Dr. Atiur Rahman

Dr. Atiur Rahman presenting a keynote paper at the SEACEN-OMFIF Policy Summit at Kuala Lumpur on September 08, 2017. Photo: BBN

Dhaka, Bangladesh (BBN) – Stringent regulation can result in hindering financial inclusion and financial exclusion may also cause instability, Atiur Rahman, former Governor of Bangladesh Bank (BB) said.

“Regulation of financial sector is needed to prevent credit bubbles, create level playing field for all actors and to ensure stability of the sector as a whole,” Dr. Rahman said while presenting a keynote paper at the SEACEN-OMFIF Policy Summit at Kuala Lumpur on Friday.

Chaired by Dr. Hand Genberg, Executive Director of SEACEN the session was also shared by Professor David Mayes of Aukland University, according to a message, received in Dhaka from Kuala Lumpur.

During the last global financial crisis, on the one hand due to lax regulation in the developed countries financial sector was collapsing, on the other hand, a quiet revolution of financial inclusion was taking place in some developing countries like Bangladesh, the former governor explained.

He also said that regulation can facilitate financial inclusion if done properly. For example, in case of African countries like Kenya and Tanzania, prudent moves from the regulators ensured fair competition and interoperability in the mobile–payment market.

On the other hand, due to lax regulation big banks are favored in Indonesia over smaller operators and as a result only 36 per cent of the adults have accounts with formal financial service providers.

He added that in India, introduction of the Aadhaar card has ensured reliable source of information about the customers (especially the low income customers) for the financial service providers.

“Thus, the technology based regulations have helped enhanced financial inclusion.”
When discussing the role of the regulators in Bangladesh, Dr. Rahman told that Bangladesh adopted a ‘learning by doing’ approach.

The central bank of Bangladesh promoted ‘out of box’ thinking, which has been taking advantage of evolving technology (fin-tech) in payment systems and emphasizing on stakeholder consultation and motivation.

The BB, the country’s central bank, through numerous prudent and innovative steps has promoted development of real economy e.g. agriculture sector, financing SMEs, promotion of women entrepreneurs, agent banking, loan to share-croppers, mobile financial service and green financing.

“Such inclusive finance initiatives have ensured access to segments of people who were previously un-served or under-served. This in turn, has contributed towards creating resilience against the global shock and maintaining stability in economic growth.”

Recent global financial crisis has led to more stringent regulations often without a human face, according to Dr. Rahman.

He also said the developed countries ‘helicoptered’ money to financial institutions as a ‘fire-fighting’ response to the crisis with some success but the sustainable recovery is yet to be ensured.

In most developing countries including Bangladesh money has reached the un-served perhaps through ‘bullock carts’ and bolstered productive activities.

The implication here is that a ‘one size fits all’ approach to regulation will not work. Instead proportionate regulation is needed.

Regulators must create provision of risk differentiation based on country risk, business risk, product risk etc. Risk mitigation and Customer Due Diligence (CDD) measures should be proportionate with the risk level of a customer.

“Above all it has to be acknowledged that it’s not a “zero failure” regime. It is unrealistic to expect that ML/TF activities would never occur,” he noted.

Dr. Rahman also said instead the focus should be on effective implementation of AML/CML systems without jeopardizing the financial access opportunities for the lower income groups in the name of stringent supervision.

Simultaneously, regulation and supervision should take advantage of the new opportunities being created by evolving technologies in the arena of fin-tech solutions.

Further, he argued that central banks must put more focused emphasis on meeting the challenges of Human Resources Development to face the new challenges originating from ever changing technological development with huge implications for financial inclusion.

Human Resources Development of the financial sector ought to be humane as well so that there is a desired change in their mindset to work for the unbanked and underserved, he added.