Online Desk: Nagad, a leading financial service provider in Bangladesh, is set to introduce digital lending solutions once its digital bank takes shape, with a view to expanding banking services mainly to informal sector people.

Such a groundbreaking move will help mitigate hardships faced by those with limited access to traditional banking, often facing discomfort when interacting with bank branches.

The informal sector of the economy – comprising farmers, small-scale entrepreneurs, street vendors, and daily wage workers – has long struggled to access fair and affordable financial services. Many have resorted to taking loans from moneylenders, but they are often forced to repay them at exorbitant interest rates of up to 40% per day, perpetuating a cycle of debt and financial instability, according to informal sector people.

Nagad’s digital lending initiative is poised to change this status quo. By providing these marginalized individuals with accessible and affordable credit options, Nagad aims to formalise the informal sector, promoting financial inclusion, and reducing the reliance on exploitative moneylenders, said Nagad officials in the know about the development.

This forward-thinking approach will enable individuals from all walks of life to access credit and manage their finances conveniently through their smartphones. It is an innovative step that will address the discomfort many informal sector workers face when dealing with traditional banking institutions, where their attires can also be a barrier to entry. In contrast, Nagad’s digital platform is user-friendly and tailored to the needs of the informal sector, helping them embrace the benefits of modern financial services, they pointed out.

Take farmers for an example – whenever they need money to buy fertilisers, they will be able to secure loans from Nagad’s digital bank through just a few clicks on their phones and the entire application process can be completed within a few minutes and be approved within one second. The more interesting fact is that such a process will require zero human interaction.

At present, businesses need to go through a lengthy and time-consuming process to secure a loan from traditional banks or financial institutions. This often involves filling out extensive paperwork and meeting strict eligibility criteria, which could take weeks or even months to complete.

Seeking anonymity, a financial industry expert said, “I think it will be a great opportunity for MFS operators to turn to digital lending that promises customer acquisition at a low cost, minimal operational costs and low default rate unlike traditional lending by banks.”

Small and medium-sized businesses that are struggling to secure funding from traditional lenders may now have more options available to them. This will help to level the playing field for smaller businesses and can be a significant advantage for those looking to grow and expand their operations, she noted.

“Thus, we can increase credit flows to the SME sector, which will increase employment, productivity and thus, triggering the country’s economic growth, apart from positively impacting the livelihoods of many people,” she also said.

Sharing his thoughts on this transformative endeavour, Tanvir A Mishuk, founder and managing director of Nagad Ltd., said, “Nagad is dedicated to fostering financial inclusion for all, regardless of their background or attire. We understand the struggles faced by the informal sector, and our digital lending initiative aims to empower these individuals by providing them with access to fair and affordable credit. This is a giant leap towards formalising the informal sector.”

“We will introduce single-digit and collateral-free loans for small informal businesses who are having to resort to moneylenders even at 40% interest rate per day – with no trade licences and no access to credit in the traditional banking system,” he noted.

“To assess one’s creditworthiness, we have created an AI-based credit rating system that will analyse all transactions-related data available on public domains using one’s NID and mobile number. Thus, the system will determine if giving a loan to a particular individual is safe or not,” he added.

By offering digital lending solutions, this state-owned MFS operator looks to ensure financial stability for the informal sector. It will bridge the financial gap and empower individuals who have been marginalised for too long, paving the way for a more inclusive and equitable financial landscape in Bangladesh, he concluded.