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Source: TBS 27 July, 2022, 09:35 pm

The profit margin of Marico Bangladesh Limited – an India-based multinational company – shrank in the March-June quarter – despite a 9% growth in revenue – due to a sharp rise in income tax expenses.

Following financial disclosures, its shares closed 0.58% or Tk14.1 lower at Tk2,418 each on the Dhaka Stock Exchange (DSE) on Wednesday.

Marico starts its financial year in March. According to its unaudited financials, the company’s profits before tax increased 4.52% compared to the same period in the previous year.

But its net profit declined 5% to Tk102.90 crore as income tax expenses rose 56%.

Based on three-month financials, Marico, which listed on Bangladesh’s stock exchanges in 2009, has recommended a 300% interim cash dividend for its shareholders.

After the board of directors’ meeting, the multinational company revealed its financials for the first quarter on the country’s premier bourse.

During the period, its revenue increased to Tk364.65 crore from Tk334.40 crore a year ago.

Marico started out in Bangladesh in 1999 with its flagship brand, Parachute Coconut Oil.

Since then, the company has expanded its business to 29 brands in personal care and food items, such as Saffola edible oil.

To meet the growing demand for coconut oil and food products, it invested Tk29.3 crore to increase the capacity of its factory in Gazipur and set up a new manufacturing line at the beginning of 2020.

Marico Bangladesh Limited / Marico Bangladesh

Visualizing The World’s Biggest Rice Producers

It’s hard to overstate the importance of rice to the world.

As a staple food, over half of the global population depends on the crop as a major part of their diet. In fact, rice is considered a vital part of nutrition in much of Asia, Latin America, Africa, and the Caribbean, and is estimated to provide more than one-fifth of the calories consumed worldwide by humans.

This graphic highlights the world’s 10 biggest rice-producing countries, using 2019 production data from the UN’s FAOSTAT and the USDA.

Which Countries Produce the Most Rice?

With 756 million tonnes produced globally in 2019, rice is the world’s third-most produced agricultural crop behind sugarcane and corn (maize), which both have a wide variety of non-consumption uses.

Just 10 countries are responsible for a bulk of global rice production:

Country	Tonnes Rice Produced (2019)	% of Total
China	211.4M	28.0%
India	177.6M	23.5%
Indonesia	54.6M	7.2%
Bangladesh	54.6M	7.2%
Vietnam	43.4M	5.7%
Thailand	28.3M	3.7%
Myanmar	26.3M	3.5%
Philippines	18.8M	2.5%
Pakistan	11.1M	1.5%
Brazil	10.4M	1.4%
Others	119.0M	15.8%
Total	755.5M	100.0%

At the top of the charts are China (#1) and India (#2), which produced 389 million tonnes combined, accounting for more than half of global production.

They’re significantly ahead of #3 and #4 countries Indonesia and Bangladesh, which produced around 54.6 million tonnes each. Almost all of the top producers are located in Asia, with the exception of Brazil (#10).

Feeding A Growing World

With 84% of rice being harvested in just 10 countries, it’s clear that many countries globally must rely on imports to meet domestic demand.

In 2019, India, Thailand, Pakistan, and Vietnam were large net exporters of rice, shipping out nearly $16 billion of rice combined. Other countries including Iran, China, Saudi Arabia, and the Philippines consume above production numbers and rely on imports to meet their needs.

And not everything makes it from plant to table. In developing countries especially, estimates of 8–26% of rice are lost due to postharvest problems and poor infrastructure.

As the global population continues to grow, rice will continue to be a key source of calories around the world—and as our diets change, it’ll be interesting to see how that role shifts in the future.

Visualizing the Shift in Global Economic Power

As the post-pandemic recovery chugs along, the global economy is set to see major changes in the coming decades. Most significantly, China is forecast to pass the United States to become the largest economy globally.

The world’s economic center has long been drifting from Europe and North America over to Asia. This global shift was kickstarted by lowered trade barriers and greater economic freedom, which attracted foreign direct investment (FDI). Another major driving factor was the improvements in infrastructure and communications, and a general increase in economic complexity in the region.

Our visualization uses data from the 13th edition of World Economic League Table 2022, a forecast published by the Center for Economics and Business Research (CEBR).

When Will China Become the Largest Economic Power?

China is expected to surpass the U.S. by the year 2030. A faster than expected recovery in the U.S. in 2021, and China’s struggles under the “Zero-COVID” policies have delayed the country taking the top spot by about two years.

