46300-001: Consultant’s Report - Asian Development … consultant’s report does not necessarily...

Technical Assistance Consultant’s Report

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Project Number: 46300 February 2015

Bhutan: Capital Market Development Financed by the Technical Assistance Special Fund

Prepared by Phil Epps

Vinstar

Auckland, New Zealand

For Royal Monetary Authority of Bhutan

VINSTAR

VINSTAR Consulting

Final Report

Mobile Financial Services Expert

Bhutan: Preparing the Strengthening

Economic Management Program (SEMP) II

Submitted to

Asian Development Bank

February 2015

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Final Report

Bhutan: Preparing the Strengthening Economic Management Program

(SEMP) II

Prepared By:

Phil Epps


VINSTAR Consulting

PO Box2877

Auckland

New Zealand

Phone: (64 9) 3760041

Fax: (64 9) 3760046

Email: [email protected]

www.vinstar.com

Preparing the Strengthening Economic Mobile Financial Services Expert - Final Report

Management Program (SEMP) II Table of Contents - Page 1

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Table of Contents

Abbreviations

Main Report

Section 1: Introduction

Section 2: Executive Summary

Section 3: Current Status

Section 4: Branchless Banking (BB) Model

Section 5: Bhutan Development Bank Ltd (BDBL)

Section 6: Government to Citizen (G2C)

Section 7: Capacity to Support Branchless Banking

Section 8: National Pension and Provident Fund (NPPF)

Section 9: Recommendations

Section 10: Road Maps

Section 11: In Conclusion

Appendices

Appendix A: List of People Met

Appendix B: Regulations for Branchless Banking Regulations

in Bhutan

Appendix C: BFS Switch Analysis

Appendix D: Bhutan Telecom Ltd. – B-wallet Statistics


Management Program (SEMP) II Table of Contents - Page 2

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Appendix E: Banking Statistics

Appendix F: Hub and Spoke Concept

Appendix G: Press Releases (BDBL /CICs)

Appendix H: RMA Narada Switch Connectivity

Appendix I: Bhutan Banking Distribution Analysis

Appendix J: Road Map – BFS Development

Appendix K: Road Map – BDBL / CIC Development

Appendix L: Road Map – Education


Management Program (SEMP) II Abbreviations - Page 1

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Abbreviations

ADB Asian Development Bank

ATM Automatic Teller Machine

BB Branchless Banking

BB/AD Branchless Banking / Alternate Delivery

BDBL Bhutan Development Banking Ltd

BFS Bhutan Financial Switch

BIL Bhutan Insurance Ltd

BNBL Bhutan National Bank Ltd

BOBL Bank of Bhutan Ltd

BS Banking Specialist

BTL Bhutan Telecom Ltd

CIC Community Information Centre

DITT Department of Information Technology and Telecom

DPNBL Druk PNB Bank Ltd

DRC Department of Revenue and Customs

EFTCS Electronic Funds Transfer and Clearing System

FDI Foreign Direct Investor

G2C Government to Citizen

HOP Head of Population

HRE Human Resource Expert

ICT Information and Communication Technology

MFSE Mobile Financial Services Expert

MB Megabytes

MOF Ministry of Finance

NECS National Electronic Clearing System

NEFT National Electronic Funds Transfer

NPPF National Pension and Provident Fund

Nu Ngultrums

POS Point Of Sale

PUC Paid up Capital

RAMIS Revenue Administration Management Information System

RBI Reserve Bank of India



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RICB Royal Insurance Corporation of Bhutan Ltd

RMA Royal Monetary Authority of Bhutan

SEMP Strengthening Economic Management Program

SIM Subscriber Identity Module

SMS Short Message Service

Tashicell Tashi Infocomm Ltd (TIL)

TBL T Bank Ltd

TIL Tashi Infocomm Ltd (Tashicell)

ToR Terms of Reference

WB World Bank

YSEL Yalamanchili Software Exports Limited


Management Program (SEMP) II Main Report - Page 1

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Main Report

1. Introduction

1.1 Background to the Project

The Asian Development Bank (ADB) has sponsored a project to assist the Royal Monetary Authority (RMA) in considering the legal and regulatory framework to establish / promote branchless banking initiatives in Bhutan, particularly to service people in non-urban locations, and establish a road map for branchless banking under the broader project known as “Preparing the Strengthening Economic Management Program (SEMP) II”.

Branchless Banking (BB) is already prevalent in Bhutan and has been for some years. Therefore the focus must now be on how ADB can support the further development of BB in Bhutan. To this end ADB will need to identify and work with a suitable partner with the appetite for expansion into the remote locations of Bhutan. The Mobile Financial Services Expert (MFSE), Phil Epps’s, first field visit to Bhutan commenced on 12 December 2014 and his Inception Report was submitted on 29 December 2014. On 8 January 2015, ADB Project Officer (Cigdem Akin) requested that some minor alterations be made to the report. The Project Director (Gareth Davies) promptly attended to these amendments and the report was resubmitted. The MFSE returned to Bhutan on 11 January 2015 for a further field visit and meetings with stakeholders. The purpose of these meetings was to discuss and gain support for the recommendations being put forward by the MFSE. These recommendations are now contained in the Road Maps attached. The MFSE Interim Report was submitted on 20 January 2015. On 27 January 2015 ADB Project Officer requested minor changes to the report. Vinstar’s Project Director attended to the amendments and the report was resubmitted. Since his return from the field, the MFSE has worked with the Vinstar Project team in finalising this report and the Road Maps contained herein. The RMA provided comment on the MFSE’s Report. These comments have been incorporated as appropriate.

1.2 Primary Objective of the Project

They key objectives are as follows: 1.2.1 Review the current legal and regulatory and institutional framework for the

introduction of Branchless Banking (BB); 1.2.2 Assist the RMA in drafting guidelines, policies, laws or other relevant documents

to enable branchless banking or mobile financial services; 1.2.3 Formulate a road map and time schedule for piloting or launch of branchless

banking and financial service initiatives; 1.2.4 Consider the capacity of the RMA, local government, telecommunication

companies and financial service providers to implement branchless banking initiatives.



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1.3 Project Timeline

The project has progressed well and the ToR objectives have been achieved and opportunities found for ADB to play a significate roll in developing BB in Bhutan. Two field visits have been undertaken by the MFSE. The MFSE’s Inception Report and Interim Reports were submitted and ADB comments incorporated. This Final Report including the relevant Road Maps is the last report to be submitted.

2. Executive Summary

Whilst the Banks already have a strong commitment to Branchless Banking (BB) and the use of technology, the MFSE believes Bhutan is a country well placed to further develop its BB strategies. As evidenced in past reports (Inception Report and Interim Report) many of the Banks have already developed and implemented strategies to use technology to increase distribution without the need for additional Branches. This increased distribution / access is good for customers, giving them a choice of media to access their bank accounts. Banks in Bhutan offer a range of technical and non-technical solutions that support BB, namely:

• Internet Banking;

• SMS Text Banking;

• Phone Banking;

• Automatic Teller Machines (ATMs);

• Point of Sale (POS);

• Field Officers;

• Bulk Transfers;

• Direct Payments.

As BB already exists in Bhutan, the pilot or launch of BB is superseded. Therefore the MFSE has looked at improvements that can provide better connectivity, reliability and access to financial services and products. The Bhutan Financial Switch (BFS) provides connectivity with all Banks and deals with all interbank ATM and POS transactions. However other technologies such as Internet Banking and Phone Banking do not have connectivity with the BFS. Currently Internet and Phone Banking transactions are dealt with using a batch process similar to cheque processing. The MFSE believes pivotal to the further development of BB in Bhutan is that customers have online real time transactions regardless of their choice of medium, especially in Phone Banking because the customer acceptance of Mobile Phones in Bhutan is very high. Developing the BFS to incorporate Internet and Phone Banking transactions has major benefits to BB but also to a number of Government led strategic projects. The MFSE has previously made 3 recommends relating to the BFS, namely:

1. An audit and risk assessment of the BFS be undertaken; 2. Development of the BFS to transact Internet and Phone Banking Transactions; 3. Development of a Blue Print for all technology connectivity.

The MFSE believes after further assessment that these recommendations can be combined into one project. This is detailed in the Road Map for the BFS Development (Appendix J).



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The MFSE cannot stress enough the importance of developing the BFS to provide a solid, reliable and trusted backbone for electronic transactions and BB. The MFSE recommended that the ADB, in their discussions with Government and when documenting the funding arrangement, considers making the development of the BFS a condition of funding. Much of the infrastructure already exists to support BB in Bhutan. There are two telecommunication companies which provide a degree of redundancy, completion and customer choice. Department of Information Technology and Telecom (DITT) have a fibre network connecting with 180 Gewogs with plans to progressively roll out fibre to the remaining Gewogs. Although the fibre network has no redundancy, the use of mobile technology will provide a level of redundancy. Telecommunication companies already store value for prepaid services therefore they may move into BB in their own right in the medium term. However the cost of implementation, building of trust and marketing cost will present a major challenge. A significant initiative in Bhutan is the transfer of the management of the Community Information Centres (CICs) to Bhutan Development Bank Limited (BDBL) and the introduction of financial services though all CICs. BDBL are already trialling new smart POS technology in 6 CICs and plan to progressively roll out this BB technology to the other CICs. This is a mammoth undertaking and without financial and project management assistance many of the Government led strategies and provision of banking services to the people in remote locations will not be achieved within an appropriate time frame. This will be the largest move into BB that Bhutan will possibility ever experience and the outcomes are extremely beneficial for the people of Bhutan. These issues are detailed in the Road Map for BDBL / CIC Development (Appendix K). The MFSE and the ADB Senior Country Coordination Officer (Mr. Norbu) met with senior management of BDBL who confirmed that without support the roll out could take many years. As the roll out occurs, BDBL are to introduce their “Piggy Bank” services to mothers in remote locations in support of the Government’s financial inclusion framework. The MFSE again recommends that ADB, in their discussions with Government and when documenting the funding arrangement, considers making financial support to assist with the BDBL rollout a condition of funding. The biggest challenge facing BB in Bhutan will be customer acceptance especially with less financially literate people in remote locations. The CICs and the involvement of BDBL provide the greatest opportunity to educate people. This is detailed in the Road Map for Education (Appendix L).

3. Current Status The field visits have been completed, stakeholders meetings/workshops held and awareness/support gained (see Appendix A for details on People Met). A substantial level of analysis and research has been provided in the previous reports (Inception Report and Interim Report). Comment on the infrastructure and operational readiness has also be provided. As requested by the ADB Project Officer, this report incorporates



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much of the information and analysis previously circulated so that all the information is in the Final Report.

3.1 Operating Environment

3.1.1 Legal / Regulatory Framework

As discussed in the Inception Report, the Financial Markets, including the Banks, are

very heavily regulated. The RMA is involved in a number of ways including:

• Regulation;

• Supervision;

• Establishment of interest rates (deposit and lending);

• Approval of products and services;

• Approval of Licenses;

• Approval of placements of Branches and ATMs.

As reported earlier, the MFSE has not undertaken a legal review but has concentrated on

assessing whether or not the regulatory framework inhibits the ability of Banks and Non-

Banks to provide BB/AD initiatives.

Regulations for Branchless Banking (to be withdrawn):

The RMA has issued regulations known as “Regulation for Branchless Banking in

Bhutan”. These regulations can be found on the RMA website and are appended in the

report for ease of reference (see Appendix B). Appendix B now also includes the MFSE

review of these regulations. The MFSE believed these regulations needed more work.

These regulations are the only approved regulations currently in force covering

Branchless Banking although the Deputy Governor of the RMA previously advised that

the Regulations for Branchless Banking are to be withdrawn and replaced with the

Regulation for E-Money Issuers in Bhutan which are still in draft form. A subsequent

meeting of representatives of the RMA concluded that the new Regulation should put

more emphasis on the Banks. As the Banks are already involved in BB the MFSE

believes this is a logical way forward. These Regulations will be drafted and issued at a

later date.

The RMA is considering development of the e-Money regulatory and supervisory

framework in a phased manner. In this regard, the RMA will first put in place an e-

payment gateway to facilitate interoperability of e-payments amongst the commercial

banks. In parallel the RMA will also draft and issue the regulation on Branchless Banking

which will facilitate and support the usage of e-Money.

3.1.2 Institutional Framework

There are a number of financial institutions providing deposit and lending products to the

public. These include Banks, Insurance Companies and the National Pension and

Provident Fund (NPPF). Many of these players are well established. However Banks are



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clearly the most dominant player in providing both Branch and BB servicers. These

matters were covered in the Inception Report.

3.1.3 Technical / Financial Infrastructure

It is important to understand the technical infrastructure and capabilities that currently

exist within Bhutan. This infrastructure is pivotal in supporting the further development of

BB in Bhutan and providing banking to people located in non-urban / remote locations.

To a large extent a suitable infrastructure already exists in Bhutan and already provides

support to BB services.

When the MFSE met with representatives of the Department of Information Technology

and Telecom (DITT), he was advised that fibre has already been laid to circa 180

Gewogs. DITT own the fibre network and lease access to the telecommunication

companies. Also DITT advised that the speed across the network has recently been

increased to 512MB. However, it should be noted that there is only a single level of

redundancy (i.e. no back up). Over time, an increase in mobile network services may

lead to an additional level of redundancy.

Currently a number of Banks offer services similar to that of a BB organisation namely:



• Phone Banking (with limitations) via B-Wallet;

• ATMs;

• POS;

• Direct Debits;

• Mobile Van;

• Field Staff.

These services are available to the public but Bhutan would benefit from a greater

distribution network (similar to BDBLs / CIC initiative discussed below). Access to a

reliable telecommunications network is key.

After discussion with stakeholders, the MFSE is of the view that the current infrastructure

should not restrict the further development of BB, remembering that BB is already

supported.

3.1.3.1 RMA

The RMA is responsible for the management and administration of the Bhutan Financial

Switch (BFS). The RMA also has responsibility for reconciliation and settlement of

interbank transactions.

As reported in the Inception Report, all five Commercial Banks in Bhutan have access to

the BFS via their own in-house switches which allow customers of one Bank to transact at



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another Bank's ATM / POS. A diagram showing this connectivity is attached (Appendix

H). The MFSE believes that this is an important step towards the further development of

BB and achieving a greater level of customer acceptance.

Although the BFS currently only deals with inter-bank ATM / POS transactions, a strategy

/ Blue Print needs to be developed to integrate other technologies such as Phone and

Internet Banking solutions. This is covered in the Road Map – BFS Development

(Appendix J).

The MFSE believe that the RMA needs to work with stakeholders to produce a Blue Print

for technology integration. Without a defined strategy / Blue Print there is a risk of a

number of disparate solutions which will make connectivity between Banks and Non-

Banks extremely difficult.

Therefore it is important to understand how the BFS is currently performing and whether

the existing infrastructure supports online real time transactions. The MFSE believes that

online real time transactions must be set as a goal. This sits well with Bhutan’s ICT

program.

The MFSE has analysed the information available from the RMA website and notes that

the level of unsuccessful transactions needs to be investigated because an average of

23% (over the 20 month period) of all transactions being rejected is simply unacceptable.

This can result from customer error or technical difficulties.

Appendix E provides an analysis of the performance of the BFS and contains a table

created from the information contained on the RMA website.

The MFSE remains of the view that, as the BFS is pivotal to online real time BB

transactions and because there has never been an audit of the BFS switch since its

inception, that an audit or risk assessment should be undertaken by a suitably qualified

person. Technical assistance by the ADB will be required to conduct the audit.

Whilst an audit is recommended, it is clear that there will be a need to purchase a

software package or customise the BFS to accept internet and phone transactions.

There will also be a requirement at the Bank level for a degree of customisation. The

infrastructure Blue Print will also need to address resourcing. Additional project

resources will be required by the RMA to scope, identify the correct solution, liaise with

the Banks and project manage such a substantial change.

Whilst the MFSE is not an IT specialist, to progress matters and gain general acceptance,

the following action has occurred and has resulted in the formation of the Road Map for

BFS Development (Appendix J):

a. A stakeholder meeting with Senior IT people of all the Banks and RMA

staff was held at the RMA offices

The MFSE believes that this was a very successful meeting with all present

seeing the development of the BFS critical for BB. The benefits also flowed into

other areas such as achieving G2C & DITT objectives. Also, the benefit of having



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an up to date, safe and reliable payment system will go a long way in convincing

less financially literate people in remote locations to use BB type products and

services.

The Banks are happy to be involved in and support in-principal the following

projects:

• An infrastructure Blue Print Plan;

• Introduction of a Payment Gateway on the BFS;

• Assist G2C objectives.

Clearly, there will be a cost to all Banks as they will need to custom-tailor their

systems to connect to the BFS. They appreciate it is too early to understand the

implications and costs but they would like the BFS project to support the Banks'

cost of connectivity.

The above projects are interlinked and the MFSE believes that it is appropriate to

incorporate them into one project because the analysis and outcomes are similar.

It should be noted that the Reserve Bank of India (RBI) has provided a technical assistance to put in place a system known as Electronic Funds Transfer and Clearing System consisting of three electronic payment systems National Electronic Funds Transfer, National Electronic Clearing System Credit and National Electronic Clearing System Debit. These three system are currently offered by the commercial Banks.

b. Conference call with YSEL was arranged

In the first instance, Yalamanchili Software Exports Limited (YSEL), the switch

provider with whom the RMA has a support agreement, was approached by the

MFSE. A subsequent conference call between YSEL representatives, MFSE and

staff at the RMA was held. YSEL has responded very positively confirming that

they have provided a similar Payment Gateway in Malaysia and Singapore. YSEL

also provided indicative costs based on their previous experience which has been

incorporated in the Road Map BFS Development (Appendix J).

3.1.3.2 Telecommunication Networks

The MFSE met with representatives from Bhutan Telecom Ltd (BTL) and Tashi Infocomm

Ltd (TIL). It is rumoured that an Indian telecommunications company may also enter the

Bhutan market but the MFSE has been unable to substantiate this. This would provide

BB providers, the RMA and the Banks with a choice and will provide additional

competition to the market.



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3.2. Participant Environment

3.2.1 Customers

BB is all about providing customers with great and easy access to banking products and

services, regardless of where they are located. As evidenced below (see sub section

3.2.2) the people of Bhutan will have ready access to BB and substantially more than in

other neighbouring countries.

Acceptance of the new technology by customers in remote locations may take time as

they become familiar with and are educated on the new technology. Reliability, safety

and trust in the new technology are all important.

The use of Community Information Centres (CICs) to offer banking products and services

is very good for people in rural / non-urban areas. With BDBL taking control of the CICs,

a greater level of trust is likely to be perceived by customers because people in Bhutan

appear to have trust in their Banks.

As evidenced by the analysis on unsuccessful transactions on the RMA switch (Appendix

H), there is a real need for customer education. This will become even more essential as

BB is introduced in areas where there are less financially aware/literate people. All the

Banks that the MFSE has met with understand the need for customer education and the

challenges this creates.

With the development of the CICs, there is now a medium to provide educational

programs. This can be done in the CICs either in person or through a series of specially

made videos. This is detailed in the Road Map Education (Appendix L).

3.2.2 Bank Providers

It is important to understand the current level of banking distribution (Branches / ATMs)

across all Dzongkhags / Districts and consider how this relates to the population in those

locations. The MFSE conducted a review of the current size by asset value of each Bank

as detailed in Appendix E. Bank of Bhutan Ltd is the largest Bank by assets value

followed by Bhutan National Bank Ltd, Bhutan Development Bank Ltd, Druk PNB Bank

Ltd then T-Bank.

The MFSE has undertaken an analysis to benchmark how Bhutan sits in comparison with

neighbouring countries for Branch and ATM distribution. To ensure that the information is

comparable, CICs have not been included in this analysis.



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Source: World Bank’s 2014 States and Markets – Financial Access

Even without CICs being included, Bhutan provides a good level of banking distribution.

When CICs are included, a substantially greater level of banking facilities are available

within Bhutan as illustrated in the chart below (for greater detail see Appendix I).

The inclusion of CICs makes an extremely positive change to people’s access to financial

services as evidenced by the graph above and in more detail in Appendix I. Thimphu at

4452 (HOP (Head of Population)/ Branch + CIC) has the worst distribution but because

this is a densely populated urban area this is not an issue. Even at this level, distribution

is more than acceptable.

The MFSE believes the use of the CIC in providing greater access to people in remote

locations sits well with the Financial Inclusion Program and just as importantly will assist

in increasing people’s understanding of financial services.



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3.2.3 Non-Bank Providers

Insurance Companies

There are 2 Insurance Companies, namely:

1. Royal Insurance Corporation of Bhutan Ltd (RICB);

RICB are a life and general insurance company with a strong relationship with BDBL.

BDBL sell RICB insurance products. RICB understand the distribution advantage that

BDBL’s control of CICs provide and will work with BDBL to provide insurance in rural

locations. RICB also have agents in the field that sell insurance products.

2. Bhutan Insurance Ltd (BIL)

BIL is a general insurance company. BIL has agency arrangements with BNBL and

DPNBL who issue their collateral insurance with BIL. BIL did not see BB helping them

because BDBL has an agency arrangement with RICL.

Both insurance companies make limited amounts of credit available to the public.

3.2.4 Telecommunication Companies There are 2 telecommunication companies, namely:

Bhutan Telecom (BTL)

BTL is already a dominant player in BB providing the B-Wallet, a smart phone application

that enables customers of a Bank to undertake transactions, although its functionality is

believed to be limited only to transactions with the Bank the customer is with. BTL

purchased a solution and customised it to meet its requirements. BTL licence B-Wallet to

participating Banks. B-Wallet was launched in 2012 and has shown steady growth

although customer acceptance was a little slow to start with. The MFSE was advised that

customers need time to accept that the technology was safe.

