Banking Article, Banking Finance 2022, Banking Finance May 2022

Transformation Efforts of the Banking Industry of Bangladesh in the New Normal

The impact of the Covid-19 crisis createdt foundation for the transformation and restructuringof the banking industry. Historically, economic and financial crises challenged traditional business models which appear to be even more relevant during new normal. The evolving and changing business and economic environment necessitate adjusting and transformingbusinessand operating models of the banking and financial institutions. Covid-19 responses and sustainability are crucial in a fast-moving developing country like Bangladesh where the economic activities and the businesses have notable dependence on the banking industry for almost all types of financing. Considering the range of activities pursued by the banking industry of Bangladesh, it might be labeled as a very good example of a ‘universal banking approach’ and thus theassociated level of expectations from the industry have made strategic and operational adjustment even more complex in this critical situation. As in most global economies, the circumstances demand transformation and restructuring in the banking industry of Bangladesh where reviewing existing approaches, technology adoption, capacity development, newer risks, and supportive policy and regulatory environment seem to have a remarkable role.  The feature is about understanding the emergence and capturing information on the transformation and restructuring efforts in the banking industry of Bangladesh for coping with Covid-19 changes and ensuring sustainable operation in the new normal.

Covid-19 severely affected Bangladesh’s real sector which has notable implications for the financial sector of the country. Not different from most other global economies, banking sector of Bangladesh was affected from the very first wave of the pandemic. Regular banking activities and depositsshrunk, and banks reflect over conscious approach to lending operations.Especially, capital adequacy, asset quality, and other solvency indicators came under stress. There are positive indications of recovery and turning around following the symptoms of improving the real sector of the country mainly following the third quarter of 2020. However, uncertainty remains, and the strength of the banking sector would be truly tested when moratoriums and special policy supports will be completely withdrawn.

Covid-19 policy responses covering the government’s stimulus packages, central bank’s expansionary monetary policy, and moratoriums associated with loan classification and provisioning have notable implications for the banking industry of Bangladesh. The government has distributed its social safety payments, incentive packages, salary and allowances to the garment workers through mobile banking accounts. Banks were given the responsibility of implementing most of the stimulus packages while ensuring credit risks for the credit facilities. The central bank has been very active to promote smooth and easy payment facilitation by banks and other associated entities from the very first day of the pandemic disruption. The transaction limit and cost of different payment channels were relaxed, and payment system facilities were expanded and speeded up for smoother transactions. Bangladesh Bank advised banks and financial institutions to operate limited business activities resorting to online banking while handling cyber security. Banks and MFS providers were instructed to open MFS accountsto support garment workers and other customers. The central bank also permitted some non-bank entities to operate ATMs across the country for spreading banking networksat an affordable cost. Online and mobile transactions received a remarkable boost duringthe pandemic that has given customers the experience of easy, smooth, and instant payment.

The central bank came up strongly to promoting digital venturesin the context of the Covid-19. Bangladesh Bank (BB) approved Digital Nano Loan in 2021 which has huge potential to pull credit delivery to the SMEs. Technology adoption and inclination to the new technology and innovation received impetus as part of Covid-19 response activities and startups came up with numerous ventures and initiatives. To support these, BB formulated a policy relating to the disbursement of collateral-free loans by creating aBDT 500 crore refinancing fund to help the country’s startups. Besides, the commercial banks are instructed to form their own funds with money equivalent to 1.0 percent of their respective operating profits. Despite the necessity of such funds, this seems to be a deviation from the regular practices of venture capital financing, and might contribute to adding another avenue of bank financing in the context of Bangladesh. The issuance of the guideline on e-KYC is a notable initiative by the Bangladesh Financial Intelligence Unit (BFIU) which might prove to be remarkable in facilitating the ongoing transformation efforts. This is also very much connected with the addressing of money laundering and cyber security concerns.

Like in most other economies, special compliances, relaxation, warning to handle financial crimes were evidenced in the context of Bangladesh.  BFIU issued instructions for relaxed and smooth delivery of stimulus packages for much-needed quick economic recovery, while on the other hand, it issued warning to the banks to be alert to the potential risks of financial crime. The declaration of the government of Bangladesh regarding 50 percent penalty reflects the country’s concernabout falsification of invoicing during the period. During the period, BFIU issued specific guidelines on trade-based money laundering (TBML)to be enforced by the banks. The guideline is expected to have notable implications to reshape the compliance framework and would require reasonably high investment on the part of banks.

Enhancement of green and sustainable banking is desired to be one of the most crucial automatic responses of the Covid-19 which is associated with the cause of the ongoing devastated pandemic. BB circulated ‘Sustainable Banking Policy’ and newer approach tothe intended expansion of health-related CSR activities during 2020 and 2021. The central bank issued new CSR guidelines emphasizing health sector in the context of Covid-19. BB’s policy approach to sustainable banking during the period intended to encourage the banking industry to undertake green financing activities and to handle environmental risks in the banking operation.

Since the beginning of Covid-19, most banks have used digital channels such as telephone, SMS, and e-mail services instead of actual meetings with clients for communication purposes. Furthermore, some banks have launched various initiatives to aware consumers how to use applications and digital services. Virtual platforms for corporate meetings, as well as digitized process automation to prevent direct interaction and people gatherings, are being emphasized increasingly. Despite the risks, several banks use in-person communication due to their large customer base and capacity limitations. Furthermore, rural bank locations were unable to implement alternative digital channels for client connections.