China has maintained its positive GDP growth due to the stability provided by domestic demand. This has proven crucial in sustaining the country’s economic growth. China’s fiscal and economic policy had focused on this prior to the pandemic over fears of growing Western trade restrictions.

India is Primed for the #3 Spot

India is expected to become the third largest country in terms of GDP with $10.8 trillion projected in 2031.

Looking back, India had a GDP of just $949 billion in 2006. Fast forward to today and India’s GDP has more than tripled, reaching $3.1 trillion in 2022. Over the next 15 years, it’s expected to triple yet again. What is behind this impressive growth?

For starters, the country’s economy had a lot more room to improve than other nations. Demographics are also working in the country’s favor. While the median age in many mature economies is shooting up, India has a youthful workforce. In fact, India’s median age is a full 20 years lower than Japan, which is currently the third largest economy.

Over the last 60 years, the service industry has boomed to around 55% of India’s GDP. Telecommunications, software, and IT generate most of the revenue in this sector. IT alone produces 10% of the country’s GDP. India’s large tech-savvy, English-speaking workforce has proved attractive for international companies like Intel, Google, Meta, Microsoft, IBM, and many others, while the domestic startup scene continues to boom.

The Indian government is also pursuing “production-linked incentives” (i.e. subsidies) for multinational companies looking to diversify their production away from China. If these incentives prove successful, more of the world’s solar panels and smartphones will be produced within India’s borders.

How Will the Global Economy Look in 2031?

By the year 2031, there will be major changes in the global economic power rankings.

As we said before: China will have become the world’s largest economy in terms of GDP and India will be the world’s third largest economy. Let’s also take a look at the top 10 economies by 2031.

Rank	Country	Region	Projected GDP in 2031 (in Trillions of USD)
1	China	Asia	$37.6
2	United States	North America	$35.4
3	India	Asia	$6.8
4	Japan	Asia	$6.4
5	Germany	Europe	$6.3
6	United Kingdom	Europe	$4.6
7	France	Europe	$4.2
8	Brazil	South America	$3.1
9	Canada	North America	$3.0
10	Italy	Europe	$3.0

Out of the top five economies, three are located in Asia: China, India, and Japan⁠—a clear demonstration of how economic power is shifting towards large population centers in Asia.

Europe will have four countries in the top 10: Germany, the United Kingdom, France, and Italy. From South America, only Brazil appears in the top 10.

Under these projections, Russia sits outside the top 10 in 2031. Of course, it remains to be seen how crushing sanctions and global isolation will affect the economic trajectory of the country.

Now, the big question. Is it inevitable that China takes the top spot in the global economy as predicted by this forecast? The truth is that nothing is guaranteed. Other projections have modeled reasonable alternative scenarios for China’s economy. A debt crisis, international isolation, or a shrinking population could keep China’s economy in second place for longer than expected.

Factor Investing: How You May Experience it

Why do investments perform the way they do? This is a question many investment experts have been attempting to answer for years. Luckily, factor investing can provide investors with a data-driven understanding.

In this infographic from MSCI, we use scenarios from everyday life to explain how factor investing works.

What is Factor Investing?

Simply put, investors choose stocks based on the “factors”, or characteristics, that help explain investment performance. They are typically aiming for:

• Higher returns
• Lower risk
• More diversification

While you may not have actively incorporated factor investing in your current portfolio, almost everyone will be familiar with the underlying concepts in real life. Here are five common factors and scenarios where you likely experience their principles.

1. Low Volatility Factor

The low volatility factor attempts to capture excess returns to stocks with lower than average risk. This factor has generally performed best during economic slowdowns or contractions.

How you may experience it: If you want a writing career with relatively reliable income, you’ll likely choose to be a marketer at a large company rather than a self-employed author.

2. Quality Factor

The quality factor attempts to capture excess returns in shares of companies that are characterized by low debt, stable earnings growth, and other “quality” metrics. This factor has generally performed best during economic contractions.

How you may experience it: When you’re purchasing new tires for your car, you might consider characteristics like tread longevity, traction, and fuel economy.

3. Value Factor

The value factor attempts to capture excess returns to stocks that have low prices relative to their fundamental value. This factor has generally performed best during economic recoveries.

How you may experience it: If you want a good deal, you may look for items that are on sale.

4. Momentum Factor

The momentum factor attempts to capture excess returns to stocks with stronger past performance. It has generally performed best during economic expansions.