Transaction numbers and the value of total transactions have increased substantially

from 2013 to 2014. Details of the statistics provided by BTL in respect of B-Wallet

transaction volumes are provided in Appendix D with an extract given below.

2013 2104 Variance % Variance

Trans # 559,733 2,003,834 1,444,101 258%

Trans Value 238,643,092 1,246,659,881 1,008,016,789 422% Source: BTL Statistics

The MFSE has used total transaction numbers and values because even the top-up of

prepay accounts are a form of e-Commerce akin to BB.

This is important data which demonstrates the acceptance of new technologies within

Bhutan which is key to BB.



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Tashicell (Tashi Infocomm Ltd)

TIL does not currently offer any product similar to B-Wallet. In discussions with their

representative, it is apparent that TIL will be considering purchasing a similar offering to

B-Wallet and introducing this to the market although no definite timeframe is known.

Summary of Telecommunication Infrastructure

Telecommunications is a key component of any BB solution. Therefore it is essential that

the strategy and capabilities of the telecoms is well understood. It is also important to

understand customer acceptance of telecommunication technology. Both BT and TIL

already have technology that could, with some investment, move them into BB. After all

both BT and TIL already have the ability to store funds for their prepay service. Currently

neither telecommunications company has plans to enter the BB market directly, because

of the level of investment required. BTL is happy to support the Banks through its B-

Wallet offering. TIL plans to introduce a similar service that will also support the Banks by

providing smart phone services. The MFSE believes that telecommunications companies

will in the future develop strategies to compete in providing BB services. Discussions the

MFSE has had with representatives of DITT show that they would be keen to see

telecommunication companies enter the BB market. A change in Regulation (discussed

earlier) may force telecommunication companies into the BB market depending on

whether or not prepay and stored value cards fall within the new Regulation for E-Money,

which is currently only in draft form.

As evidenced by the B-Wallet statistics above (from Appendix D), smart phone

technology has gained solid customer acceptance.

The graphs below show that Bhutan customer acceptance of telephone technology is

greater than its neighbouring countries and this places Bhutan in an extremely good

position to progress with BB initiatives.

Source: ADB Basic Statistics 2014

Most new POS equipment has the ability to utilise multiple SIM cards as redundancy.

Therefore in a scenario where BTL was the primary network via a SIM and failed, the

back-up SIM with Tashicell would provide connectivity where Tashicell has a network. So,

having two telecommunication companies provides a level of redundancy (back-up



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option) in the infrastructure. And there is always the fibre network as the ultimate network

to support BB.

Telecommunication companies need to support BB initiatives. DITT owns the fibre, the infrastructure in the ground, which is leased to telecommunication companies. BTL is the larger of the telecommunication companies and already supports the Banks in their BB initiatives via B-Wallet and access to their networks.

Telecommunications have the capacity to support BB as the infrastructure already exist therefore BB relates more to an increase in transactions across their current networks.

Telecommunications are well placed to enter the BB market as they already use prepay and stored value technology. But like most technology providers, they need distribution and a strong marketing plan and a point of difference. One thing that telecommunication companies do not have and will need to build to take market share off the Banks is customer trust in their ability to manage people’s money.

An issue that will face telecommunication companies is how to transact funds across multiple banks. This is currently an issue for the Banks but, with some investment (as identified by the MFSE in the Road Map for BFS Development – Appendix J), the BFS will provide interbank transactions. Telecommunication companies will either need to negotiate access to the BFS or build their own portal which will require the Banks’ buy in as customisation of their own switches will be required. The MFSE sees no reason why a Telecommunication company should not have access to BFS if they comply with all rules and regulations.

4. Branchless Banking Model (BB) As previously stated in the Inception Report, the MFSE believes a “Hub and Spoke” approach is well suited to Bhutan because of access to the Community Information Centres (CICs). The diagram contained in Appendix F shows the “Hub and Spoke” concepts. Whilst the MFSE has used CICs in the example, CICs in this diagram could also represent, schools, stores, telephone outlets, group or co-operatives. Also, Branches could be replaced by the head office of large organisations such as telecommunication operators. A Branch can have responsibility for more than one CIC depending on location. In addition to CICs there is an opportunity to introduce mobile services operating from the CICs in the future. CICs also provide an avenue to provide education to customers on financial matters increasing the knowledge of the people in remote locations. Even without the BDBL initiative, CICs should not be discounted in providing training to the rural population. NPPF and the insurance companies could also (subject to agreement) use the CICs on an agency basis. The MFSE has spoken to BDBL about NPPF products and BDBL appear very receptive (discussed later in Section 7). The MFSE believes that BDBL and NPPF are already in discussion. In summary, there is an opportunity to provide banking and other financial services via the CICs. This also provides the opportunity to increase people’s knowledge of a full range of financial products in rural locations.



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5. Bhutan Development Bank Ltd (BDBL) The MFSE provided comment in the Inception Report and the Interim Report about BDBL’s initiative in respect of CICs and the opportunity that this presents to the ADB. The MFSE has continued to liaise with representatives of BDBL who remain keen to look at opportunities involving the ADB. Currently CICs remain under the control of the Post Office but from recent press releases (see Appendix G) it is apparent that BDBL will soon take over the management of CICs providing this Bank with a substantial distribution network. Senior Management within BDBL is already working on the assumption that Cabinet will soon approve the transfer. BDBL is currently trialling smart POS technology (dual SIM) in 6 CICs. The MFSE believes that the challenge for BDBL is no longer in the technology area but more in the following areas:

• Project Management of the future roll out to the other 196 CICs

• Internal Capacity. The IT team have managed the project so far but now a business unit needs to be established to drive acceptance and usage.

• Marketing strategies need to be developed and implemented.

• 410 new staff (2 each for each CIC) needs to be recruited and trained. The MFSE is told there is neither a training department at BDBL nor support material. This must be developed.

• Potential customers need to be educated so that a level of trust is achieved over time.

At this stage, BDBL have no Project Manager nor project programme. The roll out will be very public and failure or major problems are not an acceptable option. The MFSE sees this as a real area of risk but also an opportunity for the ADB to assist. With ADB’s support, these risks can be managed and mitigated. The Road Map for BDDL / CIC Development (Appendix K) details the recommended way forward.

6. Government to Citizen (G2C) When the MFSE learned about a meeting of all stakeholders to be held at the Prime Minister’s office, he was able to obtain an invitation and participate in the stakeholder meeting. Representatives from all Banks, MOF, G2C, DITT, DRC, BT, TIL and RMA were all present. This again provides the ADB with a real opportunity to get involved. The Prime Minister is keen to see progress and the assistance of the ADB is likely to be greatly appreciated. This program could sit quite nicely alongside the BFS project, if that too is initiated. The meeting was productive. In essence, the Government wants to automate the collection of taxes, fees (such as passport fees, Customer Identification Cards) and enable a customer of one Bank to pay funds into a Government account possibly at another Bank. The Department of Revenue and Customs (DRC) were also keen to have the payment system integrated with the Revenue Administration Management Information System (RAMIS). It was made very clear to all at the meeting that BDBL will be taking control of the CICs.



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The use of CICs was discussed and BDBL are happy to progress subject to an understanding on operational matters and the development of the RMA Payment Gateway as detailed in the Road Map for BFS Development (Appendix J). There are a number of operational matters that will need to be resolved and whilst not directly related to BB, the solution could be the same. By establishing a Payment Gateway on the BFS, which is already recommended by the MFSE, the funds transfer matters can be resolved. The MFSE has discussed this matter with representatives of the RMA and with other stakeholders and they are all in agreement.

7. Capacity to Support Branchless Banking Branchless Banking (BB) requires capacity in a range of areas. The existence of BB in Bhutan suggest that there is already capacity that can be adopted and, where necessary, enhanced to further develop BB thus providing the people of Bhutan greater access to a range of financial services.

7.1 Banks

7.1.1 Services The Banks already offer a range of BB related services. These services include:

• Internet Banking,

• Phone Bank,

• ATMS,

• POS.

The current inability for interbank real time online transactions via the Internet and Phone Banking is a restriction to customer service. This is as a result of lack of connectivity to the BFS. This is covered in the Road Map for the BFS Development (Appendix J).

7.1.2 Operational

The Banks already provide BB services therefore the MFSE believes capacity already exists to support BB. However the further development or strategic projects may create pressure on internal resources. BDBL is one Bank currently attempting to deal with such challenge. The specific challenges facing BDBL are discussed in the Road Map for BDBL / CIC Development (Appendix K). A number of the banks the MFSE met with did not have internal training departments or training material. This is an area that would benefit from improvement. 7.1.3 Systems / Technology The Banks have different host banking systems and their own switches that manage their own customer initiated transactions. Interbank ATM and POS transactions necessitate assess to the BFS, which all Banks currently have. The MFSE has already commented on the need to improve interbank Internet and Phone Banking connectivity. The Banks as stakeholders are supportive of improving connectivity and are happy to work with the RMA on this initiative



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although the cost of customisation on their own switches needs to be better understood. This is covered in the Road Map for BFS Development (Appendix J).

7.2 Royal Monetary Authority of Bhutan (RMA) 7.2.1 Services

The RMA is the regulator of the financial markets in Bhutan. The financial markets are heavily regulated. In addition to regulation and ensuring compliance, the RMA operates the interbank switch known as the Bhutan Financial Switch (BFS) which provides interbank ATM and POS transactions between banks. The RMA also provides interbank settlement (Cheques transactions) between Banks. Cash management is a key function. In addition the RMA operates 3 electronic funds transfer and clearing systems, namely:

1. National Electronic Funds Transfer (NEFT). This system enables funds transfer on a batch basis between Banks;

2. National Electronic Clearing System (NECS) Credit; and 3. National Electronic Clearing System (NECS) Debit which enables bulk

payment transactions on a T+1 settlement basis between Banks.

The MFSE is advised that one Bank is using NEFT for Internet Banking transactions between accounts at other Banks but it is not widely used by the other Banks because of its lack of online real time functionality. The RMA develops and implements regulations to cover various areas of the financial markets, including BB. The MFSE provided comment on the current BB Regulations in his Interim Report. As discussed above, the MFSE has been advised that the BB Regulations are to be withdrawn and will be replaced with new Regulations with an emphasis on the Banks. 7.2.2 Operational The MFSE has met with relevant managers at the RMA to better understand resourcing, capacity, training and related issues. The MFSE is of the opinion that the RMA is adequately resourced for day to day operations in all areas supporting BB. However the MFSE believes any large or strategic project will require additional resourcing. The MFSE has also discussed this with the Deputy Governor of the RMA. The MFSE notes that there is no training department at RMA and that training manuals are not apparent. This is an area that requires improvement and support. The Road Map - Education (Appendix L) details recommendations to assist the RMA in this area. 7.2.3 Systems / Technology The MFSE has provided considerable comment in previous reports (Inception Report and Interim Report) on the capacity of the BFS switch. The MFSE believes that the development of the BFS is pivotal to the further development of BB in Bhutan. The level of transactions that will be transacted via the BFS will increase substantially and therefore it is essential that its capacity be tested. The inclusion of Internet and Phone Banking transactions will increase the transaction



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volumes without any allowance for growth or launch of a similar B-Wallet product by Tashicell. The RMA do not collect data on the level of Internet or Phone Banking transactions because these are not interoperable between the commercial Banks. From discussions with payment staff at the RMA, it appears that a 15% to 20% increase is estimated by them but the MFSE cannot substantiate this. The BDBL initiative with CICs will also substantially increase the volume of transactions. Whilst the MFSE is not an IT expert, he is of the view that the database, application system and firewall may need to be upgraded to reliably transact the increasing volumes that will occur through the development of BB. Also the BFS has not been audited since inception and because it plays such an important function in supporting electronic financial transactions in Bhutan, an audit and risk assessment should occur regularly and would be in keeping with best practice. A technology Blue Print to support further connectivity or integration would also be of benefit. These are detailed in the Road Map for BFS Development (Appendix J). The development of the BFS must occur to support the growth in BB and provide customers and the Banks with a trusted, reliable and stable platform for online real time electronic transactions. In the future, other parties other than the Banks may require access to the BFS. Telecommunication companies may enter the BB market in their own right and access would be necessary to transact across all Banks. This would need to be considered on its merits and dealt with at that later stage.

7.3 Telecommunication Companies 7.3.1 Services

Department of Information Technology and Telecom (DITT) own the fibre network and lease access to the telecommunication companies. DITT has advised 180 Gewogs have access to fibre and the other will receive access over time. Currently there is no redundancy for the fibre network but this should not stop the development of BB. There are two telecom companies that also provide mobile services which can provide back up and hence it has not inhibited the development of BB so far. This is the approaching being adopted by BDBL.

Telecommunications already support BB, providing connectivity between the Banks and RMA and the Banks and their own host systems. In addition, Bhutan Telecom Ltd (BTL) supports a number of Banks in delivering their Phone Banking services known as B-Wallet. BTL lease access to B-Wallet to BOBL and BDBL. As discussed in the Interim Report, a substantial level of growth in the number of transactions (258% over 12 months) and value of transaction (422% over 12 months) has occurred. The MFSE believes this growth will continue especially with the development on interbank transactions via the BFS. The people of Bhutan have already accepted mobile phone technology and this will be one medium that customers will certainly use for BB. Tashicell (TIL) does not have a similar product to B-Wallet although they are investing in the introduction of a similar product. This will give their customer base



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assess to BB which will increase the number of transactions over time. If the BTL experience is replicated this would substantially increase people’s access to BB. 7.3.2 Operational Operational telecommunication companies already provide services that support BB and therefore the MFSE does not see any issue arising from them in the further expansion of BB services.

7.3.3 Systems / Technology The RMA IT team advice that telecommunication service is normally very good and any major outage is very infrequent. The MFSE questioned the RMA staff on this issue on a number of occasions and was given the same answer. On questioning of the Banks they gave a similar answer. Therefore one must assume that the stakeholders are happy with the telecommunication network that already supports BB in Bhutan. The stakeholders advise the MSFE that they see no reason why telecommunication should inhibit a further expansion of BB in Bhutan.

8. National Pension and Provident Fund (NPPF) The NPPF has members throughout Bhutan but they have a mandate / strategy to increase membership in the rural / non-urban locations. To a large extent the current membership is made up of civil servants and military personnel. The NPPF has supplied the table below outlining the distribution of their members.

Dzongkhag/Location Number of Members 22% contribution inflow in a month/Fund Inflow # % $ %

Belgium 2 11930 0.01% 0.01%

Bumthang 887 2882662 2.37% 2.00%

Chukha 3340 12449858 8.93% 8.64%

Dagana 615 2089994 1.64% 1.45%

Gasa 147 592376 0.39% 0.41%

Haa 419 1413025 1.12% 0.98%

India 41 188470 0.11% 0.13%

Kuwait 2 18814 0.01% 0.01%

Lhuentse 509 1645891 1.36% 1.14%

Mongar 1446 5148938 3.86% 3.57%

Paro 1933 7622840 5.17% 5.29%

Pemagatshel 599 1954804 1.60% 1.36%

Punakha 892 3195324 2.38% 2.22%

Samdrup Jongkhar 1631 5260999 4.36% 3.65%

Samtse 1816 9699052 4.85% 6.73%

Sarbang 2227 9537198 5.95% 6.62%

Swizerland 2 9514 0.01% 0.01%

Thailand 1 3886 0.00% 0.00%

Thimphu 13672 56050408 36.54% 38.88%

Trashigang 1534 5230986 4.10% 3.63%

Trashiyangtse 583 2001517 1.56% 1.39%

Trongsa 984 3343710 2.63% 2.32%

Tsirang 664 2275640 1.77% 1.58%

Wangdue 2735 8985126 7.31% 6.23%

Zhemgang 734 2544048 1.96% 1.76%

Total 37,415 144,157,010 100.00% 100.00%

Number of members and fund inflow by location



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This table illustrates the issue facing NPPF but also the opportunity that exists. Three locations (Chukha, Thimphu and Wangdue) make up 53% of the membership. These locations also account for 54% of the funds flow. With BDBL soon to assume responsibility for the CICs, the opportunity exists for NPPF to establish an agency distribution relationship with BDBL to sell NPPF products (as stated earlier in the report, BDBL and NPPF are already in discussion). The MFSE believes this will work well for both BDBL and NPPF because BDBL will be able to generate fees for the service and NPPF will widen its distribution capability. This can only be good for the people of Bhutan who will have a greater access to financial services. Clearly this will increase the level of training required for the staff at the CICs but it also represents an opportunity to provide further training on financial matters to people in remote locations.

9. Recommendations

The major recommendations are now documented in detail within individual Road Maps

(Appendices J, K and L).

These include previous recommendations such as:

1. ADB should provide assistance to BDBL in the rollout of financial services via the

CICs. Please refer to the Road Map - BDBL / CIC Development (Appendix K).

2. ADB should support the RMA with a Project incorporating the following (Please

refer to the Road Map – BFS Development (Appendix J), which includes:

a. Developing a Blue Print for technology / connectivity. This is even more

critical because of G2C.

b. Development of a Payment Gateway solution for the BFS (for BB and

G2C).

c. Undertaking of a systems audit / risk assessment of the BFS.

3. Consideration be given to using the CICs as an avenue to provide training to

people in rural areas. An education programme to the public is a must. Specialist

inputs in the area of training and adult education will be the key. These are

detailed as Road Map – Education (Appendix L).

4. Consideration be given to assisting the RMA and BDBL in creating training

manuals and internal training program.

5. Consideration be given to supporting the G2C project which can sit alongside the

BFS project.

10. Road Maps

The MFSE has created Road Maps to capture his recommendations. The Road Maps have been prepared so as to provide the reader with a full understanding of the importance, priority and the estimated timeline.



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The following Road Maps are appended: Appendix J: Road Map for the BFS Development

Appendix K: Road Map for BDBL / CIC Development Appendix L: Road Map for Education

11. In Conclusion

BB already exists in Bhutan and customer acceptance, especially in urban locations, has

been strong. BB is an accepted distribution strategy in Bhutan but not all parties have the

appetite to proceed down this path at this time. Telephone and Internet Banking

solutions will be enhanced via the development of the BFS. With the apparently strong

acceptance of mobile phone technology, the MFSE expects this will be the customers’ BB

medium of choice. ATM, POS, Internet and Phone Banking technology will provide the

people of Bhutan with great access to banking services and products.

The BFS is extremely important to BB in Bhutan. The BFS is one of the key technologies

to deliver safe and reliable BB services to the people of Bhutan. At the same time, the

BFS will achieve the requirements of G2C and DITT.

The MFSE was encouraged that most Banks have BB solutions although they have

differing appetites to push into remote locations. BDBL is however very active and has a

mandate to do so which presents the ADB with a substantial opportunity to support the

development of BB in Bhutan.

As BB already exists in Bhutan the focus of the MFSE has been to identify opportunities

that present the ADB with the chance to add real value to the development and growth of

BB and, more importantly, assist people in remote locations with access to banking

services and provide education to the less financially aware.

