Financial inclusion has emerged as a tool to achieve inclusive growth for poverty reduction
since 2005, a year that the UN has declared International Microcredit Year.Studies (King et.
al, 1993; Beck et. al, 2000, 2004; Levine, 2005 and Demirgüc-Kunt et. al, 2008) indicate
that a positive correlation exists between financial development and economic growth.
Current development theories suggest that greater financial inclusion can have a positive
impact on the lives of the poor.
A review of literature suggests that there is no universally accepted definition of financial inclusion. As
measuring inclusion is perceived to be difficult, financial inclusion is generally defined in terms of
exclusion from the financial system
Financial exclusion refers to the lack of access to financial services. It limits opportunities for
employment and enterprise development and imposes a premium on the cost of basic
services. Financial exclusion thus makes it difficult to reduce inequalities and alleviate
poverty. Beck et. al (2008) finds that financial exclusion is a barrier to economic
development. Financially excluded populations include marginal farmers, landless labors,
unorganized enterprises, urban slum dwellers, migrants, senior citizens and women. Financial
inclusion is thus a high priority policy goal for developing and developed countries in order
to ensure stable and equitable economic growth.
United Nations (2006), in its blue book titled “Building Inclusive Financial Sectors for
Development”, defines financial inclusion as the “access to the range of financial services
at a reasonable cost for the bankable people and farms”. Basic financial services include
savings, short and long-term credit, leasing and factoring, mortgages, insurance, pensions,
payments, local money transfers and international remittances. Rangarajan Committee (2006)
defines financial inclusion as the “process of ensuring access to financial services and timely
and adequate credit for low income people at an acceptable cost”. An inclusive financial
system thus has to provide access to an extended range of services to the poor.
Rahman (2009) defines financial inclusion in Bangladesh as access to financial services
from officially regulated and supervised entities in which banks and financial institutions are
licensed by the Bangladesh Bank, MFIs by the Microcredit Regulatory Authority (MRA),
registered cooperatives by the Department of Cooperatives; and official entities themselves
including post offices and National Savings Directorate. Microfinance activities in
Bangladesh, pioneered by Nobel laureate Dr. Yunus and replicated extensively worldwide,
have been expanding the access of financial inclusion.
NATURE, CAUSES AND CONSEQUENCES OF FINANCIAL
Nature and Causes
The nature and forms of exclusion and the factors responsible for it are varied and, thus, no
single factor could explain the phenomenon. The principal barriers in the expansion of
financial services are often identified as physical access, high charges and penalties,
conditions attached to products which make them inappropriate or complicated and
perceptions of financial service institutions which are thought to be unwelcoming to low
income people (Sinclair, 2001). These barriers to inclusion have not been constructed
deliberately; they are a result of the structural operation of the financial services industry.
Kempson et al. (2000) analyse a range of physical and geographical barriers to financial
inclusion and a broad range of other factors that can contribute to financial exclusion for
different products and individuals under certain circumstances. A number of ‘dimensions’ or
‘forms’ of financial exclusion have been identified. The critical dimensions of financial
(i) Access exclusion- restriction of access through the process of risk management (by
financial services providers);
(ii) Condition exclusion - conditions attached to financial products which make them
inappropriate for the needs of some segments of population;
(iii) Price exclusion- some people can only gain access to financial products at prices they
(iv) Marketing exclusion - some people are effectively excluded by targeted marketing and
(v) Self-exclusion - people decide not to opt for a financial product because of the fear of
refusal to access by the service providers (Kempson and Whyley, 1999; Kempson et al.,
2000; Connolly and Hajaj, 2001).
(vi) Exclusion may also have resulted from a variety of structural factors such as unavailability
of products suiting their requirements, stringent documentation and collateral
requirements and increased competition in financial services
(vii) Apart from the supply side factors, demand side factors also have a significant bearing on
the extent of financial inclusion. A higher share of population below the poverty line
results in lower demand for financial services as the poor may not have savings to place
as deposit in savings banks. Thus, low income leads to low demand for financial services,
particularly savings products. Likewise, at low levels of development, investment activity
may be low and hence, may lead to low demand for credit from banks and other formal
Factors Affecting Access to Financial Services
A number of factors affecting access to financial services have been identified in many countries.
• Gender issues: Access to credit is often limited for women who do not have, or cannot hold title to
assets such as land and property or must seek male guarantees to borrow.
• Age factor: Financial service providers usually target the middle of the economically active
population, often overlooking the design of appropriate products for older or younger potential
• Legal identity: Lack of legal identities like identity cards, birth certificates or written records often
exclude women, ethnic minorities, economic and political refugees and migrant workers from
accessing financial services.
• Limited literacy: Limited literacy, particularly financial literacy, i.e., basic mathematics, business
finance skills as well as lack of understanding often constrain demand for financial services.
• Place of living: Although effective distance is as much about transportation infrastructure as
physical distance, factors like density of population, rural and remote areas, mobility of the population
(i.e., highly mobile people with no fixed or formal address), insurgency in a location, etc., also affect
access to financial services.
• Psychological and cultural barriers: The feeling that banks are not interested to look into their
cause has led to self-exclusion for many of the low income groups. However, cultural and religious
barriers to banking have also been observed in some of the countries.