How you may experience it: When you’re deciding what to watch, you may choose a TV show that has high audience ratings. You’ll likely also recommend it to your friends, which further boosts viewer numbers.

5. Low Size Factor

The low size factor attempts to capture excess returns of smaller firms (by market capitalization) relative to their larger counterparts. It has generally performed best during economic recoveries.

How you may experience it: When you’re learning a new sport, you’ll see larger increases in your skill level than a professional athlete will.

Understanding Your Investments With Factor Investing

These simple concepts are at work in your everyday life and in your investments. Targeting these factors can help you meet your investing goals, including maximizing return potential and managing risk.

From 2000 to 2020, here’s how the risk and return of the above factors compared to the benchmark MSCI World Index.

	Return	Risk
Momentum	9.4%	14.8%
Quality	8.7%	13.9%
Low Size	8.0%	17.0%
Value	7.9%	17.9%
Low Volatility	7.6%	11.1%
MSCI World Index	6.6%	15.6%

​​Annualized risk and gross returns in USD from December 29 2000 to December 31 2020 for MSCI World Factor Indexes.

All five of the factors have had greater historical returns than the benchmark index, and some have also had lower risk.

With factor investing, you can better understand what drives your portfolio’s performance.

Who’s Still Buying Fossil Fuels From Russia?

The Largest Importers of Russian Fossil Fuels Since the War

Despite looming sanctions and import bans, Russia exported $97.7 billion worth of fossil fuels in the first 100 days since its invasion of Ukraine, at an average of $977 million per day.

So, which fossil fuels are being exported by Russia, and who is importing these fuels?

The above infographic tracks the biggest importers of Russia’s fossil fuel exports during the first 100 days of the war based on data from the Centre for Research on Energy and Clean Air (CREA).

In Demand: Russia’s Black Gold

The global energy market has seen several cyclical shocks over the last few years.

The gradual decline in upstream oil and gas investment followed by pandemic-induced production cuts led to a drop in supply, while people consumed more energy as economies reopened and winters got colder. Consequently, fossil fuel demand was rising even before Russia’s invasion of Ukraine, which exacerbated the market shock.

Russia is the third-largest producer and second-largest exporter of crude oil. In the 100 days since the invasion, oil was by far Russia’s most valuable fossil fuel export, accounting for $48 billion or roughly half of the total export revenue.

While Russian crude oil is shipped on tankers, a network of pipelines transports Russian gas to Europe. In fact, Russia accounts for 41% of all natural gas imports to the EU, and some countries are almost exclusively dependent on Russian gas. Of the $25 billion exported in pipeline gas, 85% went to the EU.

The Top Importers of Russian Fossil Fuels

The EU bloc accounted for 61% of Russia’s fossil fuel export revenue during the 100-day period.

Germany, Italy, and the Netherlands—members of both the EU and NATO—were among the largest importers, with only China surpassing them.

China overtook Germany as the largest importer, importing nearly 2 million barrels of discounted Russian oil per day in May—up 55% relative to a year ago. Similarly, Russia surpassed Saudi Arabia as China’s largest oil supplier.

The biggest increase in imports came from India, buying 18% of all Russian oil exports during the 100-day period. A significant amount of the oil that goes to India is re-exported as refined products to the U.S. and Europe, which are trying to become independent of Russian imports.

Reducing Reliance on Russia

In response to the invasion of Ukraine, several countries have taken strict action against Russia through sanctions on exports, including fossil fuels. 

The U.S. and Sweden have banned Russian fossil fuel imports entirely, with monthly import volumes down 100% and 99% in May relative to when the invasion began, respectively.

On a global scale, monthly fossil fuel import volumes from Russia were down 15% in May, an indication of the negative political sentiment surrounding the country.

It’s also worth noting that several European countries, including some of the largest importers over the 100-day period, have cut back on Russian fossil fuels. Besides the EU’s collective decision to reduce dependence on Russia, some countries have also refused the country’s ruble payment scheme, leading to a drop in imports.

The import curtailment is likely to continue. The EU recently adopted a sixth sanction package against Russia, placing a complete ban on all Russian seaborne crude oil products. The ban, which covers 90% of the EU’s oil imports from Russia, will likely realize its full impact after a six-to-eight month period that permits the execution of existing contracts.

While the EU is phasing out Russian oil, several European countries are heavily reliant on Russian gas. A full-fledged boycott on Russia’s fossil fuels would also hurt the European economy—therefore, the phase-out will likely be gradual, and subject to the changing geopolitical environment.