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Appendices


Appendix B: Regulations for Branchless Banking in Bhutan

Appendix C: BFS Switch Analysis

Appendix D: Bhutan Telecom Ltd. – B-wallet Statistics

Appendix E: Banking Statistics

Appendix F: Hub and Spoke Concept

Appendix G: Press Releases (BDBL /CICs)

Appendix H: RMA Narada Switch Connectivity

Appendix I: Bhutan Banking Distribution Analysis

Appendix J: Road Map – BFS Development

Appendix K: Road Map – BDBL / CIC Development

Appendix L: Road Map – Education


Management Program (SEMP) II Appendix A - Page 1

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Appendix A

List of People Met

A1. List of People Met on First Field Visit

Person Position

Cigdem Akin Asian Development Bank

Eden Dema Deputy Governor, RMA

Hem Lal Chhetri Offg. Director, Information Technology, RMA

Kelzang Jurmey Payment Systems Officer, Payment and Settlement RMA

Ngawang Tenzin Asst. IT Officer / Systems Administration, RMA

Shankar Chhetri Asst. Examining Officer, Financial Regulation and Supervision,

RMA

Sonam Pelden Legal Officer, RMA

Jamie Bowman Credit Information Bureau and Secured Transactions Expert,

ADB Consultant

Ujjal Choudhury Banking Consultant, ADB, Consultant

B.B. Chuwan Deputy CEO, Druk PNB Bank Ltd

Prakash Jayakar Executive Vice President, Druk PNB Bank Ltd

Tshewang Rinzin DCFO, Bank of Bhutan

Tashi Dhendup Head of Alternate Deliver Channels, Bank of Bhutan

Thinley Dorji Senior Manager Compliance, Bank of Bhutan

Choney Dorji Forex Officer, Bank of Bhutan

Navyjot Adhikari Credit Analyst, Bank of Bhutan

Dasho Penjore CEO, National Pension & Provident Fund

Sonam Yeshey Head, Pension & Actuarial National Pension & Provident Fund

Nawang Gyetse CEO, Credit Information Bureau

Ugyen Tshering Manager, Credit Information Bureau

Tshewang Dorji Assistant General Manager, Bhutan Development Bank Ltd



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Person Position

Genevieve Boyreau Resident Representative, The World Bank

Pelzore Rumba Chief Credit Officer, Bhutan National Bank Ltd

Mann Rai Head of Information Technology, Bhutan National Bank Ltd

A2. List of People Met on Second Field Visit

Person Position



Ugyen Dhendup Deputy Managing Director, Bhutan Development Bank Ltd

Teswang Dorji Assistant General Manager, Bhutan Development Bank Ltd

Sangay Wangdi General Manager (Marketing Division), Bhutan Telecom Ltd

Pasang Wangdi Manager – Product Management, Bhutan Telecom Ltd

Phub Dorji Head MIS, Tashi Infocomm Ltd


Tshering Gyaltshen CEO, Bhutan Insurance Ltd


RMA

Namgyal Lhendup CEO, Royal Insurance Corporation of Bhutan Ltd

Namgay Phuntsho Head of IT, T-Bank

Jigme Tenzing Chief ICT Officer, Department of Information Technology and

Telecom

Sonam Penjor Deputy Chief ICT Officer, Department of Information Technology

and Telecom

Sonam Tobgay Senior ICT Officer, Department of Information Technology and

Telecom

Dechen Chhoeden ICT Officer, Department of Information Technology and Telecom

A.Vijaya Kumar Head CBS IT Department, Bank of Bhutan Ltd



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Ugyen Dorji Manager IT Department, Bank of Bhutan Ltd

D. Samten Chhofel Head of IT, Druk PNB Bank

Pema Tshering Managing Director, Bhutan Development Bank Ltd


Tashi Yezerr IT Officer, RMA

Kesang Jigme Oversight Officer, Payment & Settlement Systems Department,

RMA

Gopal Reddy Yalamanchili Software Exports Ltd (Conference Call)

A3. List of Attendees at Stakeholder Meetings

Meeting Co-ordinator Purpose Participants G2C Sonam Thaye To Co-ordinate G2C RMA, MOF, Revenue, BT, TIL,

BDBL, BOBL, BNBL, TBL, DPBNB, G2C, DITT, MFSE

Meeting Co-ordinator Purpose Participants

BB / BFS Switch

MFSE To gain agreement on the approach involving a Payment Gateway

IT Specialist from BDBL, BOBL, BNBL, TBL, DPBNB, RMA, MFSE


Management Program (SEMP) II Appendix B - Page 1

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Appendix B

Regulation for Branchless Banking in Bhutan

The regulations are more descriptive than similar regulations the MFSE is familiar with. The

policy would benefit from an abbreviations key which would make it easier to interpret when

Banks are expected to comply with certain provisions. This was apparent in discussion with

various RMA staff, DITT and other stakeholders. The MFSE was of the preliminary view that

the regulations may require rethinking.

The regulations are established under the Financial Service Act of Bhutan 2011. Chapter 19

section 362 (page 122):

‘The Authority may regulate financial services other than banking, insurance or securities businesses by

adopting regulations to establish systems of licensing and regulation consistent with the section of this

Act applicable to financial services, including but not limited to:

a) Inter corporate borrowings;

b) Pension and Provident Funds;

c) Trust funds;

d) Cooperative, lending companies, Foreign Exchange dealers or money transmitters; and

e) Any service which is deemed financial in nature.’

The regulations allow for two models of BB:

• Bank Based (customers have a direct banking relationship);

• Non-Bank Based (customers have no contractual relationship with a financial

institution (e.g. Bank).

The organisation providing BB services must be a company incorporated in Bhutan and no

more than 49% of its shares can be held by any Foreign Direct Investor (FDI).

There are capital requirements that the organisation providing BB services should meet - Nu

20m on incorporation increasing to Nu50m in 5 years which may restrict Non – Bank Based

organisations. In addition to the capital requirements, an escrow account must be

maintained with the RMA. A sum of money equivalent to 50% of the total value of

transactions in a month with an initial deposit of Nu1m is required to be invested in RMA

approved securities. It is unclear as to why Banks that are already subject to RMA oversight

with capital adequacy requirements to achieve should also need to contribute to an escrow

account and the MFSE has raised this matter with the RMA.

The regulations require a member on the BB management board to be a RMA

representative. The MFSE believes this may create a conflict of interest - the RMA regulates

the BB organisation but also has a representative making decisions on the management

board. This could arise if the RMA questions a decision made by the BB management board

at a later date. The MFSE has raised this matter also with the RMA.

There are maximum limits on BB account balances and transaction limits, namely:

• Maximum balance limit in BB account (debit or credit) shall be limited to Nu50,000;



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• Maximum transaction limits of Nu20,000 per day, Nu60,000 per month and

Nu350,000 per annum.

The MFSE has questioned the RMA on how these transaction limits were derived and why

there is a need for restrictions especially if the BB is a Bank as Banks may already be

subject to similar regulations.

REGULATIONS FOR BRANCHLESS BANKING IN

BHUTAN

Introduction

Background



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In view of the limited access to financial services compounded by a low market

penetration in Bhutan, the RMA has initiated various measures to institute legal and

regulatory changes to support new technology–based products and services and enable

increased outreach. The RMA’s objectives to secure extension of financial services to the

poor and unbanked clients shall be met through the establishment of Branchless

Banking Financial service providers (BBFSP). Such services will not only supplement

the banking system in Bhutan but would also promote financial inclusion by providing

cheap, reliable, efficient financial services to the unbanked communities of Bhutan.

Branchless Banking (BB) means the delivery of the financial services outside

conventional bank branches using information and communication technologies and

non‐bank retail agents.

Objectives

The objectives of these Regulations are:

• To define BB activities as a delivery channel to offer financial

services in a reliable, efficient and cost effective manner.

• To broadly outline activities that can be provided by a BBFSP.

• To serve as a set of minimum standards of data & network

security, Know Your Customer policy (KYC), customer protection and risk

management to be followed by the BBFSP desirous to offer BB services.

Ownership and Capital Requirement

A BBFSP shall be a company incorporated under the Companies Act of Kingdom of

Bhutan 2000, with a minimum paid up capital of Nu.20,000,000 (Ngultrum Twenty

Million)which shall be increased to Nu. 50,000,000(Ngultrum Fifty Million) within a

period of five years after its operation.

In case of a FDI only a BB service provider will be permitted to provide BB services in

partnership with domestic companies.

In terms of ownership limits the FDI partner shall be allowed only up to 49% of the total

paid up capital.

Permissible Branchless Banking Models and Activities

These regulations are based on the two models of BB – Bank Based and NonBank

Based. A bank based model is one under which every customer has a direct

contractual relationship with a prudentially licensed and supervised financial

institution—all though the customer may deal exclusively with a retail agent who is

equipped to communicate directly with the bank.



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In the nonbank based model, customers have no direct contractual relationship with

licensed financial institution. Instead, the customer exchanges cash at a retail agent (or

otherwise transfers, or arranges for the transfer of, funds) in return for an electronic

record of value. This virtual account is stored on the server of a nonbank, such as a

mobile operator or an issuer of stored‐value cards. The balance in the account can be

used for making payments, storing funds for future use, transferring funds, and

converting back to cash at agents.

Permissible Distribution Channels

BBFSP shall be allowed to provide their services through the following channels:

(I)It can be implemented by using different agency arrangements

between the BBFSP, Bank and Telco/non‐bank and any other similar

service providers as may be approved by RMA.

(ii) Besides, other distribution channels like post office, FCB Agents,

Telephone booth operator, grocery shops/super market, Head of

Cooperatives, retired teachers and other entities as may be approved by

RMA.

Permissible Activities

Under these regulations, following products and services may be offered directly or

indirectly by the BBFSP.

(i) Opening and maintaining a BB Account. A BB account can be opened and

operated by a customer with a bank through the use of BBFSP channels. Banks

may associate such account to a centralized branchless banking unit in its head

office. Opening of such account shall be permitted upon the fulfilment of the

requirement with regard to CDD and KYC procedures as outlined under the

relevant section of this regulation

(ii) Accounttoaccount Fund transfer: Customers may transfer funds to/from

their

BB account from/to their other pre‐registered accounts (current/saving bank accounts,

loan limit accounts, credit card accounts etc.)

(iii) Persontoperson Fund Transfers: Customer can transfer funds from/to their

BB or regular account to/from BB or regular accounts of same or some other

bank (depending on the model capabilities) or to mobile numbers of other

non‐BB account holders.

(iv) Cashin and Cashout: Customers may deposit and withdraw funds to/from

their BB account using a variety of options including bank‐branch counters,



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ATM machines and authorized agent locations. Such recipients need to become

a BB account holder after completion of formalities to utilize these funds. The

message (SMS) of funds transfer to such recipients should always be generated

by the FI and must contain necessary procedural details to be followed by the

recipient in order to utilize those funds. The recipients should also be able to

utilize these funds for making utility (electricity, gas, phone/mobile phone)

payments without becoming formal BB account holder.

(v) Bill Payments: can be used to pay utility bills (e.g. Gas, Electricity, Phone etc.)

(vi) Merchant Payments: can be used to make payments for purchases of goods

and/or services.

(vii) Loan processing/disbursement/recovery follow up: BBFSP may facilitate

collection and processing of loan application and disbursement of small loan

amounts to their borrowers having BB accounts. The same accounts may be

used by customers to repay their loan instalments. The BBFSP, can also follow

up for recovery of loans.

(viii) Remittances: Can be used to send/receive remittances inside and outside

Bhutan, subject to existing regulations. To the extent possible BBFSP shall use

the RMA’s payment system particularly National Electronic Fund Transfer

System (NEFTS), NECS (Debit) and NECS (Credit).

(ix) Other Payments: Can be used to facilitate any other transactions like: receiving

dividend, receiving pension payment and any other third party payments.

However only services under serial (i,ii,iii & iv) shall be offered only by BBFSP directly,

where as other services may be permitted directly by agents/distribution channels of

BBFSP.

Customer Due Diligence and KYC norms (Bank based model) In order to facilitate the outreach of BB to the unbanked poor without undermining the

requirements of AML/CFT, all BBFSP are required to fully comply with the CDD and the

KYC policy outlined below:

KYC requirements:

(i) Filling and signing an account opening application form.

(ii) Photo copy of National ID card/pass port/labour permit and other

legal documents.

(iii) A biometric finger scan and a digital photo taken by a BBFSP to be

submitted to the bank and the RMA on a regular basis.



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(iv) The maximum balance limit in the BB account (debit/credit) shall

be limited to Nu. 50,000.

(v) The maximum transaction limits (debit/credit) shall be Nu. 20,000

per day and Nu. 60,000 per month and Nu. 350,000 per year.

Besides the above BBFSP must ensure that their transaction processing system is

capable of:

(i) Imposing above limits to avoid any breach.

(ii) Sending alerts to the users if they are close to a limit (These

regulations do not suggest that the banks must send such alerts.

However, the capability needs to be there.)

(iii) Identifying suspicious transactions and to report the same to the

FI’s and the RMA.

(iv) BBFSP clients shall have the option to view at least the last 10

transactions free of cost. The BBFSP shall provide printed

statement of account (for a period not more than past 12 months)

by paying a nominal fee.

Customer Due Diligence and KYC norms (NonBank Based) Under the NBB model the BBFSP shall require its customer to open a virtual account

which is stored on the server of the BBFSP.

KYC requirements:

(i) Filling and signing of application form


legal documents

(iii) a digital photo taken by a BBFSP

(iv) The maximum balance limit in the virtual account (debit/credit)

shall be limited to Nu. 25,000

(v) The maximum transaction limit shall be Nu. 20,000 per day and

Nu. 60,000 per month and Nu. 350,000 per year.

Notwithstanding the requirements under section (KYC/CDD) BBFSP are advised to

ensure that they carry out suitable due diligence in respect of the entities proposed to



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be appointed as their agents/ distribution channels and also institute additional

safeguards that may be considered appropriate to minimize the agent risk.

Roles & Responsibility of the BBFSP Management

(i) The management of the BBFSP shall ensure to safeguard itself against

liabilities which might arise out of the actions of its distribution channels, service

providers or partners.

(ii) All BBFSP shall establish a management board with a minimum of four

members, one from the RMA, one from its correspondent bank which has the

highest customer base. This board shall be responsible for strategic decisions

effective oversight and compliance and internal control functions to ensure

adherence to rules regulations and other guidelines.

(iii)The senior management of the BBFSP shall remain responsible for

maintaining an effective system of internal control and for providing active

oversight of the agent’s activities/functions.

(iv)There shall be a contingency plan to mitigate any significant disruption,

discontinuity or gap in agent’s function, particularly for high‐risk areas.

(v)The written engagement contract or service level agreement with the third

party service provider/agent shall, at a minimum:

a) Define the rights, expectations and responsibilities of both parties;

b) Set the scope of, and the fees/revenue sharing structure, the work to be

performed by the agent;

c) State that the outsourced services are subject to regulatory review and

that RMA inspecting officers shall be granted full and timely access to

internal systems, documents, reports, records and staff of the agent;

d) State that the third party service provider/agent will not perform

management functions, make management decisions, or act or appear to

act in a capacity equivalent to that of a member of management or an

employee of the BBFSP;

e) Specify that the third party service provider/agent must ensure

safe‐keeping of all relevant record, data and documents /files for at least

five years; or alternately, such record is shifted to the BBFSP at regular

pre‐specified intervals which will then ensure safe‐keeping of this record

for at least five years.

f) State that all information/data that the third party service provider/agent

collects in relation to branchless banking services, whether from the

customers or the FI or from other sources, is the property of the BBFSP,

and the entity will be provided with copies of related working



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papers/files it deems necessary, and any information pertaining to the

institution must be kept confidential; and

g) Establish a protocol for changing the terms of the service contract and

stipulations for default and termination of the contract.

h) Mention suitable limits on cash holding by agents/distribution channels

as also limits on individual customer payments and receipts.

i) State the requirement that the transactions are accounted for and

reflected in the BBFSP books by end of day or next working day.

Agent Due Diligence (ADD)

(i)All BBFSP shall have clear, well documented ADD policy and procedures

approved by the RMA. Amongst others these policies and procedures shall

include minimum agent selection criteria.

(ii)Due diligence agent checks to be performed at specified intervals and a list of

early warning signals and corrective actions to ensure proactive agent

management. ADD should clearly specify roles and responsibilities of various

functions in the BBFSP with regard to agent management.

(ii)Adequate publicity on the agent in the locality that he/she is going to serve

supplemented by appropriate measures to avoid him/her being misrepresented

about the intermediary engaged by them as Agent and take measures to avoid

being misrepresented.

(iii)Appropriate AML/CFT monitoring process to be complied by the agents.

(iv)All BBFSP shall execute and submit a service level agreement/ agency

agreement and any amendments thereto, detailing the functions/activities to be

performed, the respective responsibilities of the BBFSP and its third party

service provider/agent and a confidentiality clause. The arrangements with the

agents/distribution channel shall specify:

a) Suitable limits on cash holding by agents/distribution channel and

also limits on individual customer payments and receipts

b) The requirement that the transactions are accounted for and

reflected in the BBSFP books by end of the day or next working day and

c) All agreements/contracts with the customer shall clearly specify

that the BBSFP is responsible to the customer for acts of omission and

commission of the agents/distribution channel.

(v)BBFSP shall engage agents who are well established enjoying good reputation

and having confidence of the local people.



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Use of ThirdParty Service Providers

Third‐party service (TPS) providers shall provide services related only to

technological infrastructure etc. A proper service level agreement (as defined in

Section 7 (v)) must be put in place for all third‐party service arrangements.

Risk Management Program

BB entails various categories of risk, and therefore all BBFSP must have in place

proper risk management program to measure, monitor and address risk at an

appropriate level.

All BBFSP providing non‐bank based branchless services shall open accounts in

commercial banks in Bhutan in its own name. This account shall be used for pooling

and depositing the customer funds. An internal policy of matching the value in

BBFSP virtual accounts on a one‐to‐one basis with funds deposited in its bank

accounts shall be done on a regular basis.

BBFSP shall be liable to each client for the outstanding e–money in the clients

account.

All BBFSB shall deposit in an escrow account with the RMA a sum of money

equivalent to 50% of the total value of transactions in a month. However for a new

BBFSP the initial deposit shall be Nu.1, 000,000 which can be invested in the RMA

approved securities.

All transactions pertaining to this account shall be permitted upon the approval of

the RMA.

Adoption of appropriate technology

(i)BBFSP shall adopt the most appropriate technology while implementing the BB

service,

(ii) All BBFSP shall adhere to the applicable regulations of the RMA as and when

intimated in writing by the RMA.

(iii) BBFSP providing non‐bank BB services shall be required to fulfill the

following requirements:

(a) an electronic money profile containing information on technical

specification as well as e‐money management mechanisms,

(b) first year business projections,

(c) proof of legal instrument readiness (i.e., concepts of the written key

agreements with partners),



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(d) proof of operational readiness (e.g. an organizational structure plan and

equipment and business facility plan),

(e) proof of liquidity risk management readiness,

(f) an information technology audit from an independent auditor,

(g) a disaster recovery plan,

(h) identification of product risk and other risks like operational, legal, and

reputational risks, and

(i) a description of the accounting information system to be applied to the

e‐money issuance.

Customer Protection BBFSP must have in place appropriate customer protection against risks of fraud, loss of

privacy and even loss of service to establish trust among consumers as trust and

customer confidence is the single most necessary ingredient for growth of BB. Besides

in view of the fact that BBFSP will be dealing with a large number of first time

customers with low financial literacy level, they need to ensure that adequate measures

for customer protection, awareness and dispute resolution are in place.

All BBFSP are required to fulfill the following criteria:

(i) To provide adequate financial education to all their clients with regard to

the services provided by them.

(ii) To provide a list of all their distribution channels including their services

on their website and on an annual basis in the media.

(iii) To ensure the privacy & confidentiality of customer information in the

custody or possession of the BBFSP.

(iv) To have in place appropriate grievance mechanism, that should be widely

published and also placed in their website.

(v) The details should be displayed at the premises of their distribution

channels and also be made available by the BBFSP at the request of the

customer.

(vi) All service charges on account of delivery of BB Service directly or

indirectly should be approved by the RMA. This service charges should be

reasonable and be made available on the premises of the distribution

channel on a notice board visible to the customers.



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(vii) Agents and persons working on behalf of the BBFSP shall be prohibited

from charging any fee to the customers directly for services rendered by

them on behalf of the BBFSP.

(viii) All charges/fees to be paid/received by any party involved in the BB

business directly or indirectly shall be fixed at reasonable rates and be

approved by the RMA.

(ix) BBFSP shall develop suitable training modules in the local dialect, in order

to provide proper attitudinal orientation and skills to their

agents/distribution channels.

(x) Customers may also be given the option of obtaining loss insurance.

However, the voluntary nature of this insurance must be clearly

communicated to the customer.

ICT solutions that ensure proper authentication and other security measures may be

adopted to minimize the risk while scaling‐up the models as already advised. Further

BBFSP may ensure that while appointing the above entities as agent, distribution

channels, the fundamental principles that the individuals are residents of the area in

which they propose to operate as agent/distribution channels, stands fulfilled.

Branchless banking setting up procedures

Preparation Only authorized BBFSP can provide Branchless Banking services as stipulated in these

regulations. The authorization shall be given upon fulfillment of the requirement

under this regulation.

Authorization procedure

BBSFP desirous in providing BB services shall submit to the RMA, an application

describing the services to be offered and its infrastructure. The application shall be

accompanied by a certification signed by proposer to the effect that the proposed

BBFSB has complied with the minimum pre‐conditions requirement as provided in

this regulation.

A non‐refundable application fee of Nu. 50,000 (Ngultrum Fifty Thousand) in

cash/draft/cheque shall be deposited in licensing/registration account maintained

with the RMA and shall be used for expenses incurred for licensing of such providers.

A licensing processing committee shall be formed comprising of members from the

following organizations:

• FRSD, RMA

• Representative from Ministry of Economic Affairs ( Registrar of Companies)

• Representative from Commercial Bank



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• Representative from Telecom Company

General ongoing requirements

(i) All BBFSP shall report to the RMA on regular basis information pertaining to their

transactions. Besides, the BBFSP shall also provide the financial statements on a

yearly basis. This statement shall include at the minimum the balance sheet, P&L

statement & the summary of transactions.

(ii)All BBFSP shall be subject to on‐site inspection and off‐site supervision as

deemed necessary by RMA.

(iii)All BBFSP are required to appoint/open distribution channels/agents in at least

in two gewogs of each Dzongkhag, within the first two years of operation.

(iv)All relevant officers and employees of BBFSP who are directly involved in the cash

operation must undergo the training in AML/CFT regulations conducted by the RMA.

Subsequently, they must train their agents/distribution channels on a continues basis

(v)All BBFSP/agents/distribution channels must:

• For each remittance (inward as well as outward) complete a KYC/CDD

process on the sender /receiver which entails an application form and

presenting a government issued identity document along with two

passport size photograph/digital photo.


