Bangladesh Bank’s nuclear option

The central bank’s new guidelines don’t bode well for the future of the banking industry

The Bangladesh Bank recently concluded its consultation round on draft guidelines to regulate mobile financial service (MFS) providers, such as bKash and Dutch Bangla Bank’s mobile money business. A regulatory earthquake is not a bad analogy to describe how those draft guidelines went down in the banking industry.

The most controversial elements of the draft guidelines propose that a) an entity cannot hold more than a 15% ownership stake in an MFS business, and b) at least four banks must form a consortium to have 51% majority ownership in an MFS business.

If implemented, these guidelines would effectively lead to a forced divestment of BRAC Bank and Dutch Bangla Bank’s mobile money businesses, the two dominant players, with about 95% market share.

Moreover, with BRAC Bank owning 51% of bKash and DBBL having full 100% ownership of its MFS business, complying with the four-bank consortium rule means BRAC Bank and DBBL have to sell its majority stakes to other competing banks.

Predictably, the guidelines created a huge furore. Forcing a company to sell a business through regulatory fiat is a big, provocative move that is fraught with danger. But forcing a company to sell a business to a competitor is like choosing the nuclear option.

You only go nuclear when there is an existential threat. In the world of financial markets, that means a financial system meltdown such as the one the US faced in 2008.

In our case, no one is suggesting that the mobile financial services industry is in crisis. So why is BB pursuing this nuclear option?

Understanding the behaviour of Bangladeshi public institutions is notoriously difficult, but in this case, the relative silence or lack of effort from BB’s top brass to publicly sell the policy argument is instructive. Maybe this was an unforced error of judgement that only became apparent after the industry backlash.

To be fair to BB, the public policy dilemma it faces is by no means easy.

There are 28 commercial banks with MFS licenses, but only three or four are effectively operating in the market. Moreover, as mentioned earlier, bKash and DBBL have 95% market share between them, so really there are only two players that matter.

The Bangladeshi MFS market is not sufficiently large enough to sustain numerous MFS providers, so there is a need for market consolidation. But on the other hand, having just two players controlling the market may not be economically efficient, so there is an equally valid argument for promoting more competition.

A market structure with four or more genuinely competitive MFS providers, as envisioned by the draft guidelines, can only be realised and sustained if the two dominant MFS providers lose significant market share to smaller market participants. That is only likely to happen if the smaller players are able to disrupt the market by offering better, more innovative products and services.

Forced consolidation of 20 or more smaller companies into four or five bigger ones does not guarantee competition if there is a big gulf in the quality of products and services offered to consumers.

These guidelines are unlikely to make a meaningful difference to the ability of MFS providers competing against each other on product quality, given the apparent suspicion with which BB is proposing to treat the involvement of mobile network operators (MNOs).

The simple fact of the matter is that the technology underpinning mobile financial services has been imported from overseas. The innovation happened abroad and it was brought to Bangladesh by the MNOs.

Whether we like it or not, we depend on the MNOs to invest in our mobile financial services industry to offer better products and services based on the latest technology standards, such as wireless 3G and yet-to-arrive 4G services.

The guidelines are a step in the right direction insofar as it will allow MNOs to invest and own a stake in MFS providers. But the 15% ownership restriction on an MNO proposed in the guidelines makes that an unlikely prospect.

First of all, the four or more large MFS providers BB envisions creating will effectively have only three MNOs (Grameenphone, Banglalink and Robi-Airtel, if the merger is approved) to choose from as technology partners. Furthermore, of those three MNOs, only Grameenphone has publicly expressed any interest in providing mobile financial services. The others may or may not jump into the fray in the future, but it is by no means guaranteed.

So why would these foreign MNOs invest and share their intellectual property with Bangladeshi companies for a lousy 15% share in a joint-venture? And that too in a regulatory environment where the regulator can force you to sell your business to a competitor!

The prospect of Bangladeshi consumers benefitting from foreign MNOs embarking on a technology arms race by investing in Bangladeshi banks as strategic partners is just wishful thinking. These guidelines do not create a very attractive value proposition for MNOs.

An alternative option for market consolidation

An arguably better option for BB may involve creating a two-tier MFS market involving MFS “platform operators” and “product sellers.” The two can be distinguished based on the following example.

BKash or DBBL’s mobile money service are examples of MFS “platform operators,” since both own the financial infrastructure that processes transactions from one sender to another. On the other hand, the interest BRAC bank offers on cash-in deposits people have on their bKash account (ie a savings product) makes BRAC Bank a “product seller.”

Establishing a two-tiered market structure and selling three to four “platform operator” licenses through an auction can be a simpler option for BB to achieve the regulatory outcomes it desires. An auction will enable banks most serious about being effective platform operators to bid for the limited licenses available.

And if one of the current 28 license-holding banks choose not to be a platform operator it can still participate in the MFS market as a product seller, whereby its deposit, loan, and other banking and financial services will be available on licensed platforms.

This allows for consolidation in the MFS platform or infrastructure market, while promoting more competition between banks using those platforms to offer myriad products and services.

It would of course entail BB developing a level playing field through regulations that set the rules of the game. It means ensuring platform operators offer non-discriminatory access and pricing to any bank or product seller that wants to use a platform. These are called “access regime” regulations in economics jargon and are regularly used to regulate infrastructure markets.

However, for this market-based auction approach to work, BB has to drop the provision limiting a bank or an MNO’s ownership to a 15% stake. BB has clearly articulated its preference for MFS platforms being majority-owned by banks, and not MNOs. Notwithstanding the merits and demerits of that policy position, going that one step further and mandating how much ownership a single bank can have in an MFS platform is completely unnecessary.

Such a heavy-handed intervention where BB is telling businesses what they can own and by how much can seriously undermine Bangladesh’s business and investment environment. In 2015, governments or regulators should just not be in the business of dictating corporate ownership structures.

This move by BB is all the more bewildering when one considers the fact that we are no strangers to market-driven competition and innovation in our financial sector. Think Grameen Bank and BRAC’s microfinance revolution.

The microfinance revolution happened at the expense of stateowned banks that refused to lend to poor people. Similarly, bKash’s phenomenal success can be explained by its novel use of technology to solve a payments problem that both private and public sector banks have ignored for decades.

Bangladesh has many positive experiences of market-driven competition and innovation leading to good public policy outcomes. There is no reason for us to abandon those principles now.

Source: Dhaka Tribune