• Social security payments: In those countries where the social security payment system is not
linked to the banking system, banking exclusion has been higher.
• Bank charges: In most of the countries, transaction is free as long as the account has sufficient
funds to cover the cost of transactions made. However, there are a range of other charges that have a
disproportionate effect on people with low income.
• Terms and conditions: Terms and conditions attached to products such as minimum balance
requirements and conditions relating to the use of accounts often dissuade people from using such
• Level of income: Financial status of people is always important in gaining access to financial
services. Extremely poor people find it difficult to access financial services even when the services are
tailored for them. Perception barriers and income discrimination among potential members in group-
lending programmes may exclude the poorer members of the community.
• Type of occupation: Many banks have not developed the capacity to evaluate loan applications of
small borrowers and unorganised enterprises and hence tend to deny such loan requests.
• Attractiveness of the product: Both the financial services/products (savings accounts, credit
products, payment services and insurance) and how their availability is marketed are crucial in
References:World Bank, 2008; Asian Development Bank, 2007; and Kempson et al., 2004.
1.3 Various criteria to measure the status of financial inclusion
Studies (Mehrotra et. al 2009, Sarma, et. al 2010, and United Nation, 2006) use various
criteria to measure the status of financial inclusion in an economy such as (i) outreach
dimension and (ii) actual usage dimension. In terms of outreach dimension, there are two
types of indicators: geographical penetration (number of bank branches or ATMs per 1000
square kilometers) and demographic penetration (number of bank branches or ATMs per
100000 people). More bank branches and ATMs per 1,000 square kilometers indicates
smaller distances to nearest physical bank outlets and easier geographical access.
Demographic penetration measures the average number of people served by each bank
branch or ATM. Higher numbers imply that there are fewer clients per branch or ATM and
also indicate easier access to bank’s services. Sarma et al. (2010) constructed a
multidimensional index for measuring the degree of financial inclusion that includes
information on bank penetration, availability of banking services and usage of the banking
system. Demirgüc-Kunt et. al (2008) also compiled demographic and geographic penetration
data on access of general banking branches or ATM booths.
In terms of actual usage dimension the indicators are (i) number of loan accounts per 1000
people (ii) number of deposit accounts per 1000 people. These indicators measure the use of
banking services/access to financial services. Another frequently used indicator of usage is
the ratio of deposits/GDP or credit/GDP or (deposit + credit)/GDP. The measurement of
financial inclusion depends on the level of development of a country and varies across
In Bangladesh, as in other developing countries, indicators are measured in terms of
outreach and actual usage dimensions. According to Rahman (2009), we also measure overall
financial inclusion for Bangladesh. Bangladesh and an inclusive financial system may
consider the following institutions in measuring access to financial services (Rahman, 2009):
I. Banks and financial institutions supervised by the BB;
II. MFIs supervised by the Microcredit Regulatory Authority (MRA);
III. Credit cooperatives supervised by the registrar of cooperative societies;
IV. Insurance companies supervised by Insurance Regulatory Authority
V. Capital market institutions like investment banks, merchant banks, stock exchanges
supervised by the Securities and Exchange Commission;
VI. Post offices under the Post Office Department of the government offering savings,
money transfer and insurance services; bureaus of National Savings Directorate of the
government issuing government savings instruments.
1.2.4 Insurance companies and capital market institutions are not the primary sources of
clientele information for deposit-taking financial services; therefore, these need not to be
included in measuring the extent of inclusion.
1.2.5 A comprehensive primary measure of financial inclusion is, therefore, the coverage of
deposit services which is measured by the number of deposit accounts/clients/members in
deposit schemes in banks, MFIs, post offices as percentage of total population. The coverage
of credit services is another benchmark in measuring the extent of inclusion, expressed in
terms of gaps, exclusions and barriers in access to financial services.
1.4 Importance/Benefits of financial inclusion
1.3.1 Access to credit in the formal sector may also open up entrepreneurship opportunities
for low income populations and increase the scope for investment.
1.3.2 Linkages with the formal financial sector enable clients to access different credit,
savings and insurance products with soft conditions provided by regulated institutions. In
terms of cost, easy access to the formal financial sector reduces the growth of informal
sector credit provided by moneylenders which can often be expensive and exploitive.
1.3.3 An account can be used for multiple purposes including making payments for
essential utilities, receiving benefits from government programs; therefore contributing to
1.3.4 Studies suggest that access to financial services allows the poor to save money safely
outside their homes, prevents the concentration of economic power with a few individuals
and helps to mitigate the risks that the poor face as a result of economic shocks or natural
calamities (Mehrotra et. al, 2009).
1.5 The Status of the Overall Financial Inclusion in Bangladesh
Access to Bank
2.1 Geographical penetration indicates that number of bank branch per 1000 square
kilometer increased from 44.24 in 2005 to 53.34 in 2010. Number of ATM booth per 1000
square kilometer increased tremendously from 0.82 in 2005 to 14.43 in 2010 (Chart 1). In
term of demographic penetration, number of branches per 100,000 populations increased
from 4.67 in 2005 to 5.28 in 2010. Number of ATM per 100,000 populations increased from
0.09 in 2005 to 1.43 in 2010 (Chart 2). Trend in geographical and demographic penetration
indicates that access to banking is increasing overtime in Bangladesh.