Management Program (SEMP) II Appendix C - Page 1

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Appendix C

BFS Switch Analysis

Bhutan Financial Switch

Monthly Volume of Transactions (Apr 2013 - Nov 2014)

Month/Year

No. of ATM

Transaction

s

No. of PoS

Transaction

s

Total

Transactions

Total

Successful

Transactions

% Successful

Transactions

%

Unsuccessful

Transactions

Nov-14 109,954 423 133,198 110,377 82.9% 17.1%

Oct-14 91,274 422 122,998 91,696 74.6% 25.4%

Sep-14 107,135 386 127,931 107,521 84.0% 16.0%

Aug-14 107,240 391 133,158 107,631 80.8% 19.2%

Jul-14 99,921 352 124,456 100,273 80.6% 19.4%

Jun-14 88,958 318 117,245 89,276 76.1% 23.9%

May-14 91,274 422 122,998 91,696 74.6% 25.4%

Apr-14 89,750 386 120,293 90,136 74.9% 25.1%

Mar-14 91,950 312 122,908 92,262 75.1% 24.9%

Feb-14 86,633 291 116,413 86,924 74.7% 25.3%

Jan-14 86,897 293 109,641 87,190 79.5% 20.5%

Dec-13 93,581 324 132,904 93,905 70.7% 29.3%

Nov-13 88,817 329 118,397 89,146 75.3% 24.7%

Oct-13 278,600 352 371,550 279,710 75.3% 24.7%

Sep-13 91,022 368 118,025 91,390 77.4% 22.6%

Aug-13 130,517 503 131,020 77,461 59.1% 40.9%

Jul-13 118,922 454 119,376 94,323 79.0% 21.0%

Jun-13 115,019 401 115,420 92,402 80.1% 19.9%

May-13 109,079 341 109,420 86,288 78.9% 21.1%

Apr-13 101,161 478 101,639 83,738 82.4% 17.6%

Source: RMA - BFS Analysis Nov 2014 The level of unsuccessful transactions is improving as evidenced by the diagram below but

is still at a very high level.

The MFSE requested a report from the RMA of the unsuccessful transactions in the past 3

months and this report shows:



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• 36% of unsuccessful transaction were because of Switch (time out after 40

seconds) or Communication errors (Telecom)

• 64% of unsuccessful transactions were because of customer action:

o 15% incorrect PIN;

o 18% sufficient funds;

o 31% other (this relates to stolen cards, incorrect account, transaction

limit reached and too many PIN attempts)

This information identifies that there is a level of additional education required at the

customer level.

Over the past 3 months the average transaction time reported by the RMA is 7 seconds

which is probably a little higher than ideal but is probably a communications issue (telecom)

rather than an actual issue with the BFS.


Management Program (SEMP) II Appendix D

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Appendix D

Bhutan Telecom Ltd B-Wallet Statistics

Total # Total Value

Trans

# of Trans Amount # of Trans Amount # of Trans Amount # of Trans Amount

January 0 0 8394 552,303 0 0 0 0 0 0 567 3,558,385 8,961 4,110,688

Febuary 0 0 8270 583,071 0 0 0 0 0 0 456 3,402,041 8,726 3,985,112

March 0 0 8966 609,178 0 0 0 0 0 0 570 3,416,242 9,536 4,025,420

April 0 0 10353 724,622 0 0 0 0 0 0 713 4,910,957 11,066 5,635,579

May 0 0 13169 981,116 0 0 0 0 0 0 751 4,538,712 13,920 5,519,828

June 47 1,486 11988 804,176 0 0 0 0 18 11,565 701 4,025,572 12,754 4,842,799

July 11917 676,105 12242 851,568 0 0 0 0 1098 5,608,596 769 4,385,120 26,026 11,521,389

August 38986 2,374,040 15189 1,115,932 0 0 0 0 3431 16,495,372 786 4,893,300 58,392 24,878,644

September 62393 3,552,311 14729 950,039 0 0 0 0 5228 22,640,675 772 4,472,614 83,122 31,615,639

October 79789 4,583,300 14413 951,965 7 513 0 0 6843 31,512,098 868 4,829,616 101,920 41,877,492

November 86630 5,262,110 16517 1,180,585 12 707 0 0 7689 36,210,841 799 4,533,049 111,647 47,187,292

December 88852 5,391,149 15797 1,100,625 31 3,091 0 0 8025 41,253,322 958 5,695,023 113,663 53,443,210

Total 368,614 21,840,501 150,027 10,405,180 50 4,311 0 0 32,332 153,732,469 8,710 52,660,631 559,733 238,643,092


January 82,831 5,023,927 15,671 1,042,229 21 2,475 0 0 6,637 38,558,242 1,061 7,712,697 106,221 52,339,570

Febuary 71,323 4,489,774 16,614 1,193,542 24 4,603 0 0 6,546 37,501,967 919 6,132,779 95,426 49,322,665

March 101,972 6,288,519 17,170 1,196,047 22 4,491 0 0 10,469 55,167,826 1,207 7,960,162 130,840 70,617,045

April 117,326 6,987,998 15,665 1,081,109 22 4,830 0 0 12,254 64,115,192 1,092 6,032,482 146,359 78,221,611

May 135,863 8,352,063 15,495 1,222,121 27 10,604 4 1,596 14,270 70,807,731 958 5,912,636 166,617 86,306,751

June 139,628 8,413,674 16,637 1,144,644 27 5,165 35 17,265 16,531 78,628,446 1,171 6,471,721 174,029 94,680,915

July 135,535 8,156,548 16,876 1,142,854 21 4,378 102 46,098 14,739 81,068,452 1,182 7,738,049 168,455 98,156,379

August 160,118 10,114,411 18,804 1,361,808 70 15,077 161 68,639 25,545 138,513,464 1,179 7,385,467 205,877 157,458,866

September 158,862 10,032,252 21,170 1,550,876 71 18,718 237 103,562 22,491 113,174,109 1,368 8,166,552 204,199 133,046,069

October 159,535 10,098,909 20,706 1,543,546 73 17,466 231 98,370 23,622 116,468,499 1,540 9,624,644 205,707 137,851,434

November 143,555 8,973,614 21,482 1,688,326 74 16,239 269 119,756 22,657 117,350,089 1,541 9,541,055 189,578 137,689,079

December 162,377 10,550,852 22,245 1,720,582 97 24,880 310 132,091 23,857 126,466,666 1,640 12,074,426 210,526 150,969,497

Total 1,568,925 97,482,541 218,535 15,887,684 549 128,926 1,349 587,377 199,618 1,037,820,683 14,858 94,752,670 2,003,834 1,246,659,881

Amount

BOBL BNBL

Bwallet Report 2013

Bwallet Report 2014

Month

E-TOP UP XEDLINE BILL PAYMENBROADBAND BILL PAYMENT FUND TRANFER

BOBL BNBL

# of Trans Amount # of Trans

# of TransMonth


BOBL BNBL

Amount # of Trans Amount

BOBL BNBL


Management Program (SEMP) II Appendix E - Page 1

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Appendix E

Bank Statistics

There are 5 Banks, namely:

1. Bank of Bhutan

Distribution Numbers / Statistics

Branches 46

ATMs 62

Total Assets Nu 41,085,000

Ranking by Assets #1

Ranking By Branches #1

Ranking by ATMs #1

Note: 1: Branch and ATM data from Bank web site;

2: Asset data from RMAS Bulletin Nov 2014.

The Bank of Bhutan Ltd (BOBL) is the largest Bank on all the above measures. BOBL also

have an arrangement with the Post Office in respect of distribution. In addition, the BOBL

have a van fitted with an ATM. This van provides mobility but the van is only used in

Thimphu.

2. Bhutan Development Bank Ltd


Branches 37

ATMs 5




Ranking by ATMs #5



The Bhutan Development Bank Ltd (BDBL) has the 2nd largest branch network but has the

poorest distribution of ATMs. The MFSE was informed that there is about to be a very

significant announcement that will see BDBL substantially increase its distribution

capabilities. Please refer to Appendix C for details.

3. Druk PNB Bank Ltd


Branches 5

ATMs 14




Ranking by ATMs #4




Management Program (SEMP) II Appendix E - Page 2

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Druk PNB Bank Ltd (DPNBL) is largely an urban based bank.

4. T – Bank


Branches 4

ATMs 10




Ranking by ATMs #3



T-Bank (TBL) is also largely an urban based bank.

5. Bhutan National Bank Ltd


Branches 27

ATMs 32




Ranking by ATMs #2



Bhutan National Bank Ltd (BNBL) is the 2nd largest Bank by Assets and ATM distribution but

ranks 3rd in number of Branches.

Summary:

All Banks provide, short and medium term deposits and lending and have Branch networks

largely in the urban areas although both Bank of Bhutan Ltd and Bhutan Development Bank

Ltd have established strategic alliances that spread into country / rural locations.

All Banks have ATMs and have stated they have experienced an increase in electronic

transactions. The MFSE is currently attempting to confirm the acceptance and growth in

ATMs transaction volumes.


Management Program (SEMP) II Appendix F

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Appendix F

Hub and Spoke Concept

Bank

Head Office

Branch Branch

Branch

CIC CIC

CIC CIC

CIC

CIC

CIC

CIC

Customer

Customer

Mobile

Service


Management Program (SEMP) II Appendix G

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Appendix G

Recent Press Releases – BDBL / CICs:

The Bhutanese (online journal)

PM launches BDBL’s Gewog Based Banking Services in Kabesa

To commemorate 60th Birth Anniversary of Fourth Druk Gyalpo and as part of bank’s corporate social responsibility, Prime Minister Tshering Tobgay launched Gewog Based Banking Services and the Drinchen Ama Savings Scheme of Bhutan Development Bank (BDBL) in Kabesa Gewog in Punakha on 10th December.

According to press release of BDBL, the Gewog bank is to increase the accessibility of financial services without any additional costs to rural customers and introduce monthly farmers outreach banking services wherein the bank’s branch-staff visit gewog and village centers to provide financial services.

The release says that the “Gewog Based Banking Services” is a technology driven field banking service where with the help of Point of Sale (POS) device the bank shall provide a range of banking services on a real time basis at the click of button which until date were provided exclusively from the branch office.

The service facility costing over Nu 30 mn is developed in technical collaboration with Tech Mahindra of Mahindra Group conglomerate, India and South Tech Ltd. BDBL’s banking software vendor is from Bangladesh and it shall be provided in all the 205 gewogs. In the first phase, services such as cash deposits, loan repayments, withdrawals, balance inquiry, fund transfers and remittance will be there and in the second phase mobile phone top ups and utility bills payments shall be provided.

The release also says that the “Drinchen Ama Savings scheme” is a savings product, introduced as a tribute to all mothers for shaping household and family’s lives and also to inculcate savings habits. Drinchen Ama Savings box shall be distributed all Bhutanese households over a period of time. According to the release both the schemes are intended to achieve the bank’s objectives of financial inclusion and access to finance to alleviate poverty and improve living standards of the Bhutanese people as envisioned the benevolent Monarchs. It states that in order to meet diverse financial needs of the customers, the bank provide a range of credit and banking services from its 33 branch offices,6 field offices and 5 extension offices spread across the country.

The Bhutan Development Bank formerly known as Bhutan Development Finance Corporation was established on 31st January 1988 under the Royal Charter issued by His Majesty the Fourth Druk Gyalpo. The bank joined the fraternity of banking institutions in the country on 2nd March 2010 when the bank was issued a “Specialized Deposit taking” license. 22 November 2014 (extract from overall article) Pledges: With the People’s Democratic party government having completed one year and two months in office, Prime Minister Tshering Tobgay said it has got the fundamentals (of governance) correct. Speaking at the 13th meet-the-press yesterday in Thimphu, Lyonchhoen said the government wants to make Bhutan a self-reliant country by 2018, and lower dependence on external aid, so that it can finance from its own proceeds.

Lyonchhoen said Bhutan Development Bank limited (BDBL) would have branches in every gewog. This, the government will make possible by transferring the community information centres in every gewog to BDBL. He said the centres were currently underutilised and are not serving the purpose. “We’ll build a bank in every gewog. The BDFC will upgrade these centres as rural banks.”


Management Program (SEMP) II Appendix H

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Appendix H

RMA Narada Switch Connectivity

HOST

Bank #1

HOST

Bank #2

Switch

Bank #1

Switch

Bank #2

RMA (Narada)

Switch

ATM

Bank #1

ATM

Bank #2

Customer

Bank 1

Customer

Bank 2


Management Program (SEMP) II Appendix I

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Appendix I

Bhutan Banking Distribution Analysis

Bank Branch & ATM Coverage by District

Updated 14 January, 2015

DistrictDistrict

Population

Ranking by

District

Population (lowest to

Highest)

Total

Branches

Future BDBL

Financial

Services

CIC's by

District

Combined

Total

Branches

+ CIC's

Total

ATM's

Ratio

Branch :

HOP

Ratio

Combined

Branches +

CICs : HOP

Ratio ATM :

HOP

Gasa 3,579 1 2 4 6 1 1,790 597 3,579

Haa 12,600 2 3 6 9 3 4,200 1,400 4,200

Trongsa 14,700 3 6 5 11 2 2,450 1,336 7,350

Lhuntse 17,200 4 2 8 10 1 8,600 1,720 17,200

Bumthang 18,411 5 3 4 7 4 6,137 2,630 4,603

Trashi Yangtse 20,266 6 3 8 11 1 6,755 1,842 20,266

Zhemgang 20,957 7 5 8 13 2 4,191 1,612 10,479

Tsirang 21,209 8 3 12 15 2 7,070 1,414 10,605

Pema Gatshel 24,645 9 4 11 15 2 6,161 1,643 12,323

Dagana 25,100 10 7 14 21 1 3,586 1,195 25,100

Punakha 26,981 11 3 11 14 2 8,994 1,927 13,491

Wangdue-P 34,300 12 6 15 21 8 5,717 1,633 4,288

Samdrup-J 37,300 13 7 11 18 3 5,329 2,072 12,433

Paro 41,850 14 7 10 17 7 5,979 2,462 5,979

Monggar 41,852 15 5 17 22 5 8,370 1,902 8,370

Sarpang 43,915 16 8 12 20 5 5,489 2,196 8,783

Trashigang 54,768 17 9 15 24 7 6,085 2,282 7,824

Samtse 68,575 18 8 15 23 5 8,572 2,982 13,715

Chhukha 85,609 19 11 11 22 17 7,783 3,891 5,036

Thimphu 111,306 20 17 8 25 45 6,547 4,452 2,473

Total 725,123 119 205 324 123

Gew ogs

Effect of

Adding CICs

to Branch

Road Map - Bhutan Financial Switch Development

Appendix J - Page 1

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Appendix J

Road Map - Bhutan Financial Switch (BFS) Development

1. BACKGROUND

The Government of Bhutan, with assistance from the Asian Development Bank, has charted a strategic direction towards providing increased “Branchless Banking” (BB) solutions in order to provide services to people in rural locations throughout Bhutan. This is underpinned by the clear objective of the Government of Bhutan and the Banks to offer multiple delivery channels for financial services to extend the availability of banking services to the underserved populations in remote location within Bhutan. The Bhutan Financial Switch (BFS) is the national financial switch and therefore it is a critical component here because it enables full connectivity between individual bank switches to facilitate Automated Teller Machines (ATMs) and Point of Sale (POS) transactions. The BFS enables online real time ATM and POS transactions between the Banks. The future development of the BFS to include an inter-bank Payment Gateway to facilitate Internet and Phone Banking transactions is a logical progression. In the future, other forms of transactions will also need to be accommodated such as E-Commerce and Mobile Banking services. The benefits from this course of action do not just relate to Branchless Banking. Other Government lead strategic projects will also benefit, namely:

• Government to Citizen (G2C);

• Financial Inclusion;

• Information Communication Technology (ICT)

• E-Commerce Activities; and

• Department of Information Technology and Telephone (DITT) strategies.

These various benefits to the people of Bhutan are important. It will provide a reliable and trusted platform which will assist in gaining customer acceptance and will support the education of less financially literate people. A stakeholder meeting called by the Mobile Financial Services Expert (MFSE) to discuss the development of the BFS gained the support in principle of all the Banks and the RMA. The only reason the support was only “in principle” at this stage is because the Banks wanted to fully understand the work effort and cost that they will need to bear in providing connectivity to BFS.

2. BFS OPERATING OBJECTIVES

The BFS has the following objectives:

• To transact a full range of financial transaction types across multiple delivery channels;

• Provide reliable, scalable, flexible services to its stakeholders (the Banks, Government and the people of Bhutan);

• Provide a platform for electronic payment connectivity that can meet future growth in transaction volumes;


Appendix J - Page 2

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• Improve the efficiency of payment processing across all payment channels and types;

• Support BB in Bhutan.

3. THE BFS PLATFORM

The BFS platform provides transactional switching services and settlement of inter-bank ATM and POS transactions. BFS enables inter-bank ATM and POS transaction enabling customers from a particular bank to use another bank’s networked ATM’s and POS devices. BFS also facilitates:

• Settlement and reconciliation;

• Data capture and transaction analysis;

• Systems monitoring and management information systems reporting; and

• Network access (Point to Point).

4. BFS ARCHITECTURE

a) BFS architecture comprises of:

• Production site (NARADATM switch provided by Yalamanchili Software Export Ltd (YSEL))

• Disaster Recovery (DR) - “cold” / storage of tape off site

Note: The RMA is currently considering creating a “hot” DR back up site.

b) BFS resilience and redundancy:

• The BFS platform provides for a high level of availability and has the capacity to handle current peak transaction load.

• The data is automatically replicated on a tape each night which is held off site.

• The platform has robust resilience and redundancy in terms of processing capacity.

Note: The MFSE understands there is currently no Business Continuity Plan. This is a must for a system forming the backbone of financial transactions in Bhutan.

5. FUTURE POTENTIAL BRANCHLESS BANKING SERVICES

Future development of the BFS will provide for a full range of electronic transactions. This would both provide additional banking services to existing customers, better serve new customers including underserved customers. In addition, banking services can be provided to the presently unbanked sectors of the population greatly increasing their wellbeing (Financial Inclusion Programme).

The BFS should strive to achieve the following:

(i) Transactional Banking: Potential to support:

• Mobile Phone Banking;


• Electronic funds transfer;

• Electronic commerce transactions;


Appendix J - Page 3

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• Money/cash transfers;

• Cash in and cash out (deposits/withdrawals);

• Loan collections;

• Bill / Utility payments; and

• Support G2C and ICT initiatives.

(ii) Social Banking: � Enable individual banks to achieve widespread outreach to the ‘unbanked’ in rural / remote

locations; � Potential microfinance services to serve the ‘unbanked’; � Support for biometrically enabled devises and smart (chip) cards to enable banking

transactions for Bhutanese who are not financially literate or lack formal identification.

(iii) International Compliance Standards and Best Practices: An understanding of and an intent to move towards various international financial services, cards and switching technology standards needs to be reviewed as part of the potential scope for the development of the BFS. At a high level some of theses standards and best practices include:

� ISO 8583 – The international standard for switching and other related systems that exchange electronic transactions made with credit/debit payment cards. Most ATM transactions internationally use ISO 8583. The MFSE has been advised the BFS currently complies with ISO 8583.

� EMV (Europay, MasterCard and Visa) - an international technology standard for debit and credit cards and card-reading devices for cards that have an embedded memory chip. EMV compliance enables global inter-operability and security.

� AML/CTF and KYC (‘Anti-Money Laundering/Counter-Terrorism Financing’ and ‘Know Your

Customer’) - These international banking standards exist to prevent money laundering, terrorist financing and identity theft fraud.

6. RECOMMENDED PROJECT – BFS Development

The BFS clearly performs a critical contribution to the financial infrastructure of Bhutan and to the planned financial inclusion and expansion strategies of the Government of Bhutan. Serious disruption or failure would have a major impact on the financial system. The Project that could be named “BFS Development Project” should include:

1. An Audit / Risk Assessment of the BFS, Infrastructure, Security, Operations, Redundancy, and Support;

2. Development of a Blue Print for technology / connectivity; 3. Establishment of Payment Gateways to electronically manage Internet and Phone Banking

transactions. Another benefit of creating a project with the appropriate resources is that the RMA would benefit from training and the preparation of training manuals and materials. 7. OUT OF SCOPE

It is important to detail out of scope items, namely:

1. Critical financial services infrastructure supporting the BFS and planned BB solutions clearly depends on the availability of public infrastructure and technology, such as


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electricity / power, telecommunications and data infrastructure, internet and cellular phone backbone connectivity and transportation services.

2. Inter-bank Credit Card connectivity.

3. The consolidation or amalgamation of other RMA systems such as Electronic Funds

Transfer and Clearing System (EFTCS) and National Electronic Funds Transfer (NEFT) (These may be assessed through the business case phase of the project but are excluded until a suitable qualified expert is engaged).

The above 3 items are outside the scope of this project. 8. PROJECT RESOURCES

A Steering Group should be established with membership made up of stakeholders (RMA /ADB (or their representative) / the Banks). Critical to the success of any project is the calibre and skill set of the Project Management and the support structure around them. The appointment of a skilled Senior Project Manager with both IT and Change Management skills is recommended. The Project Manager should consider the team that they require to successfully deliver the project within the agreed time lines. The MFSE considers that the part time (as required) services of a Banking Specialist (BS) may be required to adjudicate between any differences of opinions between the Banks. The MFSE believes the assistance of a Human Resource (HR) Expert / Trainer skilled in adult education and development of training materials / manuals would be of considerable benefit. Note: The BS and HR Expert could work across other ADB led projects.

9. PROJECT COSTS

The MFSE is not an IT expert and therefore is not qualified to provide any IT assessment in terms of architecture or infrastructure. Therefore the costs below are broad brush indicative estimates based on the information the MFSE has been able to gather on making enquiries. Yalamanchili Software Exports Ltd (YSEL) have provided a broad understanding of cost based on similar projects undertaken in Singapore and Malaysia.

