COVID-19 Crisis As a Lens to Understanding Resiliency of Agent Banks in Bangladesh

Resilience is a word we’ve heard a lot during the pandemic. It means having the ability to absorb, adapt, and transform during shocks and stresses. Access to financial resources allows households to make changes in response to current shocks or anticipation of future shocks. Ultimately, a resilient financial system can lead to better food security, improved health, and nutrition. One of the largest shocks in recent history, the COVID-19 crisis, has allowed us to understand just how resilient some systems are.

Market systems by nature are complex, with various levels of interconnected markets. In relation to coping with the pandemic, the agricultural sector of Bangladesh has been strengthened by the resiliency of the business models adopted by the agent banks. In our first blog of this series, we explored the resilient capacity and ability of three banks in Bangladesh to adapt to the crisis through an agent banking model. To better understand the resiliency of this model, we interviewed two experts: Bidowra Khan, team leader of market systems and social inclusion, and Mayaz Kabir, market system specialist of ICT and finance, who both serve on the Feed the Future Bangladesh Rice and Diversified Crops (RDC) Activity, funded by USAID and implemented by ACDI/VOCA.

Khan and Kabir have witnessed the effects of COVID-19 on Bangladesh’s financial sector and have supported the building of resilient market systems for the last four years, working closely with financial institutions to increase access to finance for the agricultural cottage, micro, and small- and medium-sized enterprises (CMSMEs) in Bangladesh. They share their insights below.

1. Why has the agent banking model been fairly resilient during the pandemic?

Khan and Kabir: Pre-pandemic, it was hard to think of a nation with a worse case of economic whiplash than Bangladesh. The banking sector was already facing problems with bad loans, and this was exacerbated by a recent move by the central bank to cap lending rates at 9 percent and deposit rates at 6 percent, giving banks a 3 percent spread to cover their operational expenses. The policy took effect on April 1, 2020, slamming a financial sector that was already reeling from nonperforming loans and declining deposit rates from urban customers. By not being able to price loans effectively, commercial banks looked toward untapped markets, like agriculture, to increase business.

“Agent banking means providing limited-scale banking and financial services to the underserved population through engaged agents under a valid agency agreement, rather than a teller/cashier. It is the owner of an outlet who conducts banking transactions on behalf of a bank.” – a BRAC Bank representative

Farmers in Bangladesh who are generally not part of the formal sector have over USD 1.5 billion in savings. Despite agricultural lending steadily increasing in recent years, the lack of suitable agri-credit schemes deterred farmers who own CMSMEs from availing bank loans and diverted them to informal money markets. Expanding their agent banking portfolio was a relatively new way for banks to reach the rural sector. 

The central bank announced a stimulus package targeting CMSMEs that would ensure the free flow of credit across the rural sector, particularly agriculture. Commercial banks, particularly those with a strong rural footprint, seized the opportunity and disbursed the stimulus package through already-established channel banking outlets, such as agent banks and micro-merchants. BRAC Bank, facilitated by the Feed the Future Bangladesh RDC Activity, was one such bank to dive in and begin providing credit to the rural sector. By December 2020, BRAC Bank had disbursed USD 139 million to 12,669 CMSMEs.

We believe this stimulus package, coupled with changing customer dynamics and an existing infrastructure of channel banking outlets, created the perfect opportunity for banks, agents, and CMSMEs to allocate resources, paving the foundation for agent banks to be resilient.

2. How did parent banks adapt their agent banking models in response to COVID-19?

Khan and Kabir: Commercial banks are highly regulated by the central bank in Bangladesh. The central bank not only dictates the products they sell but also often puts on hold any suggestions for incorporating demand-driven credit schemes that meet the credit needs of agri-stakeholders. However, after the pandemic, the central bank showed more interest in adopting new products and mechanisms that could unlock tied-up capital in the rural economy. Commercial banks then had more freedom to pilot projects. We saw commercial banks change their strategy during the pandemic to focus on demand-side challenges, such as low financial literacy among rural customers.

Many banks, including BRAC Bank, held courtyard meetings with communities to explain the benefits of formal financial services and the documentation required for low-cost loans. Once perceived as exclusive to urban elites, banks were now providing financial learning programs at the doorsteps of rural communities. These activities not only improved rural customer's perceptions of banks but also allowed banks to build new brand loyalties.

Other banks took similar but distinct routes. City Bank partnered with the mobile financial services platform bKash to introduce an alternative credit scoring model based on customer's transaction history. They also provided top-up loans to COVID-19-affected CMSMEs.

Bank Asia onboarded micro-merchants, who provided farmers with phones and access to financial services apps. This allowed Bank Asia to reach last-mile agricultural customers and market their products. Micro-merchants not only helped bring farmers into the formal economy but also acted as “influencers” or quasi-agents, redirecting their customer base to Bank Asia’s already-established agent bank outlets. In 2020, Bank Asia's deposits from agent banks stood at USD 331 million, a staggering increase from 2019’s USD 165 million. Where Feed the Future operates in southwestern Bangladesh, their deposit volume stood at USD 47 million, up from USD 23 million in 2019.

3. Has the agent banking model been equally resilient for both men and women?

Khan and Kabir: In short, yes, but there is a lot of room to expedite this further. Agent banking is expanding fast among women in rural areas, but its services remain well behind what’s expected by the central bank.

According to the central bank, in 2019, agent banks disbursed loans of USD 520 million and collected only about 6 percent of USD 884 million deposits. Of the loans, 59 percent were disbursed to male customers, compared to only 7 percent to female customers. The remaining 34 percent were disbursed to small enterprises.

The number of female clients has increased by 57 percent in 2019 compared to 2018 within agent banks. As of February 2020, women held 28 percent of the total deposits at agent banks. And, according to the central bank, the gap is shrinking, as women open accounts at a faster rate than their male counterparts.

Overall, the data does point to systems-level resiliency. The number of agent banking outlets increased by 63 percent in 2019 compared to 2018. They operate about 5.27 million accounts in Bangladesh, of which 83 percent are in rural areas, 43 percent are held by women, and 87 percent are savings accounts.

4. How did banking agents adapt in response to COVID-19?

Khan and Kabir: Agents demonstrated a lot of creativity, conscientiousness, and flexibility. Parent banks recognized the continued growth potential of tapping into rural markets, and they started formalizing ways to incorporate agents’ feedback. This feedback mostly came from relationship officers, who operated in remote areas and communicated directly with the agents. The parent banks incentivized the relationship officers by the volume of business they could bring to their agents.

As a result, agents were able to push their problems, feedback, and solutions to their respective parent banks through their relationship officer. As agents provided more direct customer service, parent banks gained direct knowledge of the community's needs. This led to the development of financial products for climate- and market-related shocks. Agents could then work with more robust, resilient products that incorporated contingency planning and preparedness.

To minimize the fears of rural customers during the early phase of the pandemic, agents began disseminating COVID-19 information through direct phone calls, cable television advertisements, and more. These marketing initiatives ensured safe retail points and encouraged customers to explore formal financial services to safeguard their savings. Agents also marketed low-cost loans available through the stimulus package and leveraged digital platforms to fill “know your customer” requirements and promote digital literacy.

The Feed the Future Bangladesh RDC Activity and our partnering banks have a common goal of diversifying portfolios and mitigating risk. With more buy-in to provide their services to the agricultural sector, banks are reducing the risk of bad debt and freeing up resources. We believe that building off these shared goals has strengthened the agent banking model. Stay tuned for a continuation of this series on agent banking in Bangladesh.