2.2 Access to banking in rural areas in terms of bank branch expansion, number of deposit
a/c, number of credit a/c was quite impressive during 2005-2010. Recent data show that in
rural areas total rural bank branch grew, on average, about 3.39 percent during 2005-2010 as
against the 4.75 percent growth in urban areas during the same period. Number of deposit
account grew by 11.91 percent in rural areas between 2005 and 2010 while the same was 7.82
percent in urban areas during the same period. Number of credit account during the same
period increased, on an average of 0.54 percent in rural areas as against 4.41 percent in urban
areas during 2005-2010.
2.3 In the rural areas, number of deposit account per 1,000 persons was 126.45 in 2005
which grew to 189.17 in 2010, while number of loan account decreased from 52.77 in 2005
to 50.82 in 2010 (Chart 3 and 4).
2.4 Number of deposit and loan account per 1000 population were 241.52 and 61.57
respectively in 2005 which increased to 333.19 and 63.29 respectively in 2010 (Chart 7). The
ratio of deposit-GDP increased from 42 percent in 2005 to 53 percent in 2010 while loan-
GDP ratio increased from 32 percent in 2005 to 43 percent in 2010 (Chart 5 and 6).
Outreach by Micro Finance Institutions
2.5 Access to finance by MFIs is remarkable in Bangladesh. Latest data provided by MRA
indicate that 550 MFIs operated 17 863 branch throughout the country (mostly in rural area)
in June 2011. In June 2011, MFIs have 25.81 million clients of whom 18.45 million clients
are women. Total outstanding savings mobilized by MFIs went to Taka 62.86 billion at the
end of June 2011 which was Taka 27.53 billion in June 2007. Total loan disbursement stood
at Taka 174.91 billion at the end of June 2011 which was Taka 86.95 billion at the end of
June 2007 (Chart 8).
2.6 Geographical penetration measured by branch per 1000 square kilometer stood at 123.56
branches at the end of June 2011 up from 93.43 at end June 2007. Population penetration
indicates that 9.61 branches served per 100,000 populations in June 2007 which increased to
12.08 branches in June 2011 (Chart 9).
Overall Financial Inclusion
2.7 Rate of overall financial inclusion is increasing in modest pace. The overall financial rate
is given in Table-1. It is observed that financial inclusion as percentage of total population
increased from 39.76 percent in 2004 to 56.42 percent in 2010. In t erms of adult population,
it increased from 65.33 percent in 2004 to 87.23 percent in 2010 due to opening a significant
number of 10 Taka account in the last two years.
Table 1: Status of Financial Inclusion in Bangladesh
Source: Rahman (2009b), Microcredit Regulatory Authority, Bangladesh Bureau of Statistics, and Scheduled Bank Statistics, Bangladesh Bank.
Trend in technology adoption in banking services
2.8 In order to provide banking service at lower cost and at shorter time to remote area,
Banks have adopted various modern technology viz. installation of ATM, POS, introducing
credit card and debit card, uses of mobile phone, internet banking, on line banking and tele-
banking. It is observed that mobile banking is the potent instrument for increasing outreach
and mobile phone is an ideal platform to increase of outreach of financial services to the rural
population as their penetration is already large and growing (Mehrota, et. al, 2009). Recent
survey data show that adoption of modern technology in banking services is impressive
(Chart 10 and 11). Number of ATM booth increased from 118 in 2005 to 2855 at end June
2011. Number of POS also increased immensely from 3121 in 2005 to 17183 in June 2011.
Number of debit and credit card clients increased from 0.11 million and 0.15 million in 2005
to 6.0 million and 0.61 million in June 2011 respectively. Number of mobile banking clients
grew by about 62.0 percent to 0.21 million in June 2011. Out of 47 banks, 38 banks use
modern facilities i.e., internet banking, online banking and tele-banking.
2.9 Recent trend of mobile banking indicates that financial inclusion is scaling up in
Bangladesh especially in rural area where no bank branch is available. Recent data show that
number of mobile phone subscribers and tele-density have been increasing substantially
overtime creating an opportunity for banks and MFIs to use the mobile technology in the
financial services and serve unbanked people with lower costs specially in the rural areas
(Chart 12 and 13).
Recent survey findings
2.10 Institute of Microfinance (InM) conducted a survey on “Access to financial services in
Bangladesh” in 2011 covering nearly 9000 households in 63 districts except Rangamati. The
main findings of the survey are that the aggregate access to any financial services stood at
76.77 percent of which access to formal services is about 37 percent and access to quasi
formal ( MFIs and co-operatives) is about 43 percent (Chart 14). Another finding of the
survey shows that there is a significant market overlapping both in formal and quasi formal
market (Table 1).
1.6 Barriers to financial inclusion
3.1 Identifying the barriers that prevent the lower income people in the country in accessing
to the financial services provide hints as to which policies could be supportive in removing
the barriers and broadening access. Measures for accessibility, affordability and eligibility
can indicate the extent of barriers to the financial services in terms of deposits, loans,
payments, locations, technology etc.