Source: DhakaTribune June 22, 2022 6:46 PM

If you truly want an idea of how well your portfolio is doing, you need something to compare the return with your invested capital.

It took you several months to save up and now you are finally determined to invest.

Perhaps it is for a near term personal goal or you just want to reap the benefits of greater wealth during retirement.

Whatever those goals may be, you are on the hunt for an asset manager.

However, how do you choose which firm or person to approach and how do you evaluate their performance?

Also, why is it so important you do so?

When searching for a suitable manager, there are a plethora of qualities to look for, such as integrity, talent, dedication and so on.

All of these can be grouped into three simple evaluation criteria which makes it easier to assess your manager. They are:

·         Reputation

·         Investment style

·         Performance

This guide will only focus on the third criteria, the manager’s performance which looks at the returns generated by the manager and the risks undertaken to do so.

We will briefly show you how to calculate and compare the metrics to benchmarks so you can get a solid picture of how well your manager is performing.

Keep in mind that the framework mentioned below can not only be used to judge mutual fund managers but also corporate fund managers (i.e., at banks, insurance companies or even individual portfolio performance).

Step 1: Calculate time-weighted returns

To understand time weighted returns, let us look at return calculation first.

Here, we introduce the concept of time-weighted return with an example.

1.      On December 31, 2021, an investor invested Tk1,000.

2.      As of June 2022, the portfolio grew to Tk1,200

3.      On July 1, 2022, the person invests Tk1,000 further, taking the total portfolio value to Tk2,200

4.      As of December 31, 2022, the portfolio value stood at Tk2,100.

A person who is unfamiliar with return calculation may decide to use the following equation to calculate their returns –

Return = (Ending value – money deposited) / (money deposited)

This would give us,

= (2100 – 2000)/ 2000= 5%

However, this return is inaccurate since it completely ignores the timing of fund injection and what particular returns are being generated using which particular amount.

Hence, any deposit or withdrawal can affect the calculated return of the portfolio, during the time period when those transactions took place.

Time weighted return (TWR) addresses this issue by separating the return on a portfolio into distinct intervals depending on whether cash was injected or withdrawn from the fund.

Consider the situation above, the return calculation can be broken down into two parts based on the cash flows:

·         From December 31 to June end,

Return = (1200 – 1000)/1000 = 20.00% (Holding period return)

·         From July to December 31,

Return = (2100 – 2200)/2200= -4.55% (Holding period return)

Now that we have holding period returns for both timelines, we can calculate the portfolio’s real return by finding out the geometric mean of the aforementioned returns.

Time-weighted return (geometric mean) = [(1 + 20.00%) x (1 + (-4.55%))] – 1 = 14.5%

The TWR equation would be the same if money had been withdrawn from the fund.

This method adjusts for the distorting effect of cash flows on returns.

Moreover, this method makes the returns comparable with other benchmark annual returns (since it can be annualized)

Step 2: Use appropriate benchmarks

The return of your portfolio is not very helpful by itself.

If you truly want an idea of how well your portfolio is doing, you need something to compare the return with.

This is where benchmarks come in.

Imagine a completely unmanaged portfolio with a similar investment structure to your portfolio (yours is being actively managed by a manager).

Here, the unmanaged portfolio is your benchmark, and your asset manager’s goal is to generate returns exceeding those generated by the former.

Usually, a country specific market index is considered the benchmark portfolio.

This index is a theoretical portfolio of all equity securities that are being traded within that region.

Its value is calculated based on the prices of the stocks within the index. In the case of Bangladesh, the Dhaka Stock Exchange Broad Index (DSEX) represents the market index.

However, this is not always the case.

The most important factor when considering which portfolio to use as a benchmark for comparison is its similarity to your portfolio.

Investors should look at the investment objective, asset allocation, and risk and return characteristics of the benchmark under consideration. 

For example, a portfolio consisting of exclusively fixed income securities such as bonds is likely to underperform than one consisting of exclusively stocks.

This is because bonds provide guaranteed interest payments which means they are relatively lower risk than stocks.

This makes the two incomparable (or unfair to compare).

Note: Managers mislabeling their funds and its relation to style drift

If an investor’s goal is to preserve the value of their wealth (capital preservation), their portfolio would contain low risk securities such as bonds, and fewer stocks.

Style drift occurs if the portfolio manager of this portfolio decides to change their investing style by investing in more stocks in hopes of reaping a larger return.

However, it can also occur naturally if the value of the stocks in the portfolio appreciates considerably more than the bonds.

