints: Although Bangladesh Bank has rules on the settlement of conflict/complaints for agent banking, it takes more time compared to the traditional banking system. Complaints need to be settled in main banks and get back to the customers through the agents. The process is inefficient and time consuming.

Cash carrying and management risk: Agents often fall at risk of carrying cash on their own. Banks do that with proper security. But for agents, cash management is a risky job for both urban and rural areas.

Cyber security: Agent banking mostly relies on IT enabled devices. Traditional banks have specialized cyber security departments to ensure security. Agents do not have that expertise to ensure proper security in such a monetary transaction system. That’s why there is a risk of heist or fraud by manipulating the devices.

Future Possibilities

Growth opportunity: A Large labor force is employed in different informal job sectors in Bangladesh. Most of them receive their wages in cash. They are out of the banking channels, including savings funds and bank card facilities. Agent banking still has a huge room to grow in that particular segment. Besides that, although big businessmen transact through banks, a lot of small businessmen still transact big amounts through cash. There is a huge potential for ABS to reach them.

Cross banking transaction: Cross banking transactions can be implemented in agent banking services. In that system, customers of a bank will be able to transact through any outlet close to their location. Although Bangladesh Bank allows agents to work for multiple banks, customers still consider agents serving for one bank. Bangladesh Bank can minimize restrictions on cross banking transactions and develop a centralized server system to facilitate agent banking on retail end.

Collaboration with MFS: Agent banking and MFS both have a significant role to increase financial inclusion in Bangladesh. These two services can operate in collaboration in order to provide a more convenient service experience to customers. Besides, agent banking can use transactions of MFS accounts to disburse SME loans without keeping collateral. On the other hand, MFS can directly involve monetary transactions at the retail end on behalf of agent banks. So, both parties can benefit from the collaboration.

Collaboration with MFS

Agent banking and Mobile Financial Service (MFS) both play an important role in Bangladesh’s economic development. Both these sectors can work more collaboratively to provide more convenient services for the client. Agent banks can also utilize and analyze a client’s MFS account’s transaction details while determining eligibility for a loan or credit worthiness. On the other hand, MFS agents can promote different services of agent banks while the agent banks provide those services at the back end. This means that collaboration between agent banks and MFS is beneficial to both parties.

Observing the growth of agent banking over the last few years, it can easily be said that agent banking will only increase in the future.