3.2 Poor banking infrastructure: Keeping in view the number of financially excluded people,
in Bangladesh, about half of the adult population is unbanked (48.49 percent) in terms of
deposit accounts in the banks. The major barrier is geographical or physical access measuring
the average distance from household to bank branch; however, the branches per 1,000 square
kilometers could be used as crude indicator for providing an initial idea to the barriers of
inclusion. For example, Spain has 96 branches per 100,000 people and 790 branches per
1,000 square kilometer, while Bangladesh has less than 7 branches (or ATM) per 100,000
population and about 67 branches (or ATM) per 1,000 square kilometer. A large section of
the population who do not have any physical access to the banking services are in rural and
remote areas in the country.
3.3 Lack of proper documentation: Another barrier is lack of proper documentation
including ID, proof of domicile and reference letter required to open a checking or savings
account in Bangladesh, where many people do not have such documentation.
3.4 Inadequate financial literacy or education: Financial literacy and awareness are very low
in the country, particularly in rural areas; it makes a large segment of household difficult to
get financial services from the banking system in terms of savings, credit and payments.
3.5 High requirement of minimum balance: Many institutions have a minimum account
balance requirement or fee for opening checking or savings account; consequently, many
lower income people faces difficulty to maintain such balance enforcing to exclude
themselves from the financial services. Though minimum amount to open a checking or
savings account (2.28 and 0.89 percent of GDP per capita respectively) is lower in
Bangladesh, it could be free for the poor people for broadening the extent of financial
3.6 Poor level of technological infrastructure: As a competitive and cost effective strategy,
major banks focuses on large scale of loans instead of providing services for small size of
loan; as a result, rational business decisions prevent a major portion of people from accessing
loan services including SME and agriculture loan. Promoting technological and institutional
innovations as a means could expand the financial system access and usage; however, less
than 4 people per 1,000 populations in the country are using credit cards indentifying the
technological and infrastructural weaknesses.
3.7 Low income: There is still a large section of household in the country, particularly in
rural areas, having extremely low level of income; therefore, those people are un-served from
any financial institutions.
3.8 Lack of suitable product structure of banks and MFIs: Appropriate financial products
need to develop in reaching the unbanked population to the formal financial system.
3.9 High cost of product: The cost of product of MFIs compared to that of banks (interest
rate) is still high indicating another important barrier for financial inclusion.
3.10 Absence of credit bureau and insurance of MFI borrowers: Spreading of outreach by
MFI is quite impressive in rural areas. But, there is no credit bureau for identifying
overlapping borrowers and their indebtedness. At the same time, there is no micro insurance
for credit borrowers.
1.7 Role of Bangladesh Bank for enhancing financial inclusion
4.1 Bangladesh government has been pursuing inclusive socio economic growth aiming at
well-being for all outlined in its five year and annual development plans. Supporting the
government s inclusive growth strategy, Bangladesh Bank has been pursuing financial‟
inclusion as a policy priority for accelerated economic growth while maintaining monetary
and financial stability.
4.2 Banks and financial institutions have been advised to follow BB s financial inclusion‟
initiatives by engaged themselves in increased lending to the under -served/un-served
economic sectors and population segments, including micro and SME entrepreneurs,
agricultural and other rural and urban farm and non-farm productive activities. Credit facility
to farmers and small entrepreneurs, who have been a „missing middle , are also a policy‟
priority from BB s financial inclusion initiatives. For‟ deepening and broadening financial
inclusion, BB has also been motivating banks and financial institutions to extend their
services to the physically and mentally disabled people; in other words, it conforms their
CSR obligations and also creates new opportunities of viable business in new clients.
4.3 To cover about one-fifth of adult population who could not get any financial services
from any regulated and supervised financial institutions, MFIs and cooperatives, BB s policy‟
is to encourage financial institutions, MFIs for initiating cost saving innovative partnerships
and for introducing technology based financial services.
1.8 Recent steps taken by BB for financial inclusion
5.1 BB pursues an impressive agricultural credit policy for stimulating financial inclusion,
given priority to marginal farmers; „area approach method for farming; women are given‟
priority. Agricultural credit policies and norms have been changed.The policy highlights for
reaching out to relatively underdeveloped areas for timely & hassle free delivery of adequate
agricultural/rural credit to small farmers & share-croppers. A first ever Taka 5.00 billion
refinancing line has been adopted against loans to landless sharecroppers in partnership with
a recognized MFI. A comprehensive monitoring strategy for agricultural credit system is
being devised by simultaneous monitoring of agricultural credit system at bank level and
formation of „Agricultural Credit Monitoring System in Bangladesh Bank. In addition to‟
maintaining existing policies for proper implementation of agricultural credit program, a
good number of new pro-poor policies have been adopted. A 3-level (BB, Head office and
branch office of concerned banks) monitoring system has been developed to watch credit
disbursement and recovery process. Mobile phone number of each borrower is being
collected for direct monitoring from the Central Bank.
5.2 A record amount of Taka has been targeted of agricultural credit disbursement in
agricultural sector. Recent data show that impressive record of disbursement is achieved
against the target. A record target of Taka 138.00 billion has been fixed for 2011-12, a
21.81% increase over 2010-11. An impressive record of Taka 121.84 billion had been
disbursed in 2010-2011 which was around 97% of the total target in 2010-11. Nationalized
Commercial banks and specialized banks disbursed of Taka 4.70 billion to 3.75 million share
croppers in 2009-2010 and of Taka 7.44 billion to 4.27 million share croppers in 2010-2011
respectively. Up to 30 June 2011, BRAC disbursed of Taka 2.65 billion at 10 percent interest
rate to 0.234 million sharecroppers in 171 Upzilla under 37 districts.