To avoid the possibility of investing in a mutual fund which has strayed away from its objectives, always go through the fund’s portfolio statements for multiple years to understand trends and investment styles.

These list the types of securities the fund invests in.

For balanced funds and income funds, asset allocation should not consistently be equity heavy.

For growth funds, investments should heavily favor equity.

However, study the portfolio keeping the context of the economy at larger (fewer stock investments during periods of recession or slowdowns).

Step 3: Check risk level of the strategy

So far, we have successfully looked at the return aspects of investing (both calculation and comparison).

Now, we turn toward the risks. Two very common risk measures are discussed below.

Sharpe Ratio

The Sharpe ratio is calculated as:

Where,

Rp = Portfolio Return

RFR = Risk Free Return

σp = Standard Deviation of Excess Portfolio Returns

Here, the RFR is the return generated when no risk is involved.

Removing this component from the portfolio return isolates the excess return generated by taking risk.

You can refer to treasury bond rates for RFR.

The σp shows how much risk was undertaken to generate the excess returns.

Hence, this ratio illustrates the excess return generated per unit of risk.

Higher diversification in a portfolio tends to lower the standard deviation (again, depending on the asset classes), causing the Sharpe ratio to rise.

Investors can compare the Sharpe ratio of multiple portfolios to identify portfolios that only have high returns because they take on more risk.

The ideal portfolio is one which has a comparatively higher Sharpe ratio than its peers.

This means that the portfolio generates higher return per unit of risk.

Maximum Drawdown (MDD)

Imagine a graph where the returns of a portfolio are plotted on the y-axis against time on the x-axis.

Returns fluctuate immensely over time so you should have a graph with numerous peaks and troughs.

The concept of maximum drawdown calculates the percentage difference from the highest peak to the lowest trough before another new peak begins.

It quantifies the downside risk of a portfolio over a specified time frame.

The lower the maximum drawdown value the lower the losses experienced by the portfolio.

A 0% maximum drawdown means that the portfolio never lost money in that time frame and a hundred percent maximum drawdown means that the portfolio lost all its money in that time frame.

Note that the downside risk of your portfolio must be compared to that of a benchmark.

When the benchmark is down, a superior asset manager will keep losses at a minimum.

Therefore, you would prefer a portfolio with a maximum drawdown that is lower than that of the benchmark for the same time period.

Conclusion

There is a huge body of knowledge globally on evaluating investment performance.

CFA Institute for example has published a set of standards known as Global Investment Performance Standards (GIPS) to ensure fair disclosure and fair performance.

There is also a massive consulting industry that has grown to help asset deployers select the best asset managers.

Our article focuses on the very basic steps in return performance measurement.

However, for Bangladesh where the concept of investment return performance measurement is very new, this will be a good start.

Over time we can hope to catch up to international standards.

Rahma Mirza is an investment analyst at EDGE Research & Consulting Limited. Humayra Afroz is a former intern at EDGE AMC Limited

LightCastle Analytics Wing May 23, 2022

Digital Banking has redefined the financial landscape in Bangladesh during the Covid-19 pandemic. Overnight, people needed to figure out how to use banking services electronically because, despite a pandemic, the demand for credit did not disappear. While residents in the cities rushed to adopt digital banking, rural communities were still hesitant to embrace the technology. Therefore, innovation is paramount to ensure customer satisfaction and improve access to finance for minorities and marginalized communities.

The Beginning

Dutch Bangla Bank Limited (DBBL) is responsible for the inception of mobile banking in Bangladesh. DBBL introduced Rocket in May 2011, which was stipulated to be an alternative to traditional banking that caters to even the poorest members of the society and spreads out banking services outside urban regions. It triggered the usage of mobile banking at an unprecedented rate as the number of registered mobile financial services (MFS) accounts in Bangladesh increased faster than in any other country in 2013. [1]

For Rocket subscribers, an account had to be created through DBBL-approved agents around the country and with a fee of BDT 10. A user must have a cell phone with a registered SIM, NID, and recent photograph to use the banking service.

In the same year, bKash was also launched with the same view of reaching a larger population to improve access to finance for minorities and marginalized communities. In addition, the platform aimed at facilitating foreign remittance, emancipating women through financial independence, enhancing the overall living standards of rural communities, and developing SMEs. Since then, it has done wonders for the financial sector of Bangladesh with incremental innovation to promote financial inclusion, income distributions, and, consequently, economic growth. In retrospect, this was the first innovation in the Mobile Finance Services (MFS) industry.

