I am currently in Bangladesh, fresh from presenting the findings from the CARE / Accenture report Within Reach: How banks in emerging economies can grow profitably by being more inclusive to a group of bankers, donors and members of civil society. It was hosted by the Bangladesh Institute of Bank Management and supported by the central bank, Bangladesh Bank.
Our event was attended by around 50 people, many of them specialising in the SME sector (which in Bangladesh reaches down towards micro-enterprises). After presenting the report, we had a whole group discussion in which some of the banks set out the support that they would like to see to allow them to play a stronger role in financial inclusion. This included the Central Bank allowing the banks to charge a wider spread on credit to the micro-sector, and also the possibility of a credit guarantee fund. However, I want to look in a bit more detail at two other points that were raised.
Financial literacy education
Participants stressed the importance of financial literacy for ensuring that potential customers would get the benefits from formal financial services, but also for reducing the banks’ own costs. Improved financial literacy will help micro and small enterprises better access credit, but one banker felt that it was very difficult for banks to develop financial literacy in ‘bottom of the pyramid’ customers. Rather, they said, that needed to be tackled by NGOs – by which he meant the very large and far-reaching micro-finance sector in Bangladesh.
Digital credit scoring
There was a lot of acknowledgement of a key message in the Within Reach report that digitisation is a major opportunity for the banks, and there was enthusiasm for developing digital credit scoring. However, individual banks feel that they cannot necessarily afford to develop such scoring themselves and also that they have relatively little data (also borne out by our research). A speaker therefore touched on the idea of digital credit scoring as a public good, and one that should be supported by the central bank and donors.
Opportunities for collective action by the banks?
What strikes me about these two areas is that the banks could do a lot themselves to address the issues. This is not a point specifically about banks in Bangladesh – the same is true in the other markets that the Within Reach research looked at. Banks do not have a well-developed sense of ‘pre-competitive’ activity – CSR/sustainability work that ultimately protects or enhances the entire market (and its supply chain) and which requires a lot of coordination of activity from multiple players, many of whom normally compete with one another. The concept is well understood in consumer products markets, particularly food (eg in palm oil, cocoa, coffee).
The two issues raised here – financial literacy and credit scoring – both seem very suitable for pre-competitive work. For instance on financial literacy, the banks, government, the education sector, and civil society all have key roles to play. Yet in our research the banks seem to invest very little in broad financial literacy (even of their CSR money), and on the other hand, it is clear that no one bank is going to make an entire nation financially literate. So it would seem to be an ideal area where the banks could work together to invest collectively in an area that ultimately will repay, to everyone’s advantage (well, all the responsible players anyway), in developing customers who are motivated to use financial services and who can use them effectively.
Credit scoring is perhaps an area where one can see that an individual bank may feel that if it could develop its own credit scoring models it would potentially have a huge competitive advantage. However, the lack of quality data acknowledged by the banks will make this very difficult, and indeed the way forward for credit scoring for previously unserved customers seems to be to use non-bank ‘big data’. However, the ‘big data’ approach requires a lot of targeted effort in developing insights and algorithms, plus access to non-bank data to be gleaned from mobile phone records, utilities, even behavioural analysis. In a developing country such as Bangladesh, each bank may individually find it difficult to make the necessary investments, yet improved credit availability, based on better understanding of risk, is a public good which can play an important role in supporting economic development, and indeed even in reducing inequality and poverty. It therefore deserves collective action by the banks to extend the overall market, and service the previously unserved. The competitive advantage can then come from how banks use these new insights and capabilities.
Perhaps this lack of collective investment is another facet of the short-term attitudes of the banks, an attitude highlighted in our report and acknowledge by at least one of the discussion participants. Yet collective investment has to be the most efficient way forward, and perhaps represents one of the best opportunities for banks to develop the market and tackle the disruption that digital is bringing to their world.