5.3 In order to cover un-served farmer by the commercial banks, BB has advised to
commercial bank to open bank accounts for farmers at free of charge with initial deposits of
only Taka 10; already opened around 9.5 million accounts. These accounts are being used to
disburse government input subsidies to the farmers. Till to date, about Taka 7.22 billion of
diesel subsidy has been disbursed to farmers by the Government through this account. These
accounts will also facilitate small savings, revolv ing loans, remittances etc.
5.4 A Taka 2.0 billion refinance line has been introduced in FY10 against bank loans for
environment friendly investments in solar energy, biogas plants and effluent treatment plants.
5.5 In issuing new branch licenses to banks, BB has been following a policy of requiring at
least one in every five new branches to be in rural locations; with a view to pushing banking
services physically closer to the rural population.
5.6 BB and the GoB have adopted several remedial and promotional measures to bridge
the gaps in financial inclusion. In SME financing, BB has kept refinance lines available to
banks against their loans to Small and Medium Enterprises (SMEs); multilateral development
partners such as the IDA and ADB are supplementing BB s refinance lines with their co-‟
finance. Besides, BB is allowing banks to open SME service booth in areas with no branches
of the banks concerned.
5.7 In order to deepen financial inclusion, BB has formulated elaborate guidelines for SME
credit. A separate department titled „SME and Special Programs Department has been‟
launched to accelerate SME activities and also to enhance monitoring. BB has arranged
refinance scheme of Taka 6.00 billion for small and medium enterprises; 15% of the
refinance fund allocated for woman entrepreneurs. SME credit up to Taka 2.5 million can be
disbursed against personal guarantee to woman entrepreneurs. In view of increasing
awareness, an arrangement of SME fairs, exchange of Views session with bankers and
entrepreneurs, seminars, road show have been taken throughout the country with cooperation
from Banks, FIs, Chambers, Professional Bodies .
5.8 As of September 2011, about 0.24 million entrepreneurs (0.22 million male and 0.02
million woman) received loan. The cumulative SME loan disbursement stood at Taka 399.41
billion up to September 2011.
5.9 The BB has also been exhorting banks and financial institutions to embrace fostering
financial inclusion as a Corporate Social Responsibility (CSR) obligation. As a longer term
measure towards mitigating risks in agricultural production (and hence also in agricultural
financing), crop insurance has been included in the Food Policy agenda announced by the
5.10 The ongoing DFID supported BB initiative for automation of the payments system in
Bangladesh, the Remittance and Payments Partnership (RPP) project, is providing impetus to
initiatives in designing faster and cheaper remittance and money transfer services; broadening
and deepening financial inclusion particularly of rural recipients of remittances from family
members working elsewhere within or outside the country. Partial grant support incentive
from a Challenge Fund of the project has already spawned and introduced in use a number of
new IT based remittance delivery processes that are superior to previous arrangements in
speed and affordability for users. Online automated clearing and settlement of cheques and
electronic fund transfers by the Bangladesh Automated Clearing House (BACH), under BB
management has gone live. It is hopefully trigger innovation of further new service packages
better tailored to specific needs of different customer segments, thereby widening or
deepening their financial inclusion.
5.11 The GoB has been providing from annual national budgets lending resources to MFIs
(through PKSF, the apex financing agency for MFIs) for rural on- and off-farm self-
employment micro and SME credit, with some gender bias towards empowerment of women.
Financing lines from government budget have been made available also against loans to rural
poor for their construction of basic shelter housing; in a number of schemes titled Grihayan,
Ashrayan, Returning Home, and One home-One farm.
5.12 The Post Office Department of the government has of late been more actively engaging
with banks and other external and internal remittance intermediaries to offer faster
remittance deliveries to recipients. Regardless of however much the private sector remittance
and mail/parcels delivery services improve, role of the publicly owned postal services is
likely to remain necessary in catering to the needs of the remoter, sparsely populated areas
that will be seen by the private sector as expensive and unprofitable to reach out to.
5.13 To make the banking services beneficial and easily accessible for the physically
incapable people of Bangladesh, all scheduled banks are requested to designate an official as
„Focal Point at each branch of their banks.‟
5.14 Four state owned banks (Sonali/ Janata / Rupali/ Agrani Bank Ltd.) and two
specialized banks (BKB/ RAKUB) are advised to disburse agricultural credit with priority
among the physically handicapped people individually/ jointly as well as to follow the
regulations approved by themselves for special microcredit in order to make them self-
reliant and to bring them in the main stream of economic activities. The banks have to adopt
the correct monitoring system so that the physically handicapped people are not hassled and
the Compliant and Monitoring Cell of the banks will monitor this regularly.
5.15 Considering contribution of the farmers to the economic activities, specially in
agricultural activities, it has been decided that a farmer can open deposit account at any state-
owned commercial and specialized bank against national ID card/birth registration card and
agricultural equipment assistance card issued by the Department of Agricultural Extension.