Challenges in Digital Banking Industry

Digital technology, such as MFS, can improve the financial well-being of the citizens of Bangladesh, where more than four-fifths of the workforce are informal. However, prior to COVID-19, digital platforms were not utilized to their full capacity due to adoption resistance. While the growth was steady, it did not follow the trajectory of smartphone sales which skyrocketed from 86.56 million in January 2012 to 171.85 million in January 2021. [2] From smallholder farmers, and SMEs to enterprise owners, a smartphone has become an inherent part of everyone’s daily lives. However, the digital divide is still prominent due to asymmetric information, high operational cost, and inconsistent services. For instance, in comparison to India, Bangladesh’s cost of mobile data is significantly higher. [3] Moreover, many rural areas lack 24/7 electricity resulting in long network outages and unstable connections. The aforementioned challenges discourage, to some extent, restrict citizens to be aware of the available financial services and reaping the benefits of digital banking.

State of Digital Banking in Pandemic

For urban areas, the pandemic has been the main driving force for producers and consumers to indulge in e-commerce. Since shops and restaurants were closed, people shifted to purchasing products through f-commerce and e-commerce. F-commerce is a branch of e-commerce that acts as a medium for transactions of goods and services through the Facebook platform. While f-commerce facilitates transactions and communication between users and vendors, it also poses challenges for governments and for users. For instance, governments may not have full traceability of the transactions to impose a tax on goods sold, resulting in a loss of tax revenue.

Other than e-commerce, B2P transactions also embraced MFS during the pandemic. Most readymade garment (RMG) owners required their employees to open their own mobile banking accounts in order to receive their salaries and other benefits. Therefore, the garment workers had to get familiar with digital platforms and over time, learned how to avoid paying illegal fees to banking merchants resulting in more savings and improved personal finance. [4] According to a recent survey of garment workers, it has been observed that embracing digital payments aided them in developing knowledge in personal finance. This study also proved that while just a small percentage of the population is linked to the country’s official banking system, those who are left out may nevertheless obtain financial services using mobile phones. The study indicates that Digital Banking will be crucial in the future in developing a resilient economy and improving the lives of the citizens of Bangladesh.

Why Digital Banking is Crucial

Digital banking — whether it is in the form of mobile banking, telebanking, or internet banking – incubates transparency in payment, ensures better cash management, and upskills finance information for consumers. Additionally, it speeds up the rate of transactions and the cash cycle as loan sizes are less so people can borrow more frequently. For instance, bKash in collaboration with City Bank shelled out BDT 500 – 20,000 loans to 2,689 customers totaling BDT 68.3 lakh with a three-month repayment period. [8] More importantly, bKash customers with paper-based KYC were not entitled to the nano loan due to a regulatory embargo eliminating red tapes.

In addition, digital banking can promote access to finance for marginalized communities and minorities. For example, the agriculture sector employs roughly 40.6 percent of Bangladesh’s total workforce. [5] Their ability to access and use formal financial services is imperative as the sector contributes to approximately 13.6 percent of the country’s GDP. [6] One of the main hurdles to these industries’ expansion has been a lack of access to capital. Nano loan services similar to bKash can bridge the gap to provide access to finance for these smallholders and the unbanked population. Therefore, innovation in services, delivery, and technology in the Digital Banking industry will enable new revenue streams for financial service companies while improving access to finance for the mass population.

Innovation in Digital Banking

Technology, although a fickle friend, has become ubiquitous in almost all economies around the world. Artificial intelligence (AI), data analytics, machine learning, and digital channels are projected to drive several professional services into obscurity. Fintech offers digital financial services that automate the process of borrowing and reduces loan disbursement costs, facilitate SME owners to receive collateral for bank loans, maintain financial accounts and keep track of transaction records. However, these benefits require significant technological, social, and legal innovations to trigger adoption. For example, privacy regulatory mechanisms for data ownership and preventing cyber-attacks must be ensured. The platform must be secure while highly robust to address the needs of the mass population. Integrating Blockchain technology will enhance data security and instill trust in the informal workforce.
Blockchain technology is a digital log of transactions that is copied and distributed throughout its network of computer systems in a decentralized manner. It eliminates intermediaries and ensures that all transactions are encrypted, anonymous, and immutable. Those who are unbanked face difficulties sending and receiving money as they frequently lack the necessary documents such as a passport, proof of income, access to the Internet, and a smartphone to create an account. Blockchain technology could alleviate their pain by ensuring their personal identity is safe and secure.

