In 2014, the Royal Monetary Authority of Bhutan (RMA), the country’s central bank, made a commitment under the Alliance for Financial Inclusion’s Maya Declaration to develop a national financial inclusion strategy. It backed the overall pledge with specific commitments detailing the main pieces of the strategy. Since then, it has diligently put these pieces into place. Over the past three years, the RMA created regulations for microfinance organizations (deposit-taking and non-deposit taking) and agent banking. It set up a mobile payments system, a credit bureau and a collateral registry. This is an impressive set of accomplishments for a country starting from a relatively blank slate in these areas.
But is it enough? I wonder whether these initiatives will spark the provision of financial services that contribute to the inclusive economic growth Bhutan is seeking.
Bhutan is a special place – a hidden Himalayan kingdom sometimes called a Shangri-La. It is a mountainous country with only 800,000 people scattered across hills and along narrow valleys. Only 7 percent of Bhutan’s land is arable – the rest is too steep. And yet, according to the Bhutan Association of Women Entrepreneurs, a local NGO, the livelihoods of 80 percent of the population depend on agriculture. Bhutan is dwarfed by neighbors with enormous populations: India, on which it depends heavily, Bangladesh and China. Even Nepal has more than 20 times more people. At the recent BEFIT financial inclusion summit, representatives from the region came to share their experiences. But if your experience is all about building for scale – as, for example, with the 15 million clients of India’s Bandhan Bank – what advice do you have for tiny Bhutan? If your rural areas are very densely populated – as in Bangladesh – what can you conclude about reaching the widely dispersed rural dwellers in Bhutan? Ironically, the best point of reference for Bhutan might be the small Pacific Island nations whose people drift across dozens of islands, or Bolivia – another mountainous country surrounded by larger neighbors.
The most obvious first challenge for Bhutan is to reach people across distances, and that is why it has been a priority to introduce agent banking. I think everyone recognizes that mobile phones will be key to universal coverage, and, indeed, 86 percent of people in Bhutan have a mobile phone. The RMA will need to continue working with the telecoms regulators toward full mobile penetration and high bandwidth coverage that will support mobile financial services across the country. Meanwhile, and for at least the next several years, banking agents will be essential for creating localized access. The RMA is seeking ways to ensure that agents operate responsibly across the country.
In my own vision of a financially inclusive Bhutan, I see savings and credit groups spreading across the country and linking to banks via mobile phones and banking agents. It strikes me that promoting savings groups and pairing them with mobile banking is potentially the most powerful financial inclusion strategy Bhutan can adopt. I say this in large part because the sparse population and rugged terrain will make it difficult, if not impossible, for a traditional microlender operating outside the main cities to be financially viable, even with mobile banking, whereas savings groups can continue to operate long after the initial start-up subsidies. This appears to be playing itself out in the experience of RENEW, a German-backed microlender offering a Grameen Bank-style group loans. While RENEW is the largest microfinance institution and undoubtedly well-run, its prospects for financial viability remain elusive. Unfortunately, the savings and credit group methodology, which has been so successfully promoted across Africa by Care, Oxfam, and others, is not known in Bhutan, and even the Indian self-help group experience seems under-represented. There are only a few very small cooperatively-owned savings and credit groups in the country. Introducing this methodology in Bhutan could well be a major step forward. It would require an acknowledgement by the RMA that informally-based financial services can be beneficial – a concept that is currently somewhat equivocal, evidenced by a government effort to crack down on informal moneylenders.
The policy makers in Bhutan are interested in financial inclusion primarily as an inclusive growth strategy, which is why the legislators and cabinet ministers who attended BEFIT were especially focused on financial inclusion helping small businesses – or in local parlance, cottage and small industries (CSIs). The Bhutanese I spoke with were especially concerned about youth unemployment and the perceived lack of entrepreneurship – “The young just want to be tour guides or civil servants.” This is why one of the government’s financial inclusion initiatives was to set up a no-interest revolving loan fund that lends only to start-up projects. While inspired by the best of motives, my sense is that such lending to new projects is ill-advised, not only because it requires heavy ongoing subsidy, but also because it is not necessarily a favor to young first-time entrepreneurs, who are highly susceptible to failure. Business failure combined with debt can bring on significant negative consequences; shared equity may be a better approach. Debt is more appropriate for the more established businesses targeted under a new private investment fund, the Bhutan Fund, now in formation. The Bhutan Fund seeks to develop export businesses, such as horticulture, that can feed into the enormous markets just beyond Bhutan’s borders. However, for most CSIs, the existing microfinance program, RENEW, possibly combined with expertise from an experienced microlender that provides individual loans, such as those from Bolivia, would be a more accessible approach.
Bhutan’s financial system is, understandably, very small – consisting of five banks, two insurance companies, a pension fund and three microfinance institutions (only one of which has any scale). The advantage of having a small system is that the central bank can work together with the financial system to implement good ideas quickly. We see the fruits of that kind of cooperation already in the progress Bhutan has made on its Maya commitments.
The leaders of Bhutan’s government, central bank and major financial institutions are determined to continue advancing financial inclusion. It will be fascinating to watch them select the best and most relevant concepts from around the world and come out with a system that is uniquely their own.
Image credits: Elisabeth Rhyne
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