There will be no bindings for maintaining minimum balance on the said account and banks
shall not impose any charges/fees on these accounts.
5.16 Strategy and policy pronouncements of developing economies like Bangladesh can
clearly articulate commitment to inclusive economic growth to open up blocked advancement
opportunities for the disadvantaged population segments of the society. The longer term
Perspective Plan and sixth Five Year Plan of GOB articulate this commitment.
1.8 Policy measures/recommendations for broadening the level of financial
inclusion in the SAARC region
6.1 South Asia s population of more than 1.5 billion has a high concentration of poverty-‟
ridden people including small farmers, micro and small entrepreneurs. Despite there being
substantial expansion of microfinance and SME activities in different parts of the SAARC
region, a number of people are still extremely poor. The central banks of the SAARC region
can initiate policies targeting low income populations by introducing agriculture and rural
programs under a comprehensive monitoring strategy. In this regard, loans to sharecroppers
and small enterprises introduced by the BB has been contributing not only to achieving
wider coverage of financial inclusion in Bangladesh but also to reducing the high
dependence of small and marginal farmers on non-institutional sources. Moreover, the
Microcredit Regulatory Authority (MRA), the regulatory and monitoring body for
microfinance institutions in the country, has capped MFI interest rates.
6.2 Recent global financial crisis identifies the weaknesses of financial markets routed in
institutional flaws like absence of good credit appraisal, risk management etc. An efficient
and organized financial sector can contribute to economic growth through savings
mobilization and capital formation. Governments and central banks have an important
role to play to avoid pervasive market failures and financial inclusion could help
overcome frictions in the market mechanism by expanding coverage to poor and
underprivileged people. A comprehensive plan for the financial sector may be undertaken by
the monetary authorities of SAARC countries to provide access to those who are excluded
from formal financial systems.
6.3 Technology is now playing a key role in the banking services in terms of cost and time
efficiency; moreover, outreach population and credit delivery in rural areas can be addressed
easily through technology. The issue of technological innovation and its infrastructural
development needs to be a priority for the countries in this region for reaching to the mass
people within the inclusive financial system aiming at rapid reduction of poverty in terms of
food security, human development etc.
Core Banking Solution
What is Core Banking Solution?
Core Banking Solution (CBS) is networking of branches, which enables customers to operate
their accounts, and avail banking services from any branch of the bank on CBS network,
regardless of where he maintains his account. The customer is no more the customer of a
Branch. He becomes the bank’s Customer. This task is carried through an advance software
by making use of the services provided by specialized agencies. The core banking system is
the set of basic software components that manage the services provided by a bank to its
customers through its branches (branch network).
Thus CBS is a step towards enhancing customer convenience through anywhere and anytime
banking. In Core Banking Solutions (CBS) or Centralized Banking solutions everything is
completed in a centralized environment i.e. under which the information relating to the
customer’s account (i.e. financial dealings, profession, income, family members etc.) is
stored in the central server of the bank (that is available to all the networked branches)
instead of the branch server. Depending upon the size and needs of a bank, it could be for the
all the operations or for limited operations.
The reason for calling it Core Banking System, after deployment, is the hart or the Core of
the Bank / financial institution. All entities that form part of the eco-system of the bank /
financial institution interact with. The entities are;
Ingredients of core banking solution:
There are 5 ingredients that form part of the Core Banking system. These are the essential
building blocks for the entire bank / institution.
(1) General Ledger:
The absolute Core is the General Ledger of the bank accordingly, the absolute core of the
banking system is the General Ledger system, every single financial activity that happens at
any location within entire bank has to be reflected in the G.L. system that generates the
financial statements for the entire bank which provides any entity to monitor the financial
health of the bank.
(2) Customer Information System:
The next major ingredient of a Core Banking system is the Customer Information System or
CIS. Accordingly in the CIS, a customer is identified by uniquely by his / her CIS number
and all information related to that customer (name, address, phones, employment, credit
history, relatives, family members, and demographic data) is stored along with this unique
number. All this is stored in a centralized CIS system allowing the customer to visit any
branch to do business with the bank.
(3) Deposit System:
The third major ingredient is the deposit system. The ability to process various types of
deposits is a must. These include current, savings, time deposit and hundreds of variations in
each of these. e.g. Simple current accounts, current accounts with overdraft, cash credit
accounts, variable rate overdrafts, simple savings, multi-currency savings, time deposits,
CDS, variable rate time deposit, recurring deposits, multi-currency, time deposits, and so on.
This is required to handle the liability side of the bank / financial institution's business.
(4) Loan System:
The fourth major ingredient is the loan system. This system handles the asset side of this
business. In most banks / financial institutions around the world loans are separated by those
to retail customer and those to commercial customers processing requirement of loans to
corporate customers is different form retail customers and hence there are loan systems that
cater to retail customers and those that cater to commercial or corporate customers.
(5) Management Information System (MIS):
Once the core deposit and loan business transaction for all customers of the bank are captured
and appropriate General Ledger accounts are updated, various users of the Core Banking
System throughout the bank need to know what is happening within the entire financial
institution. As a result, the fifth major ingredient is the management information system. This
enables everybody in the bank to obtain the relevant information from the system in order to
carry out their business effectively.
