Financial inclusion is a term used to describe the process of expanding banking services in Bangladesh. The aim is to address the issue of a significant portion of the population, especially the underprivileged, not having access to bank accounts. Presently, Bangladesh is home to 62 scheduled banks, yet only 28.3 percent of individuals aged 15 and above hold accounts with financial institutions, as per the Bangladesh Sample Vital Statistics 2023. This presents a paradoxical situation where despite the presence of state-owned and private banks in both urban and rural areas, the impoverished have limited access to banking services. Notably, foreign banks mainly operate in urban regions, neglecting rural populations, and fail to offer tailored services for the poor.
Traditional banks struggle to cater to the financial needs of the poor due to their conservative lending practices. These banks typically require collateral for loan approvals, a condition that poses challenges for low-income families who lack significant assets to pledge. Additionally, traditional banks adhere to strict lending criteria, making it difficult for most impoverished individuals to qualify for loans. These banks prefer larger loan amounts to reduce operational expenses, whereas the poor often seek smaller loans which traditional banks avoid due to high operational costs. Monitoring numerous small borrowers is costly for conventional banks, particularly as rural poor communities are geographically dispersed, and urban poor populations lack fixed addresses. Moreover, loans extended to the poor using traditional methods are deemed risky due to potential misuse in unproductive sectors.
Conventional banks also face challenges related to asymmetric information, where one party possesses more information than the other during the selection of low-income borrowers. Many impoverished individuals lack formal credit histories, leading to the risk of adverse selection, where the wrong borrowers are chosen over suitable candidates. In cases of incorrect borrower selection, loans may be diverted to unproductive ventures, resulting in moral hazards. Consequently, traditional banks tend to prioritize collateral-backed lending for the poor.
Despite being private entities mandated to offer inclusive banking services, banks in Bangladesh struggle to serve the poor, particularly impoverished women. This exclusion is not intentional but is a result of flawed loan production systems that overlook the underprivileged. By focusing on affluent customers, the banking sector has accumulated a non-performing loan rate of 32.78 percent, the highest globally. While informal moneylenders provide collateral-free loans to the poor, their limited reach and exorbitant interest rates pose challenges. In contrast, microfinance institutions (MFIs) have successfully provided collateral-free loans to the poor, addressing the issue of asymmetric information through self-selection and joint liability mechanisms.
Microfinance institutions have achieved significant outreach, with nearly 91 percent of beneficiaries being women. These institutions complement credit services with microsavings, promoting capital accumulation and offering a safety net for families facing various risks. However, recent tax regulations by the National Board of Revenue on interest earned from microsavings have raised concerns among microfinance operators. Although the volume of microsavings and associated profits is relatively low, the tax imposition could deter the poor from saving, potentially increasing their reliance on credit and exacerbating indebtedness.
It is crucial to encourage and incentivize the participation of the poor in microfinance programs to enhance their economic well-being. Taxing the profits of microsavers, who generally earn below taxable thresholds, may deter financial inclusion efforts and disrupt the balance of the microfinance sector. The primary goal of microfinance is to combat poverty by extending financial services to underserved communities, a mission that traditional banks have struggled to fulfill effectively. Unlike traditional banks that often redirect funds from the poor to wealthier clients, microfinance institutions reinvest resources back into disadvantaged communities, fostering financial equity and empowerment.
Microfinance institutions have effectively reduced reliance on moneylenders by offering loans at lower interest rates. Despite the higher operating costs associated with microcredit, the interest rates charged (maximum of 24 percent) are justified compared to the exorbitant rates prevalent in informal markets. Microcredit operations exhibit low default risk and boast a high repayment rate of 95 percent, attributing to the success in serving the poor and reducing poverty.
The emergence of microfinance stemmed from the failure of traditional banks to reach marginalized populations, disproving the notion that the poor are unbankable. The government’s recent decision to tax microsaving profits from low-income individuals, who fall below taxable income thresholds, could have adverse implications on financial inclusion efforts. Encouraging savings among the poor is essential to reduce dependency on credit and enhance their financial resilience. Hence, it is imperative for the government to reconsider the taxation policy and support the microfinance sector’s pivotal role in poverty alleviation.
