Leveraging fintech and mobile financial services to combat impending global recession

Leveraging MFS and fintech services will be a big step towards our preparation for the impending recession and towards a quick recovery. Moreover, the benefit of adopting modern financial technology lasts beyond recessions

While still struggling with the coronavirus pandemic, the world is facing a new round of challenges in the form of economic depression. The World Bank has already forecast a strong possibility of global recession in the coming year due to a rapid deterioration in growth prospects, combined with rising inflation and tighter financial conditions.

Today’s situation in Bangladesh is not very different either. An unprecedented high inflation rate and unstable dollar exchange rates at the Bangladesh Bank and private banks, along with crippling power outages, have added stress to people’s daily lives, as well as the country’s agricultural and manufacturing sectors.

The nature of this recession is completely different from other recent recessions. Recent recessions were mostly due to economic causes, while this recession is going to be a mixed effect of the Covid-19 pandemic and the political effects of the Ukraine-Russia conflict, especially the economic sanctions imposed by the Western bloc.

Bangladesh will face, and is already facing to some extent, several challenges due to the recession. Challenges will come in the form of a declining trend in export earnings, unstable fuel prices, higher costs of essential food and medicines, and a decline in monetary income, etc. The low- and middle-income families are already feeling the heat as they struggle to manage their day-to-day expenses.

Recently, the Prime Minister also warned about the economic crisis and a possible food shortage in the coming years. Being part of a globally connected economy, this crisis certainly cannot be avoided. But the key to success lies in managing the recession through effective financial management. There is no doubt that most countries in the world will face challenges, but those that can handle the crisis effectively will bounce back sooner than the others.

Fintech and Mobile Financial Services (MFS) companies can be an integral part of managing financial services effectively during this economic crisis. Fintech companies offer a faster transaction speed, a greater convenience for customers, saving both precious time and costs for both consumers and financial institutions.

Exploiting such technical advantages in financial services will benefit all parties. Moreover, adopting digital financial services on a larger scale will help combat the economic crisis more effectively by bringing the benefits outlined below.

Digital loans to support mSME

According to the BBS National Economic Census 2013, there are 12 million micro, small and medium enterprises (mSMEs) in Bangladesh. These mSMEs are the heart of the country’s economy as they contribute about 25% of our national GDP, 31% of industrial sector productivity and around 30 million people are employed through these mSMEs.

During the economic crisis, these mSMEs will be hit hard as they have very little access to formal financial services.

More than 60% of micro enterprises are unable to obtain credit facilities through formal financial channels. Those who can get credit facilities through informal or semi-formal channels pay even higher interest rates.

Since Bangladesh already has a wide adoption of MFS among 180 million customers, providing small digital loans through fintech companies can serve as a boon for these mSMEs as they can apply for loans faster through electronic KYC without going through lengthy paperwork , wet signatures and receive loans based on digital records of previous transactions and cash flow, without traditional security. Such financial support during an economic crisis will keep mSMBs alive and will help the economy to recover faster.

Digitized payment of social security benefits through MFS

The government adopted electronic payment of social welfare benefits in the direct, government to person (G2P) modality through MFS. It saw great success as it solved some of the problems associated with the old system, such as ghost payments and ensuring that beneficiaries are remunerated within an acceptable time frame, all without any middleman.

In 2021, the G2P payout was approximately Tk5,136 crore. Digitization of such payment flows has shown great potential to accelerate financial inclusion in Bangladesh, while improving digital financial literacy. With a global recession looming, low-income people will face hard times and will need even more support from the government. Digital payment will make it possible for the state to support the recipients as quickly as possible and build a digital overview of how the funds are paid out and used.

Simple payment through MFS

Currently, the foreign exchange reserve of Bangladesh is under stress. Bangladesh’s foreign exchange reserves were down to $36.90 billion in September 2022, despite the central bank’s move to curb imports and foreign exchange diversification. So, to keep the supply of dollars, sending remittances has to be made very convenient for the workers working in different parts of the world. Sending money transfers through mobile apps was very warmly received by non-resident Bangladeshis.

According to Bangladesh Bank, inward remittances stood at Tk380.97 crore in July 2022, which is 24.11% higher than in June 2022. A large part of remittances comes through an informal channel known as “hundi.” Popularization of remittances through MFS channels will not only reduce hundi but will also increase the flow of remittances through formal channels.

Agricultural incentives through MFS

Due to the ongoing war between Ukraine and Russia and high inflation, experts warn of widespread global food shortages, which could even lead to famine. Expressing the urgency, the Prime Minister emphasized increasing food production in preparation for the famine. Since increasing domestic food production is a priority, agricultural subsidies can be paid directly to farmers to buy fertilizer and seeds, cutting out the middlemen.

The government can also buy crops from farmers and pay them through mobile wallets. In addition, subsidies or incentives can be given through MFS to increase the mechanization of agriculture. MFS can even be expanded to provide crop insurance support to farmers.

Micro savings through MFS

Saving plays an important role in our socio-economic life. Savings provides a sense of security to deal with financial uncertainty and emergencies in life. It also empowers people economically, especially rural women.

If the recession deepens, people in the low-income group will be more likely to avoid formal savings, which require more time and paperwork, and instead prefer MFS or fintech-based fast, short-term micro-savings. Enabling millions of micro-savers, MFS and fintech-based micro-savings services can help address recession in a wider domain.

Digital transaction data to understand the nature of the recession

Digitization of transactions generates huge amounts of detailed transaction data that can be used as a basis for estimating revenues, evaluating risks and expanding financial services. Digital transactions help to formalize small and medium-sized enterprises in emerging markets, which in turn can lead to an increase in overall economic output and expansion of the tax base. Digital transaction data can be a useful source for analyzing the impact and nature of the recession.

The more daily transactions are channeled through MFS and fintech platforms, the more detailed data on financial behavior can be studied and more informed decisions can be made. Thus, strategies and guidelines for overcoming the recession can be drawn accordingly.

As the maxim of neoliberalism goes: “Every crisis is an opportunity.” The Covid-19 crisis drove a massive shift towards digital markets and digital finance. Now global recession is imminent and inevitable.

Bangladesh, as a nation of 170 million people with limited direct benefits from its rich natural resources, needs to be well prepared. We already have a wide use of MFS and the fintech field is also growing rapidly. Leveraging MFS and fintech services will be a big step towards our preparation for the impending recession and towards a quick recovery. Moreover, the benefit of adopting modern financial technology lasts beyond recessions.

Sketch: TBS

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Sketch: TBS