Senior Project / Change Manager (Full Time) USD200,000 Banking Specialist (Part Time) USD 50,000 Trainer (Part Time) USD 50,000 YSEL – Network and Hardware (INR3.5m) USD 57,000 YSEL – ACS Application (INR2.0m) USD 33,000 YSEL – E- Commerce Module (Bank Interface) (INR3.5m) USD 57,000 YSEL – Resources – Estimate USD300,000 Infrastructure Upgrade (Application and Database) USD 75,000 Bank Connectivity (Providing all Bank access) USD 50,000

Sub Total: USD872,000 Contingency (10%) USD 87,200 Total Estimate: USD959,200


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The MFSE has not costed the time of RMA staff who will work on the project as this will form only part of their day to day activities. Note: This is an estimate only and will need to be developed further.

10. PROJECT BENEFITS

The benefits at this stage are largely social and the achievement of various Government lead strategic initiatives viz.

• Development of BB


• G2C;

• ICT;

• DIIT Programme. There is an opportunity for the RMA to negotiate a fee with each of the Banks. The development of training material and manuals will greatly benefit the RMA.


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Roadmap Matrix

MILESTONES:

Priority: High

Task Description (in logical order)

Stakeholder Action Required

ADB Action Required & Level of Input

Indicative Timeline (Est)

Days = Working Days

1. Consider the Recommendations of the MFSE

ABD to consider and engage with Government of Bhutan in respect of funding this project. Consideration should also be given to the establishment of a Steering Group comprising ADB and RMA representatives.

ADB and Government of Bhutan.

Engagement with Government and establishment of funding and relevant tranche conditions.

30 days

2. Engage a dedicated Senior Project /Change Manager (SPCM) with expertise in financial switching systems

The SPCM is to lead the project from inception through feasibility, technical review, business case development and final implementation.

ADB / RMA / Banks ADB Funding, engage SPCM and provide project oversight.

30 days – Cumulative Total 60 days

3. Establishment of Steering Group

ADB & RMA to agree on membership. Could involve people from G2C or DITT.

ADB / RMA Appointment of Membership. Same time as for task # 2

4. SPCM is to recommend the skills required within the Project Team

The MSFE currently believes that a Banking Specialist and Human Resource Expert / Trainer who add real value to the project but the SPCM should consider and submit a paper to ADB on agreement with stakeholders.

Note: SPCM is responsible for the successful delivery of all tasks within the project.

SPCM / RMA Approval by ADB and if appropriate assistance with engagement of other consultants.

10 days plus approval time say 10 days.

Cumulative Total 80 days

5. Formation of the Project Team

SPCM to establish a project team to deliver on all aspects of the Project.

Banking Specialist (part time) and Trainer (part time).

Note: The Bank Specialist and Human Resource Expert could work on other ADB Bhutan projects as well.

SPCM ADB Agreement, funding of external consultants, Project oversight.



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6. Initial Project Plan

The Project Team headed by the SPCM is to produce an initial Project Plan, to include Terms of Reference, activities, confirmation of cost, timetable and required outcomes.

Project Team / Banks / RMA

ADB agreement to plan. 15 days – Cumulative Total 105 days.

7. Comprehensive audit, risk analysis and feasibility study of the BFS and its end-to-end operating environment

Project team is to assess whether BFS is currently ‘fit for purpose’ and to identify technical, business, HR capability and operational ‘Gaps’ and risks that would limit BFS’s ability to support a wider branchless banking strategy.

SPCM / Project Team / RMA

ADB oversight. Could overlap with tasks # 4 & #5.

30 days – Cumulative Total 135 days.

8. Determine the business, technology strategy and requirements and formulate a detailed technology roadmap

Project Team is to provide a roadmap to support the business objectives, including required infrastructure upgrade or capability enhancements needed from the Gap analysis identified in the proposed BFS audit (above).

SPCM / Project Team ADB oversight. Could overlap with tasks #6 and #7.


9. Develop draft business case to support the proposed actions above as tasks #1-#8

To include updated timeline and costs estimate.

SPMC / RMA ADB approval and oversight. This should be developed along the way and only need final assessment.

10 Days – Cumulative Total 165 Days

10. Confirm potential technology partners

Project Team needs to assess who can deliver the capabilities outlined in the business and technology roadmap and meet the specific requirements. Develop the business model for the partnership, including pricing, contractual performance requirements and service level agreements. This may include the preparation for a Request for Information (RFI).

Note: Yalamanchili are a logical partner as they provide the BFS switch, maintain the BFS and have undertaken similar developments in Malaysia and Singapore. This approach could provide a quicker implementation.

SPMC ADB oversight. As YESL provides the switch the process could be shortened by getting YESL involved sooner in the project. Whilst this removes contestability it would deliver the project earlier.

20 Days – Cumulative Total 185 days

11. Finalise detailed business case and Implementation Plan for review by the RMA and ADB

SPMC / RMA ADB oversight & approval. 20 days – Cumulative Total 205 Days


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12. Project Implementation

As determined by the Implementation Plan and ADB approval.

SPMC / Partner / Project Team

ADB oversight. 150 days Cumulative Total 355 Days

13. Review

Review of Project objectives and costs.

SPMC / RMA ADB oversight and close-out of project.

Note: ADB could appoint a consultant to the Steering Group to lesson its day–to- day involvement.

Road Map - BDBL / CIC Development

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Appendix K

Road Map - Bhutan Development Bank Ltd / Community Information Centre (BDBL / CIC) Development

1. BACKGROUND

The Government of Bhutan, with assistance from the Asian Development Bank, has charted a strategic direction towards providing increased “Branchless Banking” (BB) solutions in order to provide services to people in rural locations throughout Bhutan. This is underpinned by the clear objective of the Government of Bhutan and the Banks to offer multiple delivery channels for financial services to extend the availability of banking services to the underserved populations in remote location within Bhutan. The Bhutan Development Bank Limited (BDBL) will soon assume responsibility for the Community Information Centres (CICs) from the Post Office. BDBL is the third largest Bank in Bhutan and is ultimately (majority) owned by the Government. Although BDBL is the 3rd largest Bank by assets, it has the 2nd largest branch network. BDBL is the only bank that has shown (and is still showing) any real interest in maximising its distribution into the more remote areas of Bhutan. From a banking prospective, increasing BDBL’s distribution capability through the control of CIC’s will change the Bhutanese banking landscape significantly by extending the access to banking services to people in remote locations. In the future, BDBL plans to extend its BB into local shops and the like through the use of technology. The Mobile Financial Services Expert (MFSE) has met with Mr. Tshewang Dorji, Deputy General Manager responsible for information technology and Project Manager for the current trial involving 6 Community Information Centres, on a number of occasions. The BDBL are committed to providing financial services to the people of Bhutan via the CICs, supporting the Government Financial Inclusion programme. BDBL are launching a Piggy Bank programme aimed at the mother of each family. A locked money box will be provided free of cost by BDBL. All members of the family can put funds into the money box but the box must be taken to a Branch or CIC to be opened because only BDBL will hold the key to the box. This programme will roll out at the same time as the financial services in CIC’s. BDBL advise that 100,000 money boxes will be required. By providing financial services via the CIC’s, BDBL will also be supporting the Government of Bhutan’s G2C, Information Communication Technology (ICT) and (Department of Information Technology and Telephone (DITT) programmes.

2. BDBL OBJECTIVES

The BDBL has the following objectives:

• To provide BB services to people in remote locations in Bhutan;

• Provide financial services and products via all CIC’s in Bhutan;


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• Provide a secure electronic payment network using smart Point of Sale (POS) devices;

• Develop and encourage people to use technology for banking services;

• Provide access to banking service from anywhere a customer may wish to undertake a transaction;

• Provide a secure, reliable technology platform for electronic payments;

• Provide online real time electronic transactions to the people of Bhutan;

• Provide cash in and cash out services via all CICs;

• Provide customers with access to all Banking products and services via CICs;

• Provide agency services to organisations such as National Pension and Provident Fund increasing distribution for these organisations; and

• Support the Government of Bhutan:

o A platform to allow for G2C payments through all CIC

o Financial Inclusion programme (banking of the unbanked)

o Information Communication Technology (ICT) Programme

This project will provide additional banking services to existing customers, better serve new customers including underserved customers. In addition, banking services can be provided to the presently unbanked sectors of the population greatly increasing their wellbeing (Financial Inclusion Programme).

3. BDBL PLATFORM & BFS ARCHITECTURE

a) BDBL BFS architecture comprises:

Currently BDBL uses Ascend Banking System (ABS) as its Core Banking System. The System was procured from SouthTech Limited, Bangladesh. BDBL also provides ATM services and its ATM switching system is managed by Smart Choice Technologies (SCT), Nepal.

With its social mandate, BDBL launched its services to under-banked and un-banked areas through ICT-based “Agent-based Branchless Banking”, where the customers can access the banking services through the usage of smart card (biometric card) on the Point of Sales (POS)/ Hand Held terminals at designated locations identified by the bank. The bank has partnered with Tech Mahindra Limited, India for the implementation of the service. Following services are provided to the customers through POS terminals in the first phase;

1. Customer Enrolment

2. Loan EMI Payment

3. Cash Deposit

4. Cash Withdrawal

5. Balance Enquiry

6. Mini Statement

7. Fund Transfer

8. Customer Account closure request

The value added services such as utility bill payment collection shall also be offered in the second phase implementation.


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b) BDBL BFS redundancy and resilience:

• The BFS platform provides for a high level of availability and has the capacity to handle current peak transaction load.

• The data is automatically replicated on a tape each night which is held off site.

• The platform has robust resilience and redundancy in terms of processing capacity. c) Tech Mahindra Limited

Tech Mahindra Limited, India is a leading provider of information technology business solutions for several industries worldwide. The company offers telecom solutions, business consulting across platforms, products and services, leveraging deep industry and functional expertise, leading and futuristic technology practices with a global delivery model to help businesses value enhancement and improvement of performance. Their Financial Inclusion solution has been integrated with various leading banks in India and Africa. The platform is well tested with largely used CBS systems like Temenos, Bancs, Finacle, Flexcube etc.

The solution uses third party Point of Sales (POS) terminals for the agents and Smart Cards for the customers to perform the transactions.

4. FUTURE POTENTIAL BRANCHLESS BANKING SERVICES

BDBL has a mandate to provide banking services to the people of Bhutan, especially in remote locations.

Their strategy as provided by BDBL is as follows:

(i) IT Strategic Vision:

A leading digital bank in Bhutan by 2020.

(ii) IT Strategic Mission:

Deploy agile, cost effective, innovative, reliable and secure information and communication technology to:

• Support BDBL in the effective delivery of its products and services;

• Inform and empower employees at all levels;

• Position customers at the core of the company’s business operations; and

• Facilitate BDBL improve its IT environment and position it to meet future challenges. 5. RECOMMENDED PROJECT – BDBL / CIC Development

This initiative will be one of the most significant projects in the financial services market. BDBL will be a leader in taking BB to remote locations of Bhutan.


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6. OUT OF SCOPE

Any other BDBL project not directly associated with this project.

7. PROJECT RESOURCES

A Steering Group should be established with membership made up of stakeholders (RMA /ADB (or their representative) / the Banks). Critical to the success of any project is the calibre and skill set of the Project Management and the support structure around them. The appointment of a skilled Senior Project Manager with both IT and Change Management skills is recommended. The Project Manager should consider the team that they require to successfully deliver the project within the agreed time lines. The MFSE considers that the part time (as required) services of a Banking Specialist (BS) may be required to adjudicate between any differences of opinions between the Banks. The MFSE believes the assistance of a Human Resource (HR) Expert / Trainer skilled in adult education and development of training materials / manuals would be of considerable benefit. The HR Expert will need to work with BDBL staff to formulate training material for both staff and the public. An education programme for people in remote locations will assist with the buy-in of BB. Note: The BS and HR Expert could work across other ADB led projects.

8. PROJECT COSTS

The MFSE is not an IT expert and therefore is not qualified to provide any IT assessment in terms of architecture or infrastructure. Therefore the costs below are only broad brush estimates based on the information that the MFSE has been able to gather on enquiries. BDBL has a strategic partnership with Tech Mahindra Ltd for the provision of Solutions and POS devices. These POS machines take 45 – 60 days to be received from the date of order.

Senior Project / Change Manager (Full Time) USD 200,000 Human Resource Expert / Trainer (Part Time) USD 50,000 Banking Specialist (Part Time) USD 50,000 POS Machines – 300 units at USD450 USD 135,000 Piggy Banks / Money Box 15,000 units at USD20 USD 300,000 System Development, Connectivity and Integration and USD 150,000 Marketing USD 25,000 Sub Total USD 910,000

Contingency (10%) USD 91,000 Total Estimate USD1,001,000 The MFSE has not costed the time of BDBL staff on the project as this will form only part of their day to day activities. Note: 1. This cost is an estimate only and will need to be developed by the Senior Project / Change Manager (SPMC). 2. SPMC’s & Banking Specialist time could reduce once the roll process is defined. 3. Human Resource / Trainer will need to develop training for BDBL and the people of Bhutan.


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4. BDBL advise 100,000 Piggy Banks will be required, however the MFSE has allowed for 15,000 until acceptance of product offering is better understood - this needs to be discussed with BDBL.

Note: Mr Dorji of BDBL is currently overseas and BDBL are yet to confirm costs and certain information.

9. PROJECT BENEFITS

The benefits at this stage are largely social and the achievement of various Government lead strategic initiatives.

• Development of BB;


• G2C;

• ICT;

• DITT Programme. The MFSE believes that a discussion with the Government should be held to negotiate a fee for the services provided. The Government of Bhutan are already providing tax incentives to BDBL in support of these initiatives. The development of training material and manuals will greatly benefit the BDBL. An education programme should be developed for the people of Bhutan.


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Roadmap Matrix

MILESTONES:

Priority: High





Days = Working Days

1. Consider the Recommendations of the MFSE

ABD to consider and engage with Government of Bhutan in respect of funding this project. Consideration should also be given to the establishment of a Steering Group comprising ADB and RMA representatives.

ABD and Government of Bhutan

Engagement with Government and establishment of funding and relevant tranche conditions.

30 days

2. Engage a dedicated Senior Project /Change Manager (SPCM)

The SPCM is to lead the project from inception through feasibility, technical review, business case development through to final implementation.

ADB / BDBL ADB Funding, engage SPCM and provide project oversight.



ADB and BDBL to agree on membership.

ADB / BDBL Appointment of Members. Same time as for task # 2

4. SPCM is to recommend the skills required within the Project Team

The MSFE believes that a Banking Specialist and Human Resource Expert / Trainer who add real value to the project but the SPCM should be considered and submit recommendations to the ADB.

Note: SPCM is responsible for the successful delivery of all tasks within the project.

SPCM Approval by ADB and, if appropriate, assist with the engagement of other consultants.




SPCM to establish a project team to deliver on all aspects of the Project.

Banking Specialist (part time) and Trainer (part time).

Note: The Bank Specialist and Human Resource Expert could work on other ADB projects.

SPCM ADB Agreement, funding of external consultants, Project oversight.



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6. Project (Roll Out) Plan

The Project Team headed by the SPCM working with BDBL is to produce an initial Project Plan, to include Terms of Reference, confirmation of costs, activities, roll out plan timetable and required outcomes.

Project Team ADB agreement to plan. 20 days – Cumulative Total 110 days.

7. Internal BDBL Human Resource Structure

Consider the structure within BDBL to support the CIC’s and drive the BB initiative.

Banking Expert / HR Expert

ADB Oversight. At the same time as task #6 above.

8. Develop Training Material

HR Expert to develop training material for:

• BDBL Staff

• People of Bhutan

HR Expert ADB Oversight. Ongoing throughout project.


As determined by the Implementation Plan and ADB approval. The MFSE believes that financial services could be rolled out to 2 CICs every 5 working days. This may increase over time as the process is fine tuned.

SPMC / Project Team ADB oversight 520 days – Cumulative Total 630 days

10. Review

Review of Project objectives and costs.

SPMC / RMA ADB oversight and close-out of project.

Note: ADB could appoint a consultant to the Steering Group to lessen its day-to-day involvement.

Road Map - Education

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Appendix L


1. BACKGROUND

The Government of Bhutan, with assistance from the Asian Development Bank, has charted a strategic direction towards providing increased “Branchless Banking” (BB) solutions in order to service people in rural locations throughout Bhutan. This is underpinned by the clear objective of the Government of Bhutan and the Banks to offer multiple delivery channels for financial services to extend the availability of banking services to the underserved populations in remote location within Bhutan. The MFSE has created two other Road Maps, namely:

1. Development of the BFS; 2. BDBL / CIC Development.

These Road Maps also contain a recommendation for a Human Resource Expert / Trainer skilled in adult education with the ability to assist in the preparation for training manuals and materials.

2. EDUCATION OBJECTIVES

Education is important for the people of Bhutan and also the RMA and Bhutan Development Bank Ltd (BDBL). People of Bhutan This is an important function of any development in financial services. As Bhutan has a large population in remote locations and as many of these people are not financially literate, education plays an even greater role here. The areas to be covered are:

• To provide education on financial services and products;

• Reinforce the use of technology and the reliability and security of these services;

• To provide the people with trust in the services and products offered; and

• The use of videos and other forms of technology to reinforce the messages.

RMA

The RMA do not have a training department or training manuals. This should be mandatory for a regulatory authority who should require a similar standard on all providers of financial services.

The areas to be covered are:

• To produce training manuals that can be used across the RMA;

• To review whether the RMA would benefit from an internal Training Department.


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BDBL

The BDBL does not have a training department or training manuals. This should be mandatory for providers of financial services.

The areas to be covered are:

• To produce training manuals that can be used across the BDBL;

• To review whether BDBL would benefit from an internal Training Department; and

• Training approach via the CIC’s

General Innovative and practical training / educational approaches such as train-the-trainer, awareness programmes on the radio etc. should be incorporated in the implementation schedule in order to handle the training volumes and geographic coverage required and also to be able to reach out to the ultimate target customers of the financially illiterate underserved rural population of Bhutan. The training and education materials should be translated into Bhutanese and suitable handouts and audio/video materials (to reach those who are not literate) should also be developed for ease of transmission and access.

3. RECOMMENDED PROJECT – EDUCATION

This initiative, working alongside BDBL / CIC Development, will be one of the most significant projects in the financial services market as BDBL will be a leader in taking BB to remote locations of Bhutan. 4. OUT OF SCOPE

This project is important and plays a key role in the other Road Maps. This should work in conjunction with the other projects, namely:

• BFS Development;

• BDBL / CIC Development. All other projects work should be excluded. 5. PROJECT RESOURCES

A Steering Group should be established with membership made up of stakeholders (RMA /ADB (or their representative) / BDBL). Critical to the success of any project is the calibre and skill set of the Human Resource / Training Expert (HRE) and the support structure around them. The appointment of a skill HRE with strong adult education skills is essential. The HRE should consider the team that they need to successfully deliver the project within the agreed time lines. The HRE could work across other related ADB led projects.


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The HRE will need to work closely with the RMA, BDBL and other Government Department staff to formulate training material for staff of the RMA, BDBL and the public. An education programme on financial services for people in remote locations is a key deliverable. 6. PROJECT COSTS

Human Resource Expert / Trainer (Part Time) USD 100,000 Materials (videos etc.)and services (translation) USD 50,000

Sub Total USD 150,000 Contingency (10%) USD 15,000

Total Estimate USD 165,000 The MFSE has not costed the time of RMA, BDBL and other Bhutan based staff on the project as this will form only part of their day to day activities. The roll out costs, which will include not only staff time but also travel costs for the deliverers of training (who have undergone train-the-trainer programmes), are also not included. Note: 1. This cost is an estimate only and will need to be developed by HRE. 2. The cost of the HRE has been spread across all 3 projects (USD200,000 in total). .

7. PROJECT BENEFITS

The benefits at this stage are largely social and the achievement of various Government-led strategic initiatives namely:

• Development of BB;

• Financial Inclusion; and

• Supports G2C and ICT initiatives.


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Roadmap Matrix

MILESTONES:

Priority: High





Days = Working Days

1. Consider the Recommendations of the MFSE.

ABD to consider and engage with Government of Bhutan in respect of funding this project. Consideration should also be given to the establishment of a Steering Group comprising ADB, RMA and BDBL representatives.

ABD and Government of Bhutan

Engagement with Government and establishment funding and relevant tranche conditions.

30 days

2. Engage a dedicated Human Resource Expert (HRE).

The HRE is to lead the project from inception through delivery of training/education.

ADB / BDBL ADB Funding, engage HRE and provide project oversight.



ADB, RMA and BDBL to agree on membership. Consideration should be given to of members from other Government Departments.

ADB / BDBL Appointment of Members. Same time as for task # 2

4. HRE is to recommend the skills required within the Project Teams.

There may need to be a different project team for the 3 projects under action. The HRE would be better placed to make this assessment.

Note: HRE is responsible for the successful delivery of all tasks within the project.

HRE Approval by ADB and if appropriate assistance with engagement of other consultants.




HRE to establish the appropriate project teams.

HRE ADB Agreement, funding of external consultants, Project oversight.


6. Project (Roll Out) Plan (BDBL / CIC); Project Team ADB agreement to plan. 20 days – Cumulative Total 110


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The Project Team headed by the HRE working with BDBL is to produce an initial Project Plan, to include Terms of Reference, confirmation of costs, activities, roll out plan timetable and required training/education outcomes for the BDBL / CIC Development

days.

7. Project (Roll Out) Plan (RMA);

The Project Team headed by the HRE working with RMA is to produce an initial Project Plan, to include Terms of Reference, confirmation of costs, activities, roll out plan timetable and required training/education outcomes for the RMA.