The majority of banks have decided to operate physical banking on a restricted scale instead ofcomplete digitalized banking; however,most banks took initiative for improving internal technology infrastructure and alternative delivery methods. Increased emphasis has been placed on using smart banking apps, online banking, and other digital platforms to carry out banking transactions, including customer onboarding. Banks have offered online account opening, automated challan system for fee-based transactions, and online transactions for payment of installments and other banking charges for clients as part of the digital transformation.Adoption of technology impacted account opening arrangement of most of the banking institutions in the country.

Banks shifted their perspective, exploring innovative methods to serve consumers efficiently in the context of Covid-19. There are several efforts to reach out to clients online through process automation. They have chosen to serve customers remotely through digital platforms for internal processes as well as customer service support. Various app-based banking products were provided through the web and Internet by some banks. Several banks have started offering easy and speedy loans via internet banking. With their existing products, certain banks have integrated features such as Debit Card, SMS Banking, Internet Banking, Bangladesh Automated Cheque Processing System (BACPS), Bangladesh Electronic Fund Transfer Network (BEFTN), Real Time Gross Settlement (RTGS), and others. Some banks have also implemented digital loan processing systems, i.e. paperless loans. Practically, digitalization efforts were initiated much before the outbreak of the Covid-19 devastation,however, the initiatives received momentum and several new digital ventures were undertaken in the context of the pandemic.

During the pandemic, banks placed a strong emphasis on sending soft copies (scanned copies) of needed documents by email. Traders in foreign trade submitted their soft copy for LC opening via email. In addition, during the early stages of Covid-19, when physical presentation of documents was difficult, certain banks worked on scanned documents and shipping guarantees to release items. Furthermore, several banks brought Non-Authorized Dealerbranches under trade centralization to help traders by ensuring smooth transactions and lowering costs. In trade service operations, certain banks have used a ‘Hub System’ for document distribution and submission. Banks later acquired hardcopy and compared it with data as necessary. Block-chain might be game-changers in trade facilitation in near future, and a few banks are already engaged in piloting blockchain-based trade facilitation.As a move toward sustainable digital transformation, some banks implemented the engineering of a Digital Documentation Management System (DMS) to gradually replace manual file processing.

Using of e-KYC is already contributing to the banking operation. Getting involved in start-up financing (in response to the BB’s call and directives) by the banking institutions would add another feather to the service dimensions of the banking institutions of the country. However, this seems a deviation from the regular practice of venture capital that intends equity mode of financing. Considering the risks associated with start-up financing, equity mode might be more attractive to the financiers.  Islamic banks of the country might grab start-up financing comfortably using Musharakah mode (equity participation contract).

Coordination with Fintech is getting emphasis amongst banks.  Banks have begun collaborating with Fintech to explore point-of-sale payment and financing andinvesting in on-boarding mobile financial services. Banks are increasing cooperating with MFS in the process of technology driven transformation. For example, ‘Binimoy’, the interoperable digital transaction is ready to be launched in 2022. First of its kind, this platform is expected to allow the flow of money from the wallet to the bank to the vendors- in all directions. By the time, bKash along with 15 banks have signed up for the platform to automate credit rating and credit scoring in near future.These trends exhibiting digital transformation in banking can be attributable to the changing customer expectations.

Collaboration with Regtech continues to rise and technological innovation is at the driving seat of the banks’ risk compliance initiatives. Despite several compliance relaxations in the context of Covid-19, the overall compliance burden of banks and financial institutions increased.  Sustainable banking initiativesmaintained consistent trend during the new normal and there was extensive expansion of health-related CSR activities by banks. However, environmental risk management did not receive the expected level of attention keeping in mind the visible cause of the pandemic and long-term sustainable approach to the development.

It is now obvious that the pandemic heightened the urgency for all banks to reassess their existing business models, core systems structure, distribution networks, and commitment to innovation and product flexibility to come up with the required level of expectations of the customers with simplified digital solutions. The new banking model must reflect more agile and capable to address aggressive competition and shareholders’ expectations with greater efficiencies having widespread uncertainties associated with the pandemic. The ongoing critical phase demand greater coordination among policymakers and market players, agility in decision making, and reflection of dynamism.Banks and technology firms have wider scopeof mutual benefits from deep cooperation in fields like cloud computing, big data, blockchain, and AI that simultaneously serves the interests of banks, technology companies, and consumers. Considering the development of Central Bank Digital Currency (CBDC), international coordination might be helpful. Developing countries like Bangladesh could be benefitted being part of a regional or developing country platform for CBDC research and experimentation.

There is no doubt that the use of digital platforms by banks to facilitate and expand their customer base is creating new forms of operational relationships between banks and non-bank technology players. Keeping distance from non-bank technology firms and Fintech might be unsustainable while adoption and partnering may lead to further consolidation of the banking industry by lowering distribution costs. Several banks are already on the track. This market transformation is expected to bring improved efficiency to financial intermediation, upgraded product diversification, and efficient pricing with potential concerns in terms of technology-driven money laundering and cybersecurity risks. Technology adoption might be the source of severalconcerns and financial crime risks,however, only embracing technology can bring the best solution for handling these challenges. In this context, shadow or less regulated portion of activities should be brought under regulatory and monitoring framework.

Finally,financial inclusion and environmental risk management should receive greater impetus in the transformed, restructured, and technology-driven banking operation of the country. And, all these banking transformations and restructuring efforts might be ineffective with weak bank governance culture. It is the three interrelated pillars ‘embracing technology’, ‘environmental risk management’, and ‘sound governance’ that should get appropriate attention and resource allocation to address the challenges of the banking industry in this new normal.

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