DFS set to replace MFI as source of rural financing
Staff Reporter :
Digital Financial Services (DFS) is going to replace Micro Finance Institution (MFI) for offering cost-efficient services to under banked communities across the country, economists said.
They came up with the observation at a training programme on “Scope and Possibilities of Digital Financial Services (DFS) in Bangladesh” organised by the Policy Research Institute of Bangladesh (PRI) at its conference room in the city on Thursday.
Speaking at the event, PRI Executive Director Dr Ahsan H Mansur said that the MFIs is still charging high interest rates as the access to finance remains a significant constraint to sustained development in rural area.
Following this, the agent banking model has emerged as a vital solution, offering cost-efficient financial services to under banked communities across the country, he added.
Highlighting the success of agent banking, Dr Mansur said, “Currently, the model has reached an impressive 16.5 million clients, a testament to its effectiveness in providing financial services to previously under served regions.”
Agent banking is highly cost-effective compared to traditional branches, boasting lower fixed costs per transaction and greater profitability for transactional accounts with low balances and frequent transactions, he added.
Moreover, agent banking has witnessed significant growth among women, addressing accessibility challenges faced in regions where cultural norms restrict women’s mobility, Dr Mansur said.
Despite its accomplishments, agent banking faces certain challenges that need attention and need for more agent outlets in closer proximity to customers and the uneven distribution of outlets across districts must be addressed, he said.
He further said that the limited agent capacity and the inability to cross-sell financial products are potential obstacles that may require additional marketing and technology investments.
Agent banking holds the potential to further enhance banking services and credit access to rural entrepreneurs and it is expected to gradually replace MFIs due to its convenience and lower costs, he observed.
Speaking on “Use of DFS among Households and Firms,” PRI Director Dr Bazlul H Khondker said, “From our analysis, we see that rural households and cottage, micro and small firms are mostly dependent on microfinance loans which they can avail without much hassle but at a very high interest rate of around 23 per cent -24 per cent or above.”
“On the other hand, the other formal financial institutions such as banks, NBFIs, and recently some mobile financial service providers are providing loan at much lower interest rates. So, there is a potential for digital financial services to replace MFIs as source of financing in the rural economy,” he added.
“There is a need for financing the rural cottage, micro and small firms for their business expansion and sustainability. If mobile financing services (MFS) and formal financial sources can meet that demand, there is huge potential for growth in the rural economy,” he said.
