Digital lending holds promise for financial inclusion: BIBM study

Digital lending can help expand financial inclusion in Bangladesh by making formal credit more accessible, affordable and convenient for underserved people, according to a study by the Bangladesh Institute of Bank Management (BIBM).

The keynote study was presented yesterday at a seminar titled “Digital Loans for Financial Inclusion: Prospects and Challenges for Bangladesh”, organised by BIBM at its auditorium in Mirpur.

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Digital lending can make small loans more commercially viable by reducing transaction costs and overcoming geographical barriers. It can also use digital and alternative data to assess borrowers who lack conventional credit histories, the study said.

The research reviewed international experiences, along with questionnaire responses from banks and interviews with key financial-sector stakeholders.

Bangladesh has already built a strong base for digital finance through mobile financial services (MFS), agent banking, e-KYC and digital payment systems. However, digital lending is still largely limited to nano-loans and bank-led or bank-MFS partnership models, it said.

Operating costs for digital lending can be less than 1-2 percent of those for traditional lending, highlighting its potential to improve efficiency.

Digital loans already account for a significant share of retail loan disbursements and loan accounts, although their share of total outstanding loans remains small.

The study found that classified loans accounted for around 3 percent to 4 percent of digital loans. Rural borrowers made up about 30 percent to 40 percent of digital borrowers, while repeat borrowers accounted for around 45 percent to 60 percent of the borrower base.

Female participation varied widely across institutions, ranging from about 3 percent to 25 percent.

The study said digital lending could particularly help underserved households, microentrepreneurs, farmers, women and micro, small and medium-sized enterprises (MSMEs).

However, it cautioned that financial inclusion should not be judged only by loan volumes or the number of borrowers. The quality, affordability, sustainability and responsible use of credit should also be considered.

Habibur Rahman, chairman of the BIBM Executive Committee and deputy governor of Bangladesh Bank, said digital lending could remove barriers to credit, especially for small borrowers and others who struggle to obtain traditional bank loans.

Md Ezazul Islam, director general of BIBM, said digital lending could become an important pillar of financial inclusion if the ecosystem is developed responsibly.

Technology can lower lending costs, speed up loan processing and bring formal credit closer to people who have traditionally remained outside the banking system, he said.

But he warned that rapid growth in digital lending could also increase risks such as defaults, over-borrowing, data misuse, fraud and consumer harm without adequate safeguards.

“The way forward is not to choose between innovation and regulation, but to make the two reinforce one another,” he said.

Ezazul called for proportionate regulation, real-time credit information systems, stronger data infrastructure, sound AI and model governance, transparent pricing, effective consumer protection, robust cybersecurity and targeted digital-literacy programmes.

He also stressed the need for responsible experimentation through partnerships and regulatory sandboxes. Banks, MFS providers, fintech firms and other players should also have clearly defined responsibilities, he said.

The keynote paper was presented by Md Nehal Ahmed, professor (Selection Grade) at BIBM. The research team included Md Shahid Ullah, associate professor; Rexona Yesmin, assistant professor; Md Emon Arefin, lecturer, all of BIBM; and Abrar Shahriar, head of eLending, Products, Acquisitions & Bancassurance, Retail Banking Division, City Bank PLC.