Providing digital financial services to the un-banked poor may have significant socio-economic benefits. One working strategy to bring the extreme poor into the folds of a mainstream financial service network is through safety net and social transfer programs, as seen in South Africa, Kenya, and now India.
This year, our government launched the National Social Security Strategy (NSSS) which calls for the digitisation and streamlining of the social transfer delivery policy, positioning us for this very change.
Annually, our government commits over $3 billion to a range of social protection programs through several ministries that distribute cash to the extreme poor.
These programs do not go only or even mainly, to the extreme poor (the single largest element of this budget goes to civil service pensions), and of those programs that do target the poorest, there are several inefficiencies: Mis-targeting, leakages, and lack of impact monitoring.
Most of these programs deliver safety net allowances as cash in hand at pick up points such as public banks or schools (in the case of education stipends).
Recently, A2i conducted a study on the cost-saving implications of digitally rather than manually transferring safety net allowances of six programs -- old-age allowance, maternity allowance, lactating mothers allowance, primary education school stipend, EGPP, and pension for primary school teachers.
Digitally transferring monthly stipends would save the government annually an estimated Tk122 crores. The time saved for citizens who travel to pick up points for cash-in-hand came to Tk115cr.
The study also estimated the cost of leakages (a significant hidden cost) across 14 programs calculated based on assumptions around the number of ghost beneficiaries, unofficial fees at the enrolment phase, and unofficial fees at the payment collection phase.
This came to an estimated annual Tk772cr.
Electronic verification of social transfer services and digital transfer of allowances would bring transparency to the system, making it harder for corrupt bureaucrats to steal citizens’ benefits.
If the reduction in leakages as a result was 50%, that would represent a saving of Tk385cr at the systemic level.
In total, by digitising social cash transfer programs, we would experience a saving of Tk622cr ($80m) per year.
If the case for digitisation is so strong, why aren’t we jumping to it? Let us explore some of the barriers to the wide-scale creation of digital financial services for the poorest.
While mobile phone penetration is high among the poor, almost every family either owns a phone or has a neighbour whose phone they can use, but still, studies suggest that women may face challenges in using the phones which are often possessed and controlled by male heads of families. This can corrode some of the gender-empowering aspects of social transfers that target women.
When strategising the change management process for technology uptake, the government needs to consider existing power structures that may resist digitisation. These power structures are often deeply entrenched in the fabric of local government and community forces.
Bundling impact results with end-of-year bonuses may help incentivise those in the chain. For example, perhaps the UNO, whose region experiences the best results, gets a bonus at the end of the year. Perhaps the union members who are most active in linking the poorest to public services receive a bonus.
Empathy for the poor is not enough. Social transformation should be seen as a citizen’s right, not an act of charity. Technology could help solve some of these problems because it would provide poor people with a way to interact with the state without depending on local officials who are now the main gate-keepers of government services.
Lack of suitable bank products
While Bangladesh Bank has shown interest in making the nation more financially inclusive, banks and MFIs have not yet developed suitable financial products to meet the needs of the poor -- products for savings, crop insurance, working capital micro loans, etc.
What we definitely don’t need is another channel for exploiting the extreme poor. If banks driven by purely profit-making motives are left to design these products, the poor may well have something to worry about.
We need public-private partnerships with social-minded entrepreneurs and researchers, strongly regulated by Bangladesh Bank, working closely with civil society and poverty experts, to develop products.
Lack of data
Data can be a powerful input to product development and service delivery strategies. The government and banks lack sophisticated data collection and analysis tools when it comes to the income and expenditure patterns of the poorest.
Line ministries with safety net programs are exploring digital channels to make their delivery processes more effective, but first, investments need to be made to develop robust information management systems that generate the dynamic data necessary to manage such an endeavour at scale.
Also, these channels of delivery need to be tested so the government can make informed, evidence-based decisions about which ones work best for the poorest: Mobile wallets, bank agents, smart cards, etc.
The way forward
Under the acronym JAM -- Jan Dhan, Aadhaar, Mobile -- India is transforming its social welfare system. This program will give poor people access to financial services, including bank accounts, credit, and insurance, through mobile money platforms.
This will enable the state to transfer cash directly to those in need -- without going through intermediaries that might take a cut. Bangladesh is also poised to make the shift to digital.
Of course, transferring cash, digitally or otherwise, is not enough. Digital financial inclusion has a great contribution to make.
However, we know from government safety net program, Shiree, that a sustainable pathway out of extreme poverty needs a combination of measures at the household level -- including access to regular social protection transfers and savings (where digital financial services can play a role) -- and also access to public services and income generating activities. Digital innovation can play a role here as well -- to help ensure access, education, and impact monitoring.