Besides the 5 major ingredients, there are optional components (like a car with options like
leather seats, flashing light etc…) that can be added on to the Core Banking Systems to help
the bank staff uses them in a more efficient manner, these include:
All the 5 major ingredients of a Core Banking system can be operated by a bank staff from
any location in the country simple by using their terminal at their workplace. Around the
world as banks started focusing on customer relationship management, they realized that
customers interact with the entire bank for banking transactions in many ways. Customer can
go to the branch, go to an ATM, call on the phone, and log on to the Internet to do their
banking transactions. They can use one or more of these delivery channels (Called customer
touch paints) to conduct segment and decide on further investment design specific products
and services to promote such delivery channels.
Hence, the add-on systems for Core Banking System include;
* Branch Automation system
* ATM Switch and connected ATM
* Call center system
* Internet Banking System
Any transaction done by the customers in any of the above systems goes and updates the
Core Banking System like deposit or loan at that in turn updates the Bank's G.L. in the Core.
What ingredients are not included in Core Banking?
Typically these systems are confined to a specific business department within the bank. They
are not Core because they do not affect all areas and entities of the bank.
* Trade finance
* Credit Card
* Mutual Funds
* Stocks, Bonds
* External System
* Payment gateways
* Shared ATM network
* World Wide credit card networks, maestro, electron etc.
* Worldwide ATM networks plus, Cirrus etc. and possibly other systems that the bank may
want to deploy in specific departments
Advantages of core banking solution: The CBS process is advantageous both to the
customers and the banks in the following manner:
How shall CBS help Customers? Perspective
1. Customer can have anywhere, more convenient and easier banking
2. All CBS branches are inter-connected with each other. Therefore, Customers of CBS
branches can avail various banking facilities from any other CBS branch located
anywhere in the world. These services are:
3. To make enquiries about the balance; debit or credit entries in the account.
4. To obtain cash payment out of his account by tendering a cheque.
5. To deposit a cheque for credit into his account.
6. To deposit cash into the account.
7. To deposit cheques / cash into account of some other person who has account in a
8. To get statement of account.
9. To transfer funds from his account to some other account – his own or of third party,
provided both accounts are in CBS branches.
10. To obtain Demand Drafts or Banker’s Cheques from any branch on CBS – amount
shall be online debited to his account.
11. Customers can continue to use ATMs and other Delivery Channels, which are also
interfaced with CBS platform. Similarly, facilities like Bill Payment, I-Bob, M-bob
etc. shall also continue to be available. Bank is in the process of launching Internet-
banking facility shortly.
12. Transaction of business from any branch, ATM that offers him anytime anywhere
13. Lower incidence of errors. Hence accuracy in transactions.
14. Better funds management due to immediate availability of funds.
15. Electronic Transactions with Other Financial Institutions
16. The bank's customers can make their transactions (deposits and withdrawals) from
any agency on the ATM / RCMP at their disposal.
All these aim to provide convenient, efficient, and high quality banking experience to the
customers, comparable to world class standards.
1. Limited Professional Manpower to be utilized more effectively
2. More Strong and economical way for MIS
3. Reduction in Branch Manpower by 15-20%
4. Additional Manpower available for Marketing, Recovery and Personalized banking
5. Instant Information availability for decision support
6. Standardization of process within the bank.
7. Quick and Accurate Implementation of Policies
8. Improved Recovery Process causing reduction on recovery costs, NPA Provisions
9. Better customer service leading to retention of customer and increased customer
10. Availability of accurate data & Better use of available infrastructure
11. Increased business volume with better asset liability management and risk
12. Innovative, redefined or improved processes (e.g. Inter Branch Reconciliation)
causing reduction in Manpower at Head Office Reduction in Software maintenance at
Branch and Head Office
13. Centralized Printing and Backup resulting in reduction in capital and revenue
expenditure on printing and backup devices and media at branches
14. Increased Speed in working resulting in more business opportunities and reduction in
penalties, legal expenses etc.
15. Transparency of financial institutions.
16. Anti-financial crime (e.g. money laundering)
17. Multi-channel (internet, phone)
18. Multi-currency (e.g. ISO 4217)
19. Multiple languages (e.g. ISO 639)
20. Scalability: Control life-cycle of products, services and processes (STP) and risk
21. The availability of the system for back office (e.g. ERP) and front office (24/7)
22. Interoperability (open format)
23. Cut into reusable module architecture (e.g. SOA / SOA and BPM)
24. Integrity of financial SWIFT core messages.
What are other benefits to the Customers?
A CBS branch is like a sales & service delivery center. Back office processes/activities are
handled through technology at some other site, called Data Center. Branch, therefore, has
more time for serving customers. This improves the quality and efficiency of the services
rendered and the customer is directly benefited by way of satisfying and happy banking
Since a CBS branch is essentially designed to focus on customer-interface and customer
service, the special lay-out and ambience of the branch is made to provide a convenient and
delightful banking experience. The Customer Service Representatives / Executives at the
branch are specially trained to understand, facilitate and deliver banking services efficiently
Criticism of Core Banking Concept
In the public sector banking has first evolved from automating the accounting processes in a
standalone mode and subsequently graduated into so called TBM's which in reality only
integrated the these standalone accounting applications. Several registers, legers scrolls and
other forms of MIS continue to be generated manually in the branch. Several application
packages still function in a standalone mode even in a TBM branch like FDR, PPF etc. Such
disjointed view of the branches resulted in a complex unmanageable IT infrastructure within
these banks such distributed data based / applications pose sever administrative problems.
