In order to promote financial inclusion, Bangladesh Bank has licensed 27 banks and one bank-subsidiary to provide mobile financial services (MFS) since 2010. The central bank provided a framework for MFS operations and their ownership through its MFS Guidelines the following year. In 2014, it made a public announcement in national dailies to make clear the specific roles of various stakeholders so that the interests of subscribers and those of the nation as whole are properly served.
At the moment, Bangladesh Bank is making efforts to pass a more formal set of rules—to be called the Bangladesh Mobile Financial Services Regulation 2018—through its board. However, regulations affecting a service that is already being used by more than 50 million people needs clear long-term vision and planning. Mistakes can lead to anarchy in the sector and serious damage to the economy, and could lead to hampered progress for the nation. A matter of such magnitude is clearly tied to national economic interests and calls for political deliberations and decisions. The Bangladesh Bank’s apparent haste raises big questions.
Among other things, why the rush?
REGULATIONS FROM THE DRAFT GUIDELINE OF MFS (2015-2018)
In 2015, Bangladesh Bank published a new draft guideline on its website to be discussed by all stakeholders of MFS. In that draft guideline, it was proposed an MFS provider could have mobile network operators (MNOs) as owners, with maximum 15 percent equity for one MNO and 30 percent for multiple MNOs collectively. However, there was a great deal of opposition to this idea. In the second phase of the drafting process of this proposed guideline, the possibility of MNO ownership was dropped. This barring of MNO ownership was consistent with the 2014 public announcement in by the central bank. All stakeholders and experts also moved away from the idea of MNO ownership. This position of the central bank was further made clear by its current governor and former deputy governor more than once in the national media.
Strangely, the current draft regulation seems to reverse this position; it seems to be implying that up to 49 percent equity or less stake in an MFS provider by MNOs (or multinationals in general) might be acceptable to Bangladesh Bank. The same special opportunity has been preserved for NGOs as well. In any event, what is really worrisome is that Bangladesh Bank is trying to get these regulations passed quickly by employing some foreign consultants and through a vote in its 10-member board, bypassing public scrutiny.
While I personally believe that the board members will consider national economic interests and the priorities of our political leadership, but the inconsistencies raise serious questions. For instance, contrary to the 2015 position of no ownership by MNOs, why is a new opening being created for them now? Why was this regulation drafted by foreign consultants while Bangladesh itself has better experience in MFS than most countries? Why did donors fund these consultants and potentially open doors for MNO-ownership of MFS when a debate has already taken place on this issue? It is necessary to examine the proposed regulations and ask serious questions.
MFS IS ABOUT THE POLITICAL ECONOMY
The decisions involving MFS are already being made at the political level. Take the case of pricing the USSD channels (a type of channels provided by MNOs to the MFS players), which has not been settled in four years. Even two committees formed to determine the price could not come to a solution. This pricing was eventually set recently by the Prime Minister’s IT Advisor. In this case, Bangladesh Bank (the regulator of financial matters) and BTRC (the regulator of MNOs) demonstrated a serious weakness. In any event, neither of these regulators could establish an appropriate and specific pricing model for USSD channels by themselves or through a neutral organisation. A settlement was reached through the political and economic acumen of the prime minister’s IT advisor. Similarly the political leadership will eventually have to decide on MFS that is increasingly of national interest. I see this clearly as a former member of the USSD Technical Committee of Bangladesh Bank and BTRC.
KEY FEATURES OF THE PROPOSED DRAFT REGULATIONS
There are, of course, several good features of this new draft regulation. Among other things, it recognises that MFS operations should be separate enterprises and not be mixed up with banks’ other activities. The draft also recognises that the central bank should directly supervise MFS, something that is long overdue. In addition, it sees many new possible financial services, particularly those relating to payment, which can be addressed by MFS. Another good feature is that the draft contains a section dedicated to definitions, useful for clarity. This is important because vague and ambiguous concepts, as well as silence on some important matters, can lead to confusion and disputes later; therefore definitions and words need to be carefully considered before finalisation. These very good features in the draft, in other words, highlight the need for a thoughtful and considered regulation for a smooth growth of a competitive MFS sector in the long run.
One of the areas that have been left vague or silent is whether MNOs can be owners of MFS enterprises, particularly now that MFS operations are encouraged to be separate enterprises as opposed to being buried in scheduled banks. This is important to note because despite years of debates and MNOs ultimately being barred from owning MFS enterprises, the MNOs’ desire to own them has not completely evaporated. As late as September 2017, Grameenphone wrote to the Ministry of Finance that this particular MNO has been frustrated in obtaining an MFS license from the central bank and that the ministry should intervene into the matter. There are, of course, many reasons why the MNOs have been so barred. Among them is the potential conflict they would create between regulators, that is, between BTRC that regulates MNOs and the central bank, which regulates financial services. An MNO entry into MFS ownership would also create customer-supplier conflict and thus unfair competition. There are four MNOs in the country that sell USSD channels to MFS operations, and any of these MNOs owning its own MFS would tend to discriminate against those MFS operations that it does not own in favour of the one it does. These and many other reasons had led Bangladesh Bank to bar MNOs from owning MFS. Yet the current draft regulation allows “multinationals” (a word that could easily include MNOs) to own MFS players, while the draft otherwise remains silent as to whether MNOs can own MFS enterprises.