8. Project (Roll Out) Plan (People);

The Project Team headed by the HRE working with BDBL is to produce an initial Project Plan, to include Terms of Reference, confirmation of costs, activities, roll out plan timetable and required outcomes for the people of Bhutan.


9. Internal BDBL Human Resource Structure

Consider the structure within BDBL to support the CIC’s and drive the BB initiative.

HRE ADB Oversight. 15 days – Cumulative Total 160 days.

10. Internal RMA Human Resource Structure

Consider the structure within RMA to support the CIC’s and drive the BB initiative.

HRE ADB Oversight. 15 days – Cumulative Total 175 days.

11. Develop Training Material

HR Expert, working with the project teams, to develop training material for:

• BDBL Staff

• RMA

• Train the Trainer

• People of Bhutan (including audio/video materials)

HRE ADB Oversight. Ongoing throughout project.


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As determined by the Implementation Plan and ADB approval and in line with the roll out at CICs( The MFSE believes that financial services could be rolled out to 2 CICs every 5 working days. This may increase over time as the process is fine tuned.).

HRE / Project Team ADB oversight.

13. Review

Review of Project objectives and costs

HRE / RMA / BDBL ADB oversight and closer of project.

Note: ADB could appoint a consultant to the Steering Group to lessen its day to day involvement.

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VINSTAR Consulting

Inception Report

of




Submitted to


December 2014

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Inception Report


(SEMP) II

Prepared By:

Phil Epps


VINSTAR Consulting

PO Box2877

Auckland

New Zealand

Phone: (64 9) 3760041

Fax: (64 9) 3760046


www.vinstar.com

Preparing the Strengthening Economic Mobile Financial Services Expert - Inception Report

Management Program (SEMP) II Table of Contents

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Table of Contents

Abbreviations

Main Report



Section 3: Initial Recommendations

Section 4: Future Work Program


Appendices

Appendix A: List of People Met and Planned Meetings

Appendix B: RMA Narada Switch Connectivity

Appendix C: Bhutan Development Bank Initiative

Appendix D: Banking Distribution


Management Program (SEMP) II Abbreviations

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Abbreviations






BFS Banking Financial Switch








Nu Ngultrums

POS Point Of Sale

RICBL Royal Insurance Corporation of Bhutan Ltd


TBL T Bank Ltd


WB World Bank




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Main Report

1. Introduction


Asian Development Bank (ADB) has sponsored a project to assist the Royal Monetary Authority (RMA) in considering the legal and regulatory framework to establish / promote branchless banking initiatives in Bhutan, particularly to service people in non-urban locations, and establish a road map for branchless banking under the broader project known as “Preparing the Strengthening Economic Management Program (SEMP) II”. The Mobile Financial Services Expert (MFSE) Phil Epps arrived in Bhutan on 12 December 2014. On 13 December 2014 the MFSE met with ADB Project Officer Cigdem Akin to discuss the initial Terms of Reference (ToR) and to arrange a time to meet with the Royal Monetary Authority (RMA) on Monday 15 December 2014. The MFSE will return to Bhutan in the week commencing 12 January 2015 for a further field visit and meetings with stakeholders.


The key objectives are as follows: 1.2.1 Review the current legal and regulatory and institutional frame work for the

introduction of Branchless Banking (BB); 1.2.2 Assist the RMA in drafting guidelines, policies, or law relevant documents to

enable branchless banking or mobile financial services; 1.2.3 Formulate a road map and time schedule for piloting or launch of branchless

banking and financial service initiatives; 1.2.4 Consider the capacity of the RMA, local government, telecommunication



The project has a number of deliverables which will be covered in various reports submitted for acceptance by the ADB. This report (the Inception Report) is the first of the required reports. The Final Report and "road map" are scheduled to be submitted to the ADB by 6 February 2014. The first phase of the project has focused on gaining an understanding of the current situation in respect of branchless banking (BB) in Bhutan, meeting with key stakeholders and considering the current infrastructure that would support BB. Although it is too early to draw any firm conclusions, a few initial recommendations feature below under Section 3, Initial Recommendations.



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2. Current Status The purpose of the first field visit was to gather information and gain an understanding of the current level of branchless banking / alternate delivery (BB/AD) initiatives and consider the capacity of the various stakeholders to provide banking services to people in non-urban locations. To this end the meetings were arranged with various parties as recorded in Appendix A, List of People Met. What became apparent during this initial visit is there are a number of consultants from other donor agencies currently assisting with financial sector reform in Bhutan. In the circumstances, it is considered essential to identify specific areas where ADB can add value whilst not overlapping the inputs of other donor agencies. The RMA plays a pivotal role in providing regulatory oversight whilst also providing electronic connectivity between the Banks and settlement facilities. Therefore it was important that the MFSE gained an understanding of the technical infrastructure that supports financial institutions (branch and branchless banking) and the capacity of the systems and internal resources to provide the required level of support. Whilst not directly part of the Terms of Reference (ToR) item 1.2.4 above addresses the need for an overview of the infrastructure. The RMA switch and its ability to support BB must therefore be reviewed, but this in no way should be considered a systems audit. An external systems audit has not been undertaken since the switch was implemented. Therefore an external audit would be appropriate and will be in keeping with best practice. This is covered in more detail below under item 2.1.3.1.

The MFSE has been considering whether the current technology and existing infrastructure could support the delivery of BB to people in remote locations of Bhutan. The use of POS applications, ATMs, Community Centres and Post Offices has been under consideration. Whilst electronic transactions can be handled by ATMs or POS type devices it is also important to find a solution for the receipt and withdrawal of cash. The MFSE believes using a hub and spoke arrangement (the closest branches being the hub) would work. It has become apparent following discussions with the Bhutan Development Bank Limited (BDBL) that they are about to implement a similar strategy. This presents the ADB with an opportunity to assist. How the ADB can assist the BDBL initiative is covered in more detail below under item 3, Initial Recommendations and in Appendix C.



The Financial Markets, including the Banks, are heavily regulated. The RMA is involved

in a number of ways including:

• Regulation

• Supervision

• Establishment of interest rates (deposit and lending)



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• Approval of products and services

The MFSE has not undertaken a legal review but has concentrated on whether the

regulatory framework inhibits the ability of Banks and Non-Banks to provide BB/AD

initiatives.

The legal / regulatory framework must work for all parties. Also the interests of

consumers / customers must be protected to ensure they fully understand the benefits

and risks associated with products and services. It is most likely that customers from

more remote or non-urban locations are less financially aware and, as such, laws must be

in place to protect these consumers.

The following documents have been provided by representatives of the RMA:

• Regulations For Establishment Of A Commercial Bank in Bhutan

• Regulations For Branchless Banking In Bhutan

• Electronic Payments Regulation (Draft)

• Banking Reporting

The MFSE will review these documents from home office and will comment on them in

the Interim Report.




Provident Fund (NPPF).

The level of credit provided by the various financial institutions is presented below. Whilst

the ToR does not specifically include any requirement to comment on credit provided, the

MFSE believes it important to understand who the dominant players are so they can be

considered in any BB solution.

Note: Source RMA Bulletin



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The MFSE found that when discussing new products and micro-finance with the Banks,

there was a real reluctance because of past experience. Most Banks advised they had

experienced losses from lending in this area even when micro-loans were government

guaranteed. The MFSE was advised that the government (Labour Department) are yet to

honour the guarantees backing this type of lending.

More detail on the size and distribution of the financial institutions is covered in item 2.2.2

below.



exists with Bhutan. This infrastructure will be pivotal in supporting BB/AD in Bhutan and

getting banking to people located in non-urban locations.

2.1.3.1 RMA

BFS Switch

The RMA commissioned the establishment of a Switch approximately 3 years ago to

support ATM and POS transactions within the financial sector. Yalamanchili Software

Exports Limited (YSEL) of India provided and installed the NARADA switch and are

contracted to carry out upgrades or additional work outside the skill of the RMA IT team.

The RMA is responsible for the management and administration of this Switch. The RMA

also has responsibility for reconciliation and settlement.

A diagram showing the RMA’s switch connectivity with the other banks is provided as

Appendix B.

All five Commercial Banks in Bhutan have access to the RMA Switch via their own in-

house switches which allow customers of one Bank to transact at another Banks’ ATM /

POS. The MFSE believes this is an important step towards branchless banking.

Although the RMA Switch currently only deals with inter-bank ATM / POS transactions,

an opportunity may exist to integrate other technologies such as phone banking or

internet banking solutions. The MFSE believes that the RMA needs to work with

stakeholders to produce a blueprint for technology integration. Banks and

telecommunication companies have already introduced or are looking to introduce

technology to support customers who are adopters of technology. This is an area where

donor agencies are not currently providing assistance. The ADB should consider

supporting such an initiative to support the provision of BB to customers in remote

locations. A technology blueprint will enable a structured approach to BB and will ensure

that connectivity to the banking system is well defined and customer transactions are

online real time. Without a blueprint there is a risk of a number of disparate solutions

make connectivity between Banks and Non-Banks extremely difficult.

The MFSE is advised that the RMA has a cold disaster recovery site where data is

backed up daily. Also a Tape / CD is kept in a fire proof cabinet at the RMA’s premises.



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The RMA has been requested to provide the following:

• Systems Operations Manual

• Systems Technical Structure

• Disaster Recovery Plan

• Service Level Agreement / Account Management Contract

The above information will be reviewed by the MFSE when it is received.

Batch Processing

This is the process by which cheques are processed, reconciled and settlement

undertaken. It is also currently used for the connect point for phone banking and internet

banking. This is a batch process which is undertaken 2 hourly until 3.00 pm each day.

Consideration needs to be given to how phone banking and internet banking can be

incorporated into the BFS switch operated by the RMA. Batch processing is not

conducive with providing online real time transactions which phone banking and internet

banking are able to deliver.


To-date, the MFSE has not been able to meet with representatives of either of the

Telecommunication companies despite regular contact by the MFSE’s counterpart at the

RMA. Therefore meeting will need to be scheduled on the return of the MFSE in January

2015.

2.2 Participant Environment

2.2.1 Customers


across all Dzongkhag’s / Districts and consider how this relates to the population in those

locations.

Attached is Appendix D on Bhutan Banking Distribution. This analysis makes interesting

reading and shows that:

• The total number of Branches in Bhutan total 119

• The total number of ATMs in Bhutan total 123

• The ratio of branches to Head of Population (HOP) varies between 2,450 and

8,370

• The ratio of ATMs to HOP varies between 2,473 and 25,100

• Although Thimphu is ranked #13 by Branch to HOP it is #1 by ATM

• Although Gasa is #1 by Branch and #2 by ATM to HOP, the population at 3,579 is

the lowest - Gasa has 2 Branches and 1 ATM

These numbers and percentages need to be understood against other countries and

whether the coverage is acceptable or not. Also with Community Centres now (or soon to



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be) providing distribution for BDBL, it is important to understand how the 205 Community

Centres will alter the numbers.

The MFSE is currently undertaking this review. In addition, the MFSE is looking to review

account number data to HOP.


There are 5 Banks, namely:

1. Bank of Bhutan


Branches 46

ATMs 62




Ranking by ATMs #1



The Bank of Bhutan Ltd (BOBL) is the largest Bank on all the above measures. BOBL

also have an arrangement with the Post Office in respect of distribution. In addition, the

BOBL have a van fitted with an ATM. This van provides mobility but the van is only used

in Thimphu.

2. Bhutan Development Bank Ltd


Branches 37

ATMs 5




Ranking by ATMs #5



The Bhutan Development Bank Ltd (BDBL) has the 2nd largest branch network but has

the poorest distribution of ATMs. The MFSE was informed that there is about to be a

very significant announcement that will see BDBL substantially increase its distribution

capabilities. Please refer to Appendix C for details.

3. Druk PNB Bank Ltd


Branches 5

ATMs 14




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Ranking by ATMs #4



Druk PNB Bank Ltd (DPNBL) is largely an urban based bank.

4. T – Bank


Branches 4

ATMs 10




Ranking by ATMs #3



T-Bank (TBL) is also largely an urban based bank.

5. Bhutan National Bank Ltd


Branches 27

ATMs 32




Ranking by ATMs #2



Bhutan National Bank Ltd (BNBL) is the 2nd largest Bank by Assets and ATM distribution

but ranks 3rd in number of Branches.

Summary:

All Banks provide, short and medium term deposits and lending and have Branch

networks largely in the urban areas although both Bank of Bhutan and Bhutan

Development Bank have established strategic alliances that spread into country / rural

locations.

All Banks have ATMs and have stated they have experienced an increase in electronic

transactions. The MFSE is currently attempting to confirm the acceptance and growth in

ATMs transaction volumes.



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Insurance Companies


1. Royal Insurance Corporation Ltd

2. Bhutan Insurance Ltd

Both insurance companies make credit available to the public. The MFSE will meet with

these parties on his return to Bhutan.

Pension Fund

There is one namely the National Pension & Provident Fund (NPPF) which makes credit

available to members in a limited capacity. The MFSE met with representatives of the

NPPF who are extremely keen to use BB to expand their membership and product

delivery.

2.3.4 Telecommunication Companies There are 2 Telecommunication companies, namely;

1. Bhutan Telecom (BT)

2. Tashicell

BT is already a dominant player in BB providing the B-Wallet a smart phone application

that enables customers of a Bank to undertake transactions although functionality is

believed to be limited only to transactions with the Bank the customer is with.

Telecommunications is a key component in any BB solution, therefore it is essential that

the strategy and capabilities of the telecoms sector in Bhutan is well understood.

2.3.5 Other

All 8 Financial Institutions (Bank and Non-Bank) use data from and provide data to the

Bhutan Credit Information Bureau.

3. Initial Recommendations

Whilst meeting with the Bhutan Development Bank Ltd (BDBL), the MFSE became aware

of an initiative (to be announced shortly) that will roll-out services to remote locations in

Bhutan. It appears to be a good fit for the provision of assistance by the ADB.

In the first instance it is essential that the exact implications of this initiative on the

financial markets in Bhutan are fully understood, however it is expected to change the

banking landscape. This initiative is covered in more detail in Appendix C but the

essential features are as follows.

• BDBL will takeover responsibility for financial services in all 205 Community

Centres.



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• BDBL has planned to partner with Tech Mahindra to increase its technical

capabilities in remote location via the use of smart POS machines in Community

Centres.

• These POS machines use very smart features, such as voice command and

biometrics security at 2 levels, agent and customers (this is a very sensible BB

solution and will provide banking service to people in remote areas).

The MFSE has established a good relationship with the General Manager at BDBL,

however there remains a need to build upon this relationship. The MFSE intends meet

with the MD and GM early on his return to Bhutan in the week of 12 January 2015.

In addition to following up on the BDBL initiative, the MFSE also recommends:

• ADB considers implementing a project to work with all stakeholders to create a

technology / infrastructure blueprint for the RMA and the Bhutanese banking

sector.

• An external systems audit be undertaken of the RMA Switch to ensure it has the

capabilities and capacity to deal comprehensively with BB in Bhutan.

4. Future Work Program

Given the ongoing and high volume of donor inputs to the financial sector in Bhutan, the MFSE believes it is important that the ADB now moves to confirm the areas where it will provide assistance. These areas should add value without overlapping the inputs of other donors. Such a confirmation (in line with the recommendations shown in Section 3 above) is likely to result in a change to the future work plan from that which was envisaged in the original ToR for the MFSE. In the meantime the MFSE will continue with the review and analysis of the information collected on his first field visit. The MFSE is scheduled to return on his second field visit in January to continue with the project.

5. In Conclusion

Currently the project is in the research and investigation phase. The MFSE has focussed on meeting with RMA representatives, bank representatives and sourcing statistical data to understand the level of branchless banking currently available in Bhutan and the infrastructure that supports this. The MFSE is currently awaiting additional information to be provided by counterparts and analysing that which has already been gathered. From the MFSE's review and analysis to date it is evident that branchless banking is relatively well advanced in Bhutan. There are however certain development/delivery areas where it is likely that the ADB can provide meaningful assistance (in line with Section 3 above). During the planned second visit of the MFSE, further investigation into such areas as well as consolidation of the ADB's role is recommended. Support for such a course of action by the MFSE is now requested of the ADB.

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Appendices

Appendix A: List of People Met and Planned Meetings

Appendix B: RMA Narada Switch Connectivity

Appendix C: Bhutan Development Bank Initiative

Appendix D: Banking Distribution



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Appendix A

List of People Met & Planned Meetings

A1. List of People Met

Person Position







RMA



ADB Consultant









Penjore Ugz CEO, National Pension & Provident Fund






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Person Position





A2. Planned Meetings

On the MFSE return to Bhutan he plans to reconnect with the key stakeholders and the two

Telecom operators in Bhutan.

In addition working groups will be held with key stakeholders.


Management Program (SEMP) II Appendix B

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Appendix B

RMA Narada Switch Connectivity

HOST

Bank #1

HOST

Bank #2

Switch

Bank #1

Switch

Bank #2

RMA (Narada)

Switch

ATM

Bank #1

ATM

Bank #2

Customer

Bank 1

Customer

Bank 2



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Appendix C

Bhutan Development Bank Initiative Background BDBL is the third largest Bank in Bhutan by asset value and is ultimately owned by the Government. BDBL is the 3rd largest Bank by assets but has the 2nd largest branch network. BDBL is the only bank that has shown and is still showing any real interest in maximising its distribution into the more remote areas of Bhutan. The MFSE has a meeting with Mr. Tsewang Dorji, Assistant General Manager responsible for information technology and Project Manager for an existing project that will take Branchless Banking to the remote areas of Bhutan.

Current Initiative / Project Whilst at the meeting Mr. Dorji revealed that the Prime Minister will be announcing that BDBL will take over the financial service responsibility for all Community Centres. This is a major initiative and will provide BDBL with access to 205 Community Centres throughout Bhutan in addition to its Branch and ATM network. The Community Centres are currently operated by the Post Office (PO). In addition, the MFSE was advised that the Government has provided tax incentives / tax break to assist BDBL facilitate an aggressive expansion into the rural locations with some very smart banking technology (handheld POS machines with GPS). This is largely driven under the Financial Inclusion Plan. No fees are to be charged to customers. Bhutan Telecom is providing the telecommunications for this online system. The POS machine will be using smart card technology with biometric security at two levels, agent and customer. The POS machines also have voice command. This is very smart technology and best of breed. Implementation of the POS equipment with BDBL’s switch has been carried out by Tech Mahindra which has a real presence in Banking around the region. An upgraded web site is also under development which will also allow similar functionality. From a Banking prospective this changes the landscape significantly. A Government owned Bank will be controlling the Community Centres therefore, from the MFSE’s initial discussion with Mr. Dorji, it would appear that this would restrict other banks from participating. In the future BDBL plans to extend this technology into local shops etc. It will be important to understand how locking the other Banks out (which will appear to be the outcome of this) may be seen politically. Clearly this gives BDBL a monopoly position and does skew the playing field somewhat although the other Banks that the MFSE has interviewed consider their market as the urban areas with a few branches and ATMs - they have shown no real interest in being significant players in the outlying / rural locations.

BDBL documented Information Technology (IT) Strategy: Mr. Dorji proved the MFSE with a copy of BDBL’s IT Strategy which is as follows: IT Strategic Vision: A leading digital bank in Bhutan by 2020



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IT Strategic Mission: Deploy agile, cost effective, innovated, reliable and secure information and communication technology to:

• Support BDBL in the effective delivery of its products and services

• Inform and empower employees at all levels

• Position customers at the core of the company’s business operations

• Facilitate BDBL improve its IT environment and position it to meet future challenges

Why is this important?

1. It delivers a best of breed banking solution (Branchless Banking) into the rural / remote areas using very smart technology

2. Other Banks seem to prefer to stay in the urban areas 3. It creates a banking monopoly with Government ownership and support (e.g. tax

incentives) 4. The technology is scheduled for released on a trial basis into 5 offices later this

month or early in January 2015, then a roll-out planned for next year 5. This initiative will probably make it very difficult for ADB to find a partner for a trial

unless BDBL is the trial 6. It provides the incentive to improve the connectivity of the Banks and the RMA

The MFSE has struck a good relationship with Mr. Dorji but unfortunately the Managing Director was out of Thimphu so a higher level discussion could not be had on the first field visit. Senior Management of BDBL has a strategic planning meeting scheduled and Mr Dorji has agreed to include a session on how the ADB may be able to participate in this significant undertaking. Although the MFSE has a foot in the door here, he understands that there are others interested in participating with BDBL in this initiative making it necessary for the ADB to make an urgent decision on its possible interest in supporting/participating in this initiative as the window of opportunity appears to be very narrow. Summary: Whilst the MFSE has only had initial discussions with BDBL, there is the potential for the ADB to assist with a significant development in the financial sector in Bhutan. There is further work required to understand what and how this initiative will affect banking in Bhutan. It is likely however to have a significant impact. It may also affect the Bank of Bhutan Ltd’s current arrangement with the Post Office especially if BDBL will have sole access to the Community Centres. The MFSE will maintain open communications with Mr Dorji of BDBL but it would be extremely beneficial if the ADB’s Country Representative could make contact with BDBL to show interest if this is to be the case.