Changing / modifying applications imply that these changes need to be applied over vast
geographically distributed systems, resulting in slow and error prone updating.
With frequent interest rate changes, product launches regulatory report MIS needs, it is
indeed a night mare to carry out these changes across 1500 odd branches and retrieve the
information and consolidate them to yield specific MIS reports. Added to this is the quality of
Data emanating from branches. Most data entry operations are out sourced and validity of
such massive data is questionable. It is often said, albeit in a lighter vein, that if the weekly
return same week, then it would be different repeatability, integrity and accuracy, became
In one panoramic / integrated view and develop that package. It is beyond view of the
branches view of the market and customers. This holistic view is implemented in centralized
software called Core Banking.
Impact of Core Banking:
The Core Banking Systems have to satisfy the requirements of all the entities that form part
of the eco-system of the Bank.
 Bank Employee: Head office, regional offices, branches etc.: Using Core banking
System. With appropriate authority employee as given above can help customers do their
 Bank management: Executives / managers at respective locations, head office, regional
offices, branches etc. can obtain the financial position from Core Banking Systems related the
respective sphere of banking operations and thus help pinpoint potential problems so as to
 Bank Customers: Can operate any of their accounts from any branch or preferred
delivery channel and have access to his funds any time 24 hours a day.
 Bank Auditors : Ones accounts audited, they operate the same year on year thus
enabling auditors to focus more on systems and procedures at delivery channels like
branches, call center etc.
 Bank regulators: Core Banking Systems produce the required reports for regulatory
bodies like the central bank, financial statement, asset and liability reports, NPA reports,
large currency transaction reports etc. are all produced by either the deposits, or the loan or a
combination of deposit, loan and G.L. System.
 Bank Share Holders: C.B. providing the desired return to shareholders from banking
operations Trends overtime on such data informs S.H. about how the banks is doing and help
take timely action to accelerate or improve performance.
Ph.D., Electronics Technocrat
Assistant Professor [Reader] & Chair: Kidevices AG
Shri Leuva Patel MBA Mahila College, Saurashtra University
Working Paper Series: WP1101
Financial Inclusion: The Role of Bangladesh Bank
Dr. Md. Ezazul Islam
Md. Salim Al Mamun
What is inclusive finance?
Inclusive finance includes but is not limited to microfinance. It focuses on expanding access
to affordable and responsible financial products and services by poor and vulnerable
populations. This also includes organizations that are often unable to gain access to financial
products and services such as micro- and small-enterprises. A wide range of financial
products and services are incorporated within the remit of inclusive finance including
savings, credit, insurance, remittances, and payments.
Benefits of Inclusive Finance:
1. Access to a full suite of financial services: Including credit, saving, insurance and
2. Provided with quality: Services are convenient, affordable, suitable, provided with
dignity and client protection.
3. To everyone who can use financial service: Both excluded and under-served
populations. Special attention to rural, people with disabilities, ethnic minorities,
women and other often-excluded groups
4. In a diverse and competitive marketplace: A range of financial service providers,
supported by robust financial infrastructure and a clear regulatory framework
5. Financial capability: Clients are informed and are able to make good decisions about
their use of financial services.
Problems of Inclusive Finance:
1. Limited Financial Literacy
2. Limited MFI capacity
3. MFI’s single-product approach
4. Limited understanding of client needs
5. Political interference
6. Lack of credit bureaus
What is Core Banking Solution?
Core banking is services provided by a group of networked bank branches. Bank customers
may access their funds and other simple transactions from any of the member branch offices.
Core Banking is normally defined as the business conducted by a banking institution with its
retail and small business customers. Many banks treat the retail customers as their core
banking customers, and have a separate line of business to manage small businesses. Larger
businesses are managed via the corporate banking division of the institution. Core banking
basically is depositing and lending of money.
Advantages of core banking Solution:
• Transparency of financial institutions.
• Anti financial crime (e.g. money laundering)
• Compatibility with European directives
• Multi-channel (internet, phone)
• Multi currency (e.g. ISO 4217)
• Multiple languages (e.g. ISO 639)
• Scalability: Control life-cycle of products, services and processes (STP) and risk
• The availability of the system for back office (e.g. ERP) and front office (24/7)
• Interoperability (open format)
• Cut into reusable module architecture (e.g. SOA / SOA and BPM)
• Integrity of financial SWIFT core messages.
Core banking roadblocks:
With intense competition and changing market dynamics, banks have to brace themselves for
newer obstacles every now and then. Moreover, fresh regulations and compliance
requirements, industry consolidation, delivering cost effective products and services,
maintaining secure data platforms, meeting ever increasing customer demands and other
strategic issues have all made banking far more complex than it used to be in the past. In
order to handle increasing transaction volumes and do away with issues hovering around the
current systems, banks need the right CBS in place.
Relationship between Inclusive Finance and Core Banking Solution:
Please write it down in your own words. (Hints: Core banking is one of the perquisites of