Additionally, innovative digital financial tools can assist low-income populations with building financial resilience. According to CPD’s former senior research associate Md Kamruzzaman, Bangladesh’s digitally delivered services (DDS) trade volume has expanded from $599 million in 2005 to $4,005 billion in 2019. This number is not very impressive when we compare Bangladesh’s DDS trade as a percentage of GDP to neighboring countries. As the textile and garment sectors account for a large portion of the country’s total exports, these industries and their workers should be equipped with digital banking tools. One way to do this is through the use of blockchain applications. For instance, “Leaf” is a Rwandan startup that allows individuals to send and receive money straight from their phone, even if it isn’t a smartphone without any need for a passport or access to the internet. In the same vein, “Kotani Pay” allows Kenyans to send and receive cryptocurrencies and then convert them to Kenyan shillings by dialing a short number on their phone. For these services, the only extra charge for international transactions is the currency conversion. Digital Banking platforms in Bangladesh should establish a way that allows customers to use their own accounts instead of depending on external agents.

Furthermore, the complexity and high operational expenses of banks left many people, especially small-scale workers, and the unemployed behind. The income of farmers and textile workers is uncertain and often erratic. When farmers confront a crisis, such as a flood, drought, or natural disaster, it threatens to overrun their savings. In the case of garment workers, they might need to withdraw small payments instantaneously in an easy and affordable way which cannot be fulfilled by traditional means of banking. One solution to such a problem has been developed in Kenya. Community Inclusion Currencies (CICs), invented by “Grassroots Economics” ensures resilience during challenging times by leveraging blockchain technology. Tokens, backed by the commodities and services in a community, such as water, food, or labor, can be issued. The villagers can then use these tokens to acquire a line of credit secured by their own assets, which they can utilize during an emergency.

While technological innovation will improve user experience, policy innovation will instill trust among users. Obstacles to creating MFS accounts should be minimized to streamline the registration process and encourage both current and potential customers to open and utilize their accounts. A simple registration process could encourage an estimated 2.73 million registered small businesses to open MFS accounts. [7] Security can be maintained by introducing an alternative to the orthodox PIN system such as biometric security software which recognizes the users automatically based on their behavioral or biological characteristics. Daily transactions can also be restricted to prevent money laundering and abuse of technology.

In summary, Even though 85.1% of the labor force is part of the informal sector, most of them are unfamiliar with e-skills. [5] They also cannot access loans from banks as they do not have the necessary documents or collateral. If they’re not saving money in a financial institution, it leads to depreciation and makes people more vulnerable to inflation which is tragic. Digital Banking Platforms and MFS can make a tremendous impact to build financial resiliency in low-income, rural and marginalized communities, and technological and policy innovation can make the impact more effective and efficient.

Shaniz Chowdhury, Content Writer, and Abdullah Reza, Digital Product Manager, at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: info@lightcastlebd.com

Source: TBS 13 July, 2022, 10:40 pm

As global market prices are still high, overall import bills are not coming down

As anticipated, foreign exchange reserves dipped below $40 billion and looks set to stay under stress in coming months given the global market volatility and the rising trend in imports, overshadowing the export growth.

The total value of import letters of credit (LCs) opened during July 2021-May 2022 was $84.85 billion, which was 43.10% higher than that of the same period of the previous year.

There have been some declines in booking for rice, onion, fruits, pulses and even petroleum goods, but those were far from having a palpable impact as the massive increase in LCs for wheat, edible oils, sugar, milk foods, fertiliser, apparel raw materials and capital machinery.

Some curbs have been in place to contain less-essential imports, but some major items cannot be checked to keep the market stable and industries running.

“We had to spend $9 billion more to import just eight products, including oil, wheat, fertilisers and gas. If their prices do not go down, the situation will be difficult to handle, because we have no control over them,” said newly appointed Bangladesh Bank Governor Abdur Rouf Talukder on Tuesday, the first day of his taking over.

Though global food prices show a declining trend, analysts do not expect much comfort from it given the global market’s volatile nature.    

As global market prices are still high, overall import bills are not coming down.

Next routine payments of Asian Clearing Union and selling of more dollars, if needed, to cool the currency market will erode the central bank’s reserves further.

ACU payments

Bangladesh has to clear the import bills to the Asian Clearing Union (ACU) every two months. The Bangladesh Bank has to spend an average of $2 billion every two months on this payment.