Consideration: The MFSE believes that this is an important change in the banking landscape in Bhutan. The ADB could take a very proactive approach and focus on:

1. Getting involved with BDBL by assisting in the operational management and roll-out of the technology;



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2. Subject to a business case (assuming that there is one), fund part of the initiative and get some credit for this;

3. Assist the BDBL in reviewing or creating internal capacity to deal with the outcomes of this initiative;

4. Once this becomes BDBL’s pilot, a paper on its deployment and results could be made available for use in other Countries;

5. Assist the RMA to prepare the appropriate regulations for disclosure to the customer (currently only in draft);

6. Assist the RMA create a policy and blueprint for technology connectivity within the overall banking sector. Banks currently do their own but having a technology blueprint could remove batch processing in favour of electronic real time processing. If Banks keep on going their own way there will be many disparate systems making connectivity a real challenge in the future. Also Credit Card functions and the infrastructure that supports credit card transactions could be reviewed along with this exercise;

7. Assist with the training of the less financially literate/able persons in rural areas. BDBL have field officers already in place but training is a must for people in remote locations. One could assisting with some form of training via video;

8. Ensure that the appropriate regulatory oversight and structure is in place to ensure that customer rights are protected (there is little consumer protection currently);

9. National Pension and Provident Fund could be brought into the product offering (e.g. managed funds / superannuation type products) in a partnership / strategic alliance with BDBL; and

10. Other partnership-type arrangements could be formed with womens groups, farming cooperatives or similar.

The MFSE believes that BDBL would be supportive of ADB being involved in some form and in reality this is a blueprint for the future. It should be noted that this initiative has been initiated under the Financial Inclusion for the good of the people and society and is not-for-profit. What is happening at BDBL will be a very public project. Assistance provided will add real value for the Bhutanese people and the financial sector in Bhutan.


Management Program (SEMP) II Appendix D- Page 1

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Appendix D

Bhutan Banking Distribution Analysis Bank Branch & ATM Coverage by District

Compiled December, 2014

DistrictDistrict

Population

Ranking by

District

Population

Total

Branches

Total

ATM's

Ratio

Branch :

HOP

Ratio

ATM:

HOP

Ranking by

Branch : HOP

Ranking by

ATM : HOP

Thimphu 111,306 1 17 45 6,547 2,473 13 1

Chhukha 85,609 2 11 17 7,783 5,036 16 5

Samtse 68,575 3 8 5 8,572 13,715 18 17

Trashigang 54,768 4 9 7 6,085 7,824 10 9

Sarpang 43,915 5 8 5 5,489 8,783 6 13

Monggar 41,852 6 5 5 8,370 8,370 17 10

Paro 41,850 7 7 7 5,979 5,979 8 7

Samdrup-J 37,300 8 7 3 5,329 12,433 7 15

Wangdue-P 34,300 9 6 8 5,717 4,288 9 6

Punakha 26,981 10 3 2 8,994 13,491 20 16

Dagana 25,100 11 7 1 3,586 25,100 3 20

Pema Gatshel 24,645 12 4 2 6,161 12,323 12 14

Tsirang 21,209 13 3 2 7,070 10,605 15 12

Zhemgang 20,957 14 5 2 4,191 10,479 4 11

Trashi Yangtse 20,266 15 3 1 6,755 20,266 14 19

Bumthang 18,411 16 3 4 6,137 4,603 11 4

Lhuntse 17,200 17 2 1 8,600 17,200 19 18

Trongsa 14,700 18 6 2 2,450 7,350 2 8

Haa 12,600 19 3 3 4,200 4,200 5 3

Gasa 3,579 20 2 1 1,790 3,579 1 2

Total 725,123 119 123

Notes:

1) Population Statistics Source: National Statistics Bureau - 2013 Annual Dzongkhag Statistics

2) Bank Data Source: RMA, Individual Banks (BOB, BDB, BNB, DPNB,T Bank)

3) Ranking by Branch or ATM | HOP [Note: Lower is Better / Higher is Worse]

Country Statistics

Total Country Population 725,123

Districts (Dzongkhag's) 20

Total Bank Branches 119

Total Bank ATM's 123

Ratio Branch|HOP 1 Branch : 6093 persons

Ratio ATM|HOP 1 ATM : 5895 persons

1 19

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VINSTAR Consulting

Interim Report

of




Submitted to


January 2015

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Interim Report


(SEMP) II

Prepared By:

Phil Epps


VINSTAR Consulting

PO Box2877

Auckland

New Zealand

Phone: (64 9) 3760041

Fax: (64 9) 3760046


www.vinstar.com

Preparing the Strengthening Economic Mobile Financial Services Expert - Interim Report

Management Program (SEMP) II Table of Contents

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Table of Contents

Abbreviations

Main Report



Section 3: Branchless Banking Model

Section 4: Bhutan Development Bank Ltd (BDBL)

Section 5: Government to Citizen (G2C)

Section 6: RMA Capacity to Support Branchless Banking

Section 7: National Pension and Provident Fund (NPPF)

Section 8: Initial Recommendations

Section 9: Future Work Program


Appendices


Appendix B: Branchless Banking Regulations

Appendix C: Bhutan Telecom Ltd B-Wallet Statistics

Appendix D: Hub and Spoke Concept

Appendix E: Banking Distribution (Including CICs)



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Abbreviations






BFS Bhutan Financial Switch




BTL Bhutan Telecom Ltd

CIC Community Information Centre

DITT Department of Information Technology and Telecom


DRC Department of Revenue and Collection

FDI Foreign Direct Investor

G2C Government to Citizen


ICT Information and Communication Technology


MB Megabytes


Nu Ngultrums

POS Point Of Sale

RAMIS Revenue Accounting Management Information System

RBI Reserve Bank of India

RICB Royal Insurance Corporation of Bhutan Ltd


SEMP Strengthening Economic Management Program

SIM Subscriber Identity Module

SMS Short Message Service

Tashicell Tashi Infocomm Ltd (TIL)

TBL T Bank Ltd



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TIL Tashi Infocomm Ltd (Tashicell)


WB World Bank




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Main Report

1. Introduction


The Asian Development Bank (ADB) has sponsored a project to assist the Royal Monetary Authority (RMA) in considering the legal and regulatory framework to establish / promote branchless banking initiatives in Bhutan, particularly to service people in non-urban locations, and establish a road map for branchless banking under the broader project known as “Preparing the Strengthening Economic Management Program (SEMP) II”. The Mobile Financial Services Expert (MFSE), Phil Epps’s first field visit to Bhutan commenced on 12 December 2014 and his Inception Report was submitted on 29 December 2014. On 8 January 2015, ADB Project Officer (Cigdem Akin) requested that some minor alterations be made to the report. The Project Director (Gareth Davies) promptly attended to these amendments and the report was resubmitted. The MFSE returned to Bhutan in the week commencing 11 January 2015 for a further field visit and meetings with stakeholders. This report documents the progress made since the Inception Report and builds on certain aspects as a result of the following advice received from Cigdem Akin:

1. That the ADB is in principle supportive of the Bhutan Development Bank Ltd (BDBL) initiative although a more detailed understanding of the time frame is required. Please refer to Section 4 of this report for an update; and

2. That SEMP II would like to support National Pension & Provident Fund (NPPF) during the program implementation but more detail on how Branchless / Mobile Banking can benefit NPPF products is required. Please refer to Section 7 of this report.

The areas remaining to be addressed will be progressed and reported on in the Final

Report due on 6 February 2015.


They key objectives are as follows: 1.2.1 Review the current legal and regulatory and institutional framework for the

introduction of Branchless Banking (BB); 1.2.2 Assist the RMA in drafting guidelines, policies, laws or other relevant documents

to enable branchless banking or mobile financial services; 1.2.3 Formulate a road map and time schedule for piloting or launch of branchless

banking and financial service initiatives; and 1.2.4 Consider the capacity of the RMA, local government, telecommunication




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The project has a number of deliverables which will be covered in the various reports submitted for acceptance by ADB. The Inception Report was the first of such reports which was submitted on 29 December 2014 and this report (Interim Report) is the second reporting deliverable. The Final Report including the "road map" is scheduled to be submitted to the ADB by 6 February 2015.

2. Current Status The purpose of the first field visit was to gather information and gain an understanding of the current level of branchless banking / alternate delivery (BB/AD) initiatives and consider the capacity of the various stakeholders to provide banking services to people in non-urban locations. The second field visit is to discuss the initial findings of the MFSE with stakeholders and gauge the level of acceptance whilst better understanding each party’s readiness and capacity to support such initiatives. To this end, further meetings were held with various parties as recorded in Appendix A, (see A2. List of People Met on the Second Field Visit and A3. Attendees at Stakeholder Meetings). The project is progressing well with further opportunities for support by the ADB identified. What is very apparent is that a Payment Gateway is required to create a backbone for all types of electronic transactions. This is discussed later in this report.



As discussed in the Inception Report, the Financial Markets, including the Banks, are

very heavily regulated. The RMA is involved in a number of ways including:

• Regulation;

• Supervision;

• Establishment of interest rates (deposit and lending);

• Approval of products and services;

• Approval of Licenses; and

• Approval of placements of Branches and ATMs.

As reported earlier, the MFSE has not undertaken a legal review but has concentrated on

assessing whether or not the regulatory framework inhibits the ability of Banks and Non-

Banks to provide BB/AD initiatives.

The RMA has issued regulations known as “Regulation for Branchless Banking in

Bhutan”. These regulations can be found on the RMA website and are appended in the

report for ease of reference (see Appendix B).

The regulations are more descriptive than similar regulations the MFSE is familiar with.

The policy would benefit from a list of abbreviations which would make it easier to

interpret when Banks are expected to comply with certain provisions. This was apparent

in discussion with various RMA staff, DITT and other stakeholders. The MFSE is of the



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preliminary view that the regulations may require rethinking and will firm up the view once

he is able to meet with the appropriate people at the RMA.

The regulations are established under the Financial Service Act of Bhutan 2011. Chapter

19 section 362 (page 122):

‘The Authority may regulate financial services other than banking, insurance or securities

businesses by adopting regulations to establish systems off licensing and regulation consistent with

the section of this Act applicable to financial services, including but not limited to:

a) Inter corporate borrowings;

b) Pension and Provident Funds;

c) Trust funds;

d) Cooperative, lending companies, Foreign Exchange dealers or money transmitters;

and

e) Any service which is deemed financial in nature.’

The regulations allow for two models of BB:

• Bank Based (customers have a direct banking relationship); and

• Non-Bank Based (customers have no contractual relationship with a financial

institution (e.g. Bank).

The organisation providing BB services must be a company incorporated in Bhutan and

no more than 49% of its shares can be held by any Foreign Direct Investor (FDI).

There are capital requirements that the organisation providing BB services should meet -

Nu 20m on incorporation increasing to Nu50m in 5 years which may restrict Non – Bank

Based organisations. In addition to the capital requirements, an escrow account must be

maintained with the RMA. A sum of money equivalent to 50% of the total value of

transactions in a month with an initial deposit of Nu1m is required to be invested in RMA

approved securities. It is unclear as to why Banks that are already subject to RMA

oversight with capital adequacy requirements to achieve should also need to contribute to

an escrow account and the MFSE has raised this matter with the RMA.

The regulations require a member on the BB management board to be a RMA

representative. The MFSE believes this may create a conflict of interest - the RMA

regulates the BB organisation but also has a representative making decisions on the

management board. This could arise if the RMA questions a decision made by the BB

management board at a later date. The MFSE has raised this matter also with the RMA.

There are maximum limits on BB account balances and transaction limits, namely:

• Maximum balance limit in BB account (debit or credit) shall be limited to

Nu50,000; and

• Maximum transaction limits of Nu20,000 per day, Nu60,000 per month and

Nu350,000 per annum.



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The MFSE has questioned the RMA on how these transaction limits were derived and

why there is a need for restrictions especially if the BB is a Bank as Banks may already

be subject to similar regulations.

The MFSE has not been able to meet with the appropriate people at the RMA and was

requested to put his questions in an email which he has done. Although the MFSE is yet

to receive a response to these questions, the Legal Officer and the MFSE Counterpart

believe that BB Regulations will be withdrawn. It appears the World Bank is working with

the RMA on new e-Commerce Regulations and that Branchless Banking may be included

in these regulations.

The MFSE intends to seek clarification when he meets with the Deputy Governor, which

is scheduled for next week. Meanwhile the MFSE will seek clarification from the ADB

Resident Office in Bhutan in respect of the World Bank’s involvement in this area.




Provident Fund (NPPF). Many of these players are well established. These matters

were covered in the Inception Report.



exist within Bhutan. This infrastructure will be pivotal in supporting BB/AD in Bhutan and

getting banking to people located in non-urban locations.

To a large extent a suitable infrastructure already exists in Bhutan to provide BB services

although further investment in telecommunications is likely to be required over time.

When the MFSE met with representatives of the Department of Information Technology

and Telecoms (DITT), he was advised that fibre has already been laid to circa 180

Gewog’s. DITT own the fibre network and lease access to the telecommunication

companies. Also DITT advised that the speed across the network has recently been

increased to 512MB. However, it should be noted that there is only a single level of

redundancy (i.e. no back up). Over time an increase in mobile network services may

provide an additional level of redundancy.

Currently a number of Banks offer services similar to that of a BB organisation namely:



• Phone Banking (with limitations) via B-Wallet;

• ATMs;



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• POS;

• Direct Debits;

• Mobile Van; and

• Field Staff.

BB will be able to provide all these services to the public over a greater distribution

network and therefore access to a reliable telecommunications network is key. The

MFSE is of the view that the current infrastructure should not restrict any move into

Branchless Banking.

2.1.3.1 RMA

The RMA is responsible for the management and administration of the Bhutan Financial

Switch (BFS). The RMA also has responsibility for reconciliation and settlement of

interbank transactions.

As reported in the Inception Report, all five Commercial Banks in Bhutan have access to

the BFS via their own in-house switches which allow customers of one Bank to transact at

another Bank's ATM / POS. The MFSE believes that this is an important step towards

BB.

Although the BFS currently only deals with inter-bank ATM / POS transactions, a strategy

/ blue print needs to be developed to integrate other technologies such as phone banking

and internet banking solutions. The MFSE believe that the RMA needs to work with

stakeholders to produce a blue print for technology integration. Without a defined

strategy / blue print there is a risk of a number of disparate solutions which will make

connectivity between Banks and Non-Banks extremely difficult.

Therefore it is important to understand how the BFS is currently performing and whether

the existing infrastructure supports online real time transactions. The MFSE believes that

online real time transactions must be set as a goal. This sits well with Bhutan’s ICT

program.

The MFSE has analysed the information available from the RMA website and notes that

the level of unsuccessful transactions needs to be investigated because an average of

23% (over the 20 month period) of all transactions being rejected is simply unacceptable.

This can result from customer error or technical difficulties.

The table has been created from the information contained on the RMA website.



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Bhutan Financial Switch

Monthly Volume of Transactions (Apr 2013 - Nov 2014)

Month/Year

No. of ATM

Transaction

s

No. of PoS

Transaction

s

Total

Transactions

Total

Successful

Transactions

% Successful

Transactions

%

Unsuccessful

Transactions

Nov-14 109,954 423 133,198 110,377 82.9% 17.1%

Oct-14 91,274 422 122,998 91,696 74.6% 25.4%

Sep-14 107,135 386 127,931 107,521 84.0% 16.0%

Aug-14 107,240 391 133,158 107,631 80.8% 19.2%

Jul-14 99,921 352 124,456 100,273 80.6% 19.4%

Jun-14 88,958 318 117,245 89,276 76.1% 23.9%

May-14 91,274 422 122,998 91,696 74.6% 25.4%

Apr-14 89,750 386 120,293 90,136 74.9% 25.1%

Mar-14 91,950 312 122,908 92,262 75.1% 24.9%

Feb-14 86,633 291 116,413 86,924 74.7% 25.3%

Jan-14 86,897 293 109,641 87,190 79.5% 20.5%

Dec-13 93,581 324 132,904 93,905 70.7% 29.3%

Nov-13 88,817 329 118,397 89,146 75.3% 24.7%

Oct-13 278,600 352 371,550 279,710 75.3% 24.7%

Sep-13 91,022 368 118,025 91,390 77.4% 22.6%

Aug-13 130,517 503 131,020 77,461 59.1% 40.9%

Jul-13 118,922 454 119,376 94,323 79.0% 21.0%

Jun-13 115,019 401 115,420 92,402 80.1% 19.9%

May-13 109,079 341 109,420 86,288 78.9% 21.1%

Apr-13 101,161 478 101,639 83,738 82.4% 17.6%

Source: RMA - BFS Analysis Nov 2014

The level of unsuccessful transactions is improving as evidenced by the diagram below

but is still at a very high level.

The MFSE requested a report from the RMA of the unsuccessful transactions in the past

3 months and this report shows:

• 36% of unsuccessful transaction were because of Switch (time out after 40

seconds) or Communication errors (Telecom)

• 64% of unsuccessful transactions were because of customer action:

o 15% incorrect PIN;



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o 18% sufficient funds; and

o 31% other (this relates to stolen cards, incorrect account,

transaction limit reached and too many PIN attempts).

This information identifies that there is a level of additional education required at the

customer level.

Over the past 3 months the average transaction time reported by the RMA is 7 seconds

which is probably a little higher than ideal but is probably a communications issue

(telecom) rather than an actual issue with the BFS.

The MFSE remains of the view that, as the BFS is pivotal to online real time BB

transactions and because there has never been an audit of the switch since its inception,

that an audit or risk assessment be undertaken by a suitably qualified person.

Whilst an audit is recommended, it is clear that there will be a need to purchase a

software package or customise the BFS to accept internet and phone transactions.

There will also be a requirement at the Bank level for a degree of customisation. The

infrastructure blue print will also need to address resourcing. Additional project resources

will be required by the RMA to scope, identify the correct solution, liaise with the Banks

and project manage such substantial changes. In the first instance, Yalamanchili

Software Exports Limited (YSEL), the switch provider with whom the RMA has a support

agreement, should be approached. It is likely that YSEL have worked on providing a

similar Payment Gateway in the past with their other customers.

Whilst the MFSE is not an IT specialist, to progress matters and gain general acceptance,

the following action has occurred:

a. A stakeholder meeting with Senior IT people of all the Banks and RMA

staff was held at the RMA offices

The MFSE believes that this was a very successful meeting with all present

seeing the development of the BFS critical for BB. The benefits also flowed into

other areas such as achieving G2C & DITT objectives. Also, the benefit of having

an up to date, safe and reliable payment system will go a long way in convincing

less financially literate people in remote locations to use BB type products and

services.

The Banks are happy to be involved in and support in-principal the following

projects:

• An infrastructure Blue Print Plan;

• Introduction of a Payment Gateway on the BFS; and

• Assist G2C objectives.

Clearly, there will be a cost to all Banks as they will need to custom-tailor their

systems to connect to the BFS. They appreciate it is too early to understand the

implications and costs but they would like the BFS project to support the Banks'

cost of connectivity.



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The above 3 projects are interlinked and could possibly be consolidated as one

project because the analysis and outcomes are similar.

It should be noted that the Reserve Bank of India (RBI) also has a system known

as National Electronic Funds Transfer that could be considered. This system has

been offered to the Banks previously although none of the Banks took up the offer

because of the cost of connectivity.

b. Conference call with YSEL was arranged

The MFSE has emailed the YSEL representative requesting a conference call with

staff at the RMA. YSEL has responded with a timing for a conference call early

next week.


The MFSE has now met with representatives from Bhutan Telecom Ltd (BTL) and Tashi

Infocomm Ltd (TIL). It is rumoured that an Indian telecommunications company may also

enter the Bhutan market but the MFSE has been unable to substantiate this. This would

provide BB providers, the RMA and the Banks with a choice and could add a degree of

competition to the market.

2.2. Participant Environment

2.2.1 Customers

BB is all about providing customers with great and easy access to banking products and

services, regardless of where they are located. As evidenced below (see sub section

2.2.2 ) the people of Bhutan will have ready access to BB and substantially more than in

other neighbouring countries.

Acceptance of the new technology by customers in remote locations may take time as

they become familiar with and educated in relation to the new technology. Reliability,

safety and trust in the new technology are all important.

The use of Community Information Centres (CICs) to offer banking products and services

is very good for people in rural / non-urban areas. With BDBL taking control of the CICs,

trust is likely to be perceived by customers because people in Bhutan appear to have

trust in their Banks.

As evidenced by the analysis on unsuccessful transactions on the RMA switch (see sub

section 2.1.3.1 above), there is a real need for customer education. This will become

even more essential as BB is introduced in areas where there are less financially

aware/literate people. All the Banks that the MFSE has met with understand the need for

customer education and the challenges this creates.



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With the development of the CICs, there is now a medium to provide educational

programs. This can be done in the CICs either in person or through a series of specially

made videos. This is covered in a little more detail in Section 3 below.



across all Dzongkhags / Districts and consider how this relates to the population in those

locations.

The MFSE has undertaken an analysis to benchmark how Bhutan sits in comparison with

neighbouring countries for Branch and ATM distribution. To ensure that the information is

comparable, CICs have not been included in this analysis.

Source: World Bank’s 2014 States and Markets – Financial Access

Even without CICs being included, Bhutan provides a good level of banking distribution.

When CICs are included, a substantially greater level of banking facilities are available

within Bhutan as illustrated in the chart below (for greater detail see Appendix E).



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In the Inception Report the MFSE undertook an analysis of banking distribution within

Bhutan to Head of Population (HOP). This has now been updated to include CICs (see

Appendix E). The inclusion of CICs makes an extremely positive change to people’s

access to financial services as evidenced by the graph above and in more detail in

Appendix E. Thimphu at 4452 (HOP / Branch + CIC) has the worst distribution but

because this is a densely populated urban area this is not an issue. Even at this level,

distribution is more than acceptable.