THOUGHTFUL, SATISFACTORY ANSWERS NEEDED TO IMPORTANT QUESTIONS
In the draft MFS regulation, the policy position seems to focus on two key points. First, the success of the bank subsidiary model has been noted and the draft encourages its replication. Second, the draft does not explicitly bar MNOs and, instead, leaves enough opening for MNOs to own 49 percent of MFS enterprises as indicated above. In light of these key points, the following five questions should be satisfactorily answered. I pose them as the starting points for a discussion that the country definitely needs to go through.
A. Has an adequate study been conducted by the central bank as to why the vast majority of its MFS licensees been unsuccessful? It turns out that 27 of its 28 licensees are operations inside scheduled banks (as opposed to through separate enterprises) and most of these 27 have minimal success.
B. If a bank subsidiary has indeed been a success, does it automatically mean that encouraging the subsidiary model would solve all problems? Has a study been conducted to satisfactorily settle this question? It is conceivable that a subsidiary arrangement has allowed a unique set of resources to be assembled and that unique set has then managed to overcome the impediments associated with the subsidiary model. Without settling this question, the central bank would simply create a new path to many more unsuccessful MFS efforts and unduly waste private and public resources.
C. Hasn’t the subsidiary model created impediments? As implied in question B above, the subsidiary model itself is fraught with problems that may have been so far overcome by a unique set of circumstances. There is only one subsidiary arrangement and thus only data point so far, hardly proving that the subsidiary model as a panaceas. Giving control power of 51 percent ownership to a bank was originally meant to outsource supervision when MFS was at its infancy; MFS was too experimental back in 2011 and the central bank did not want to dedicate resources for direct supervision. The situation is dramatically different now and the central bank recognises this; it sees the need for direct supervision at this point. What needs to be noticed, however, is that the MFS sector has paid a heavy cost for the 51 percent control by one local entity; it discouraged foreign investment in the sector while MFS operation inside banks completely prevented foreign investments in those cases. Other than perhaps a rare exception, most foreign investors, who could bring new technologies and capital, would not want to be subjected to local “landlords.” The consequent absence of know-how in the local banks is likely to be the main reason for the vast majority of the licensees to have failed, a problem that would not be overcome by superficially adopting the so-called subsidiary model.
D. Since Bangladesh Bank had taken the position of barring MNOs (for which there is much evidence, including the Grameenphone’s expressed frustration in its letter to the Ministry of Finance in September 2017), why isn’t the central bank making a clear statement in this draft regulation in favour of this position and maintaining its consistency with past statements?
E. Why is Bangladesh Bank trying to make a faulty experimental model permanent? In addition to avoiding the need to dedicate resources for direct supervision during the initial phase of MFS, the so-called bank-led model was adopted because the central bank saw a new financial service as an area for it to manage (as opposed to it being managed by authorities dedicated to supervising MNOs). However, as far as the operational functions are concerned, the bank-subsidiary model is not at all necessary for MFS. There are many other financial services (for example, leasing companies, insurance companies, and micro-finance) that are not subsidiaries of scheduled banks. MFS does not need to be either. The rush to prevent MNOs from pursuing MFS has led to the bank-led model but created other problems that will only be exasperated through another rush to fossilise this faulty model. The long-term solution involves direct supervision (a need Bangladesh Bank now recognizes) and encouragement for the creation payment system platforms.
MFS has become too important for a few officers in Bangladesh Bank or its board, or foreign consultants and donors to decide. Some 50 million people are using MFS executing close to 7 million transactions a day, and employing at least half a million agents—not to mention the increased efficiency in the economy as a whole. It promotes financial inclusion (i.e., SDGs), and can make other financial services easier. It is necessary for the country to take time so that wrong rules are not adopted in a rush, particularly in this pre-election period. The necessary discussion could start now and continue, leading to finalised regulation after the general election. In this discussion, the bank-subsidiary model itself should be questioned and scrutinised, rather than it being blindly adopted for the long run. If the subsidiary model is indeed a good one—which I very much doubt—then there is absolutely no need to rush because it is already part of the existing guidelines.
What is also part of the central bank’s existing position is the exclusion of MNO’s from MFS ownership. This has been a appropriate decision by Bangladesh Bank because of many reasons, including the prevention of further concentration of power in the hand of MNOs that are already dominant players in the economy. Although MNOs, with vast resources, claim that they bring know-how and technologies, a recent deal in Pakistan by Telenor (the controlling shareholder of our dominant MNO Grameenphone) and the Chinese payment giant Ant Finacial (which does indeed have much know-how and technological strength) clearly proves that such claims by MNOs are actually empty. Otherwise why did Telenor seek a partnership with Ant Financial?