According to the last six-month data of the central bank, the reserve is reduced by $1 billion per month thanks to the ACU payment.  

At the end of February this year, the reserve was $45.95 billion, which dropped to $43.89 billion on 6 March after clearing $2.16 billion ACU payment.

Two months later, $2.24 billion was paid to ACU on 10 May that pulled down the reserve below the $42 billion mark from $44.11 billion on 9 May.

The Bangladesh Bank paid $1.99 billion to ACU last week, as the reserve fell to $39.77 billion from June’s $41.83 billion.

Dollar sales from reserve

The central bank is selling the US Dollar from the reserve almost every day to maintain the availability of the greenback. The central bank is providing dollar support in settling letter of credits for food and fuel import and government procurement.

The central bank sold the greenback worth a total of $7.62 billion in FY2021-22. However, the sales were not the same throughout the year. Dollar sales from reserves have picked up over the past couple of months.

In the first 13 days of the current fiscal year till Wednesday, $574 million was sold from the forex reserve. In other words, the central bank has been selling $1 billion a month, as the reserve stood at $39.70 billion on Wednesday.

What is the safe reserve?

Two decades back, a reserve able to finance the imports of three to six months was considered adequate, but the adequacy norms have changed. Now other factors like reserve as percentage of short-term debt, proportion of external debt, percentage of current account deficit are also considered.

The new governor said their goal is to take the reserves to a level enough for meeting the six-month import costs. 

A senior central bank official said the country’s reserve once was $30 billion. But it is now $40 even amid the global crisis.

“We do not see any frightening situations right now. However, we are taking steps to reduce our imports as well as the costs. We are also working on how to increase the export and the remittance inflow,” said the official.

Asked whether the import of specific products would be banned, the official replied in the affirmative. “If the situation turns ugly… time will say what steps we must take.”   

Salehuddin Ahmed, former central bank governor and a noted economist, told TBS that the current reserve level cannot be labelled as alarming.  

“We have to have a reserve equal to the minimum three-month import payment, but we have more than that. But the reserve fall in a short span of time is a matter of concern. If the reserve continues to go down like this, it could be an issue for us in the future,” he noted.

Noting that the emphasis should be on keeping the reverse at current levels, he said, “Taka should not be devalued further.”

“If Taka is depreciated further, issues like import bills and production costs will compound. Exporters will get some benefits, but it will increase the money flow and fuel inflation,” he said.

Salehuddin Ahmed stressed on trimming the import of less necessary items. He also called for verifying the repayment capacity of the private sector as he said the sector is availing a large chunk of foreign credits.        

“We should not default in repaying loans in the public and private sectors.”

Prof Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said the country even last year had a reserve to pay import bills for nine months, but it now fell to five months.    

“From that point of view, the reserve situation is of course concerning. But we need to consider commodity price hikes across the globe which have made imports costlier,” he said.

Prof Mustafizur appreciated the government for widening the LC margin to 100% for import of some items, discouraging import of some products and letting Taka float freely against the US Dollar.   

He suggested opting for a ban on car imports if required. “This will reduce the revenue, but the government should focus on stabilising the balance of payment.”    

Professor of economics at Dhaka University Dr Selim Raihan said widening trade deficit, huge pressure on reserve and foreign exchange have not been compensated by the export growth.

He appreciated that some policy measures were taken in the right direction– efforts to contain imports and some adjustments in the exchange market, which, he believes, would give export and remittance a further boost.

“It’s true that reserves dipped below the $40 billion mark, yet it is not like some other countries including Sri Lanka. We have taken some measures and some more measures are needed,” he said, suggesting further adjustment in exchange rate, if needed, to offer some relief to forex reserve holdings.

There might have been some adjustments and readjustments in global fuel oil, food and commodity prices, but overall price levels are still well above their pre-war levels. “Global market is volatile and price pressure will continue for energy, food and other commodities.

So there is no room to think that the situation is going to be normal,” he warned.

Though LC margins have been raised for non-essential items, additional duties or even temporary import restriction can be imposed if situation demands in future, suggests Prof Selim Raihan, executive director of Sanem, a local think tank.

“We have to leave behind the feeling of complacency about the reserves and policymakers should not be in a comfort zone any more so that we would never fall into crisis,” he said, urging more vigilance and effective implementation of import-curbing measures.

He also referred to the IMF’s earlier question against incorporating $7 billion export credit into forex stock. “There is a dilemma: is our reserve $40b, or it is $33b?” he pointed out.