Insurance Companies


1. Royal Insurance Corporation of Bhutan Ltd (RICB);

RICB are a life and general insurance company with a strong relationship with BDBL.

BDBL sell RICB insurance products. RICB understand the distribution advantage that

BDBL’s control of CICs provide and will work with BDBL to provide insurance in rural

locations. RICB also have agents in the field that sell insurance products.

2. Bhutan Insurance Ltd (BIL)

BIL is a general insurance company. BIL has agency arrangements with BNBL and

DPNBL who issue their collateral insurance with BIL. BIL did not see BB helping them

because BDBL has an agency arrangement with RICL.

Both insurance companies make limited amounts of credit available to the public.

2.2.4 Telecommunication Companies There are 2 telecommunication companies, namely:

Bhutan Telecom (BTL)

BTL is already a dominant player in BB providing the B-Wallet, a smart phone application

that enables customers of a Bank to undertake transactions, although its functionality is

believed to be limited only to transactions with the Bank the customer is with. BTL

purchased a solution and customised it to meet its requirements. BTL licence B-Wallet to

participating Banks. B-Wallet was launched in 2012 and has shown steady growth

although customer acceptance was a little slow to start with. The MFSE was advised that

customers need time to accept that the technology was safe.

Transaction numbers and the value of total transactions have increased substantially

from 2013 to 2014. Details of the statistics provided by BTL in respect of B-Wallet

transaction volumes are provided in Appendix C with an extract given below.



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2013 2104 Variance % Variance

Trans # 559,733 2,003,834 1,444,101 258%

Trans Value 238,643,092 1,246,659,881 1,008,016,789 422% Source: BTL Statistics

The MFSE has used total transaction numbers and values because even the top-up of

prepay accounts are a form of e-Commerce akin to BB.

This is important data which demonstrates the acceptance of new technologies which is

key to BB. It is more than likely that a telecommunications company may enter into BB in

the future.

Tashicell (Tashi Infocomm Ltd)

TIL do not currently offer any product similar to B-Wallet. In discussions with their

representative, it is apparent that TIL will be considering purchasing a similar offering to

B-Wallet and introducing this to the market although no definite timeframe is known.

Summary of Telecommunication Infrastructure

Telecommunications is a key component of any BB solution. Therefore it is essential that

the strategy and capabilities of the telecoms is well understood. It is also important to

understand customer acceptance of telecommunication technology. Both BT and TIL

already have technology that could, with some investment, move them into BB. After all

both BT and TIL already have the ability to store funds for their prepay service. Currently

neither of these telecommunication companies has plans to enter the BB market directly,

because of the level of investment required. BTL is happy to support the Banks through

its B-Wallet offering. TIL plans to introduce a similar service that will also support the

Banks by providing smart phone services. The MFSE believes that telecommunications

companies will in the future develop strategies to compete in providing BB services.

Discussions that the MFSE has had with representatives of DITT show that they would be

keen to see telecommunication companies enter the BB market.

As evidenced by the B-Wallet statistics above (from Appendix C), smart phone

technology is gaining customer acceptance.

The graphs below show that Bhutan customer acceptance of telephone technology is

greater than its neighbouring countries and this places Bhutan in an extremely good

position to progress with BB initiatives.



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Source: ADB Basic Statistics 2014

Most new POS equipment has the ability to utilise multiple SIM cards as redundancy.

Therefore in a scenario where BTL was the primary network via a SIM and failed, the

back-up SIM with Tashicell would provide connectivity where Tashicell has a network. So,

having two telecommunication companies provides a level of redundancy (back-up

option) in the infrastructure.

Telecommunication companies need to support BB initiatives. DITT owns the fibre, the infrastructure in the ground, which is leased to telecommunication companies. BTL is the larger of the telecommunication companies and already supports the Banks in their BB initiatives via B-Wallet and access to their networks. The B-Wallet statistics show good growth and customer acceptance. BTL provides landline and mobile services. Tashicell is largely a mobile company who is yet to provide a phone banking product although they have plans to do so in the future. Telecommunications have the capacity to support BB as the infrastructure already exist therefore BB relates more to an increase in transactions across their current networks.

The mobile networks will be key for BB especially in remote areas. This is certainly the approach being adopted by BDBL who are going to use mobile POS devices with 2 SIM cards, one telecommunications company as the primary the other as the secondary thus providing for redundancy.

Telecommunications are well placed to enter the BB market as they already use prepay and stored value technology. But like most technology providers they need distribution and a strong marketing plan and point of difference. One thing telecommunication companies do not have and will need to build to take share off the Banks is trust in the management of peoples’ money. Nevertheless the MFSE believes at some point in time once funding is available from their own capacity or from external funding telecommunication companies will enter the BB market. Currently they remain happy to support the Banks with phone technology and their networks.

A issue that will face telecommunication companies is how to transact funds across multiple banks. This is currently an issue for the Banks but with some investment (as identified by the MFSE) the BFS will provide interbank transactions. Telecommunication companies will either need to negotiate access to the BFS or build their own portal which will require the Banks buy in as customisation of their own switches will be required. The MFSE see no reason why a Telecommunication should not have access to BFS if they comply with all rules and regulations.



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3. Branchless Banking Model (BB) As previously stated in the Inception Report, the MFSE believes a “Hub and Spoke” approach is well suited to Bhutan because of access to the Community Information Centres (CICs). The diagram contained in Appendix D shows the “Hub and Spoke” concepts. Whilst the MFSE has used CICs in the example, CICs in this diagram could also represent, schools, stores, telephone outlets, group or co-operatives. Also, Branches could be replaced by the head office of large organisations such as telecommunication operators. A Branch can have responsibility for more than one CIC depending on location. In addition to CICs there is an opportunity to introduce mobile services operating from the CICs in the future. CICs also provide an avenue to provide education to customers on financial matters increasing the knowledge of the people in remote locations. Even without the BDBL initiative, CICs should not be discounted in providing training to the rural population. NPPF and the insurance companies could also (subject to agreement) use the CICs. The MFSE has spoken to BDBL about NPPF products and BDBL are very receptive (see Section 7). In summary, there is an opportunity that banking and other financial services can be provided via the CICs. This also provides the opportunity to increase people’s knowledge of a full range of financial products in rural locations.

4. Bhutan Development Bank Ltd (BDBL) The MFSE provided comment in the Inception Report about BDBLs initiative in respect of CICs and the opportunity that this presents to the ADB. The MFSE has continued to liaise with representatives of BDBL who remain keen to look at opportunities involving the ADB. Currently CICs remain under the control of the Post Office but from recent press releases (see below) it is apparent BDBL will soon take over the management of CICs providing this Bank with a substantial distribution network. Senior Management within BDBL is already working on the assumption that Cabinet will soon approve the transfer. Recent press releases:

The Bhutanese (online journal)

PM launches BDBL’s Gewog Based Banking Services in Kabesa

To commemorate 60th Birth Anniversary of Fourth Druk Gyalpo and as part of bank’s corporate social responsibility, Prime Minister Tshering Tobgay launched Gewog Based Banking Services and the Drinchen Ama Savings Scheme of Bhutan Development Bank (BDBL) in Kabesa Gewog in Punakha on 10th December.

According to press release of BDBL, the Geowg bank is to increase the accessibility of financial services without any additional costs to rural customers and introduce monthly farmers outreach banking services wherein the bank’s branch-staff visit gewog and village centers to provide financial services.



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The release says that the “Geog Based Banking Services” is a technology driven field banking service where with the help of Point of Sale (POS) device the bank shall provide a range of banking services on a real time basis at the click of button which until date were provided exclusively from the branch office.

The service facility costing over Nu 30 mn is developed in technical collaboration with Tech Mahindra of Mahindra Group conglomerate, India and South Tech Ltd. BDBL’s banking software vendor is from Bangladesh and it shall be provided in all the 205 gewogs. In the first phase, services such as cash deposits, loan repayments, withdrawals, balance inquiry, fund transfers and remittance will be there and in the second phase mobile phone top ups and utility bills payments shall be provided.

The release also says that the “Drinchen Ama Savings scheme” is a savings product, introduced as a tribute to all mothers for shaping household and family’s lives and also to inculcate savings habits. Drinchen Ama Savings box shall be distributed all Bhutanese households over a period of time. According to the release both the schemes are intended to achieve the bank’s objectives of financial inclusion and access to finance to alleviate poverty and improve living standards of the Bhutanese people as envisioned the benevolent Monarchs. It states that in order to meet diverse financial needs of the customers, the bank provide a range of credit and banking services from its 33 branch offices,6 field offices and 5 extension offices spread across the country.

The Bhutan Development Bank formerly known as Bhutan Development Finance Corporation was established on 31st January 1988 under the Royal Charter issued by His Majesty the Fourth Druk Gyalpo. The bank joined the fraternity of banking institutions in the country on 2nd March 2010 when the bank was issued a “Specialized Deposit taking” license. 22 November 2014 (extract from overall article) Pledges: With the People’s Democratic party government having completed one year and two months in office, Prime Minister Tshering Tobgay said it has got the fundamentals (of governance) correct. Speaking at the 13th meet-the-press yesterday in Thimphu, Lyonchhoen said the government wants to make Bhutan a self-reliant country by 2018, and lower dependence on external aid, so that it can finance from its own proceeds.

Lyonchhoen said Bhutan Development Bank limited (BDBL) would have branches in every gewog. This, the government will make possible by transferring the community information centres in every gewog to BDBL. He said the centres were currently underutilised and are not serving the purpose. “We’ll build a bank in every gewog. The BDFC will upgrade these centres as rural banks.”

BDBL is currently trialling smart POS technology (dual SIM) in 6 CICs. The MFSE believes that the challenge for BDBL is not now in the technology area but more in the following areas:

• Project Management of the future roll out to the other 196 CICs.

• Internal Capacity. The IT team have managed the project so far but now a business unit needs to be established to drive acceptance and usage.

• Marketing strategies need to be developed and implemented.

• 410 new staff (2 each for each CIC) needs to be recruited and trained. The MFSE is told there is no training department at BDBL or support material. This must be developed.

• Potential customers need to be educated so that a level of trust over time is achieved.

BDBL are committed to the rollout of BB to CICs. BDBL must roll out BB to 100 CICs during 2015 and the remainder in 2016. At this stage BDBL have no Project Manager nor project programme. The roll out will be very public and failure or major problems are not an option. The MFSE sees this as a real area of risk but also an opportunity for the ADB to assist. With ADB’s support, these risks can be managed and mitigated.



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BDBL’s Managing Director is away until Monday 19 January 2015, at which time the MFSE and Mr Norbu of the ADB Bhutan Office (as requested by Cigdem Akin) will meet with the team at BDBL. If ADB are keen on becoming involved, a project group should be established quickly. All stakeholders would need to participate in the project group (ADB Project Team and representatives from BDBL, BT, TIL and the RMA) as the BFS will be the backbone of financial transactions. This is an evolving real life case study which is not only exciting but could immensely benefits the people of Bhutan.

5. Government to Citizen (G2C) When the MFSE learned about a meeting of all stakeholders to be held at the Prime Minister’s office, he was able to obtain an invitation and participated in the stakeholder meeting. Representatives from all Banks, MOF, G2C, DITT, DRC, BT, TIL and RMA were all present. This again provides the ADB with a real opportunity to get involved. The Prime Minister is keen to see progress and the assistance of the ADB is likely to be greatly appreciated. This program could sit quite nicely alongside the BFS project, if that too is initiated. The meeting was productive. In essence, the Government wants to automate the collection of taxes, fees (such as passport fees, Customer Identification Cards) and enable a customer of one Bank to pay funds into a Government account possibly at another Bank. The Department of Revenue Collection (DRC) were also keen to have the payment system integrate with the Revenue Accounting Management and Information System (RAMIS). It was made very clear to all at the meeting that BDBL will be taking control of the CICs. The use of CICs was discussed and BDBL are happy to progress subject to understanding the operational matters and the development of a Payment Gateway. There are a number of operational matters that will need to be resolved but whilst not directly related to BB, the solution could be the same. By establishing a Payment Gateway on the BFS, which is already recommended by the MFSE, the funds transfer matters are resolved. The MFSE has discussed this matter with representatives of the RMA and with other stakeholders and they are all in agreement.

6. RMA Capacity to Support Branchless Banking

The capacity of the BFS has been discussed above (section 2.1.3.1) and the MFSE has already recommended that an audit be undertaken because it is such an important element of BB. After a meeting of Government to Citizen (G2C) stakeholders at the Prime Minister’s office, a single payment switch has become even more relevant. The MFSE has also considered the human resource capacity within the RMA. The MFSE counterpart and other RMA management believe that they have sufficient resources to deal with day-to-day operations but any strategic or large project would need to be resourced. The MFSE is of a similar opinion but notes that there is a greater need to provide properly structured training, especially to new staff. There are neither staff training manuals nor a training department with the RMA.



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This is another opportunity for ADB assistance. As referred to above (see sub-section 2.1.3.1) there will be a need to resource specific projects to provide a solid and reliable platform for the successful delivery of BB in Bhutan.

7. National Pension and Provident Fund (NPPF)

In the feedback provided on the Inception Report, the MFSE has been requested to expand on the opportunity for NPPF. The NPPF has members throughout Bhutan but they have a mandate / strategy to increase membership in the rural / non-urban locations. To a large extent the current membership is made up of civil servants and military personal. The NPPF has supplied the table below outlining the distribution of their members.

Dzongkhag/Location Number of Members 22% contribution inflow in a month/Fund Inflow # % $ %

Belgium 2 11930 0.01% 0.01%

Bumthang 887 2882662 2.37% 2.00%

Chukha 3340 12449858 8.93% 8.64%

Dagana 615 2089994 1.64% 1.45%

Gasa 147 592376 0.39% 0.41%

Haa 419 1413025 1.12% 0.98%

India 41 188470 0.11% 0.13%

Kuwait 2 18814 0.01% 0.01%

Lhuentse 509 1645891 1.36% 1.14%

Mongar 1446 5148938 3.86% 3.57%

Paro 1933 7622840 5.17% 5.29%

Pemagatshel 599 1954804 1.60% 1.36%

Punakha 892 3195324 2.38% 2.22%

Samdrup Jongkhar 1631 5260999 4.36% 3.65%

Samtse 1816 9699052 4.85% 6.73%

Sarbang 2227 9537198 5.95% 6.62%

Swizerland 2 9514 0.01% 0.01%

Thailand 1 3886 0.00% 0.00%

Thimphu 13672 56050408 36.54% 38.88%

Trashigang 1534 5230986 4.10% 3.63%

Trashiyangtse 583 2001517 1.56% 1.39%

Trongsa 984 3343710 2.63% 2.32%

Tsirang 664 2275640 1.77% 1.58%

Wangdue 2735 8985126 7.31% 6.23%

Zhemgang 734 2544048 1.96% 1.76%

Total 37,415 144,157,010 100.00% 100.00%

Number of members and fund inflow by location

This table illustrates the issue facing NPPF but also the opportunity that exists. Three locations (Chukka, Thimphu and Wangdue) make up 53% of the membership. These locations also account for 54% of the funds flow. With BDBL soon to assume responsibility for the CICs, the opportunity exists for NPPF to establish an agency distribution relationship with BDBL to sell NPPF products (as stated earlier in the report, BDBL are receptive to this). This would work well for both BDBL and NPPF because BDBL will be able to generate fees for the service and NPPF will widen its distribution capability.



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Clearly this will increase the level of training required for the staff at the CICs but it also represents an opportunity to provide further training on financial matters to people in remote locations.

8. Recommendations

It is recommended that:

1. Discussions continue with BDBL to identify areas where the ADB could provide

support. As requested by Cigdem Akin, MFSE’s planned meeting on 19 January

2015 will be attended by Mr. Norbu of the ADB.

2. Consideration be given to implementing the following project(s):

a. To work with all stakeholders to create a technology / infrastructure

blueprint for the RMA and Banking sector. This is even more critical

because of G2C.

b. To evaluate a Payment Gateway solution for the BFS (for BB and G2C)

and proceed to implement.

c. To undertake a systems audit / risk assessment of the BFS.

3. Consideration be given to using the CICs as an avenue to provide training to

people in rural areas.

4. Consideration be given to assisting the RMA to create training manuals and a

training program. With the introduction of BB there will be new ways of doing

things.

5. An education programme to the public is a must and could be achieved with

BDBLs roll out to CICs. Specialist inputs in the area of training and adult

education will be the key.

6. Consideration be given to supporting the G2C project which can sit alongside the

BFS project.

9. Future Work Program

The MFSE will now look at how the roll-out of BB could occur. The outcome of the

meeting with BDBL on Monday 19 January 2015 will be important. This gives the ADB a

real BB trial, implementation experience and an opportunity to be involved at many levels.

The positive publicity may lead to other opportunities for the ADB in this area. As there is

currently no other organisation considering any BB rollout or significant BB initiative the

BDBL initiative is the only BB opportunity for the ADB to be involved in for the present.

There are of course related areas of assistance which were reviewed and discussed

earlier in this report.

The MFSE will proceed to complete the work in the remaining areas and prepare the

Final Report.



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10. In Conclusion

Whilst BB is accepted as a valid distribution strategy, not all parties have the appetite to

proceed down this path at this time. Telephone banking and internet banking solutions

will be enhanced but any real move by others to aggressively move to provide BB into

remote areas (other than BDBL) is low.

The BFS is extremely important to BB in Bhutan. The BFS is one of the key technologies to deliver safe and reliable BB services to the people of Bhutan. The BFS will at the same time achieve the requirements of G2C and DITT. The second field visit has been very productive so far with stakeholder buy-in being achieved in respect of a Payment Gateway and, if approved, the development of the BFS to become the backbone of electronic transactions. Real-time online transactions are the key to BB which creates the point of difference between technology-based BB solutions and manual over-the-counter transactions. All the research and many of the outcomes required under the ToR have already been addressed.

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Appendices

Appendix A: List of People Met on First Field Visit

Appendix B: Branchless Banking Regulations

Appendix C: Bhutan Telecom Ltd B-Wallet Statistics

Appendix D: Hub and Spoke Concept

Appendix E: Banking Distribution (Including CICs)



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Appendix A

List of People Met

A1. List of People Met on First Field Visit

Person Position







RMA



ADB Consultant









Penjore Ugz CEO, National Pension & Provident Fund







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Person Position




A2. List of People Met on Second Field Visit

Person Position



Ugyen Dhendup Deputy Managing Director, Bhutan Development Bank Ltd


Sangay Wangdi General Manager (Marketing Division), Bhutan Telecom Ltd

Pasang Wangdi Manager – Product Management, Bhutan Telecom Ltd

Phub Dorji Head MIS, Tashi Infocomm Ltd


Tshering Gyaltshen CEO, Bhutan Insurance Ltd


RMA

Namgyal Lhendup CEO, Royal Insurance Corporation of Bhutan Ltd

Namgay Phuntsho Head of IT, T-Bank

Jigme Tenzing Chief ICT Officer, Department of Information Technology and

Telecom

Sonam Penjor Deputy Chief ICT Officer, Department of Information Technology

and Telecom

Sonam Tobgay Senior ICT Officer, Department of Information Technology and

Telecom

Dechen Chhoeden ICT Officer, Department of Information Technology and Telecom

A.Vijaya Kumar Head CBS IT Department, Bank of Bhutan Ltd



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Ugyen Dorji Manager IT Department, Bank of Bhutan Ltd

D. Samten Chhofel Head of IT, Druk PNB Bank

A3. List of Attendees at Stakeholder Meetings


G2C Sonam Thaye To Co-ordinate G2C RMA, MOF, Revenue, BT, TIL,

BDBL, BOBL, BNBL, TBL, DPBNB, G2C, DITT, MFSE


BB / BFS Switch

MFSE To gain agreement on the approach involving a Payment Gateway

IT Specialist from BDBL, BOBL, BNBL, TBL, DPBNB, RMA, MFSE



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Appendix B

REGULATIONS FOR BRANCHLESS BANKING IN

BHUTAN

Introduction

Background

In view of the limited access to financial services compounded by a low market

penetration in Bhutan, the RMA has initiated various measures to institute legal and

regulatory changes to support new technology–based products and services and enable

increased outreach. The RMA’s objectives to secure extension of financial services to the

poor and unbanked clients shall be met through the establishment of Branchless

Banking Financial service providers (BBFSP). Such services will not only supplement



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the banking system in Bhutan but would also promote financial inclusion by providing

cheap, reliable, efficient financial services to the unbanked communities of Bhutan.

Branchless Banking (BB) means the delivery of the financial services outside

conventional bank branches using information and communication technologies and

non‐bank retail agents.

Objectives

The objectives of these Regulations are:

• To define BB activities as a delivery channel to offer financial

services in a reliable, efficient and cost effective manner.

• To broadly outline activities that can be provided by a BBFSP.

• To serve as a set of minimum standards of data & network

security, Know Your Customer policy (KYC), customer protection and risk

management to be followed by the BBFSP desirous to offer BB services.

Ownership and Capital Requirement A BBFSP shall be a company incorporated under the Companies Act of Kingdom of

Bhutan 2000, with a minimum paid up capital of Nu.20,000,000 (Ngultrum Twenty

Million)which shall be increased to Nu. 50,000,000(Ngultrum Fifty Million) within a

period of five years after its operation.

In case of a FDI only a BB service provider will be permitted to provide BB services in

partnership with domestic companies.

In terms of ownership limits the FDI partner shall be allowed only up to 49% of the total

paid up capital.

Permissible Branchless Banking Models and Activities

These regulations are based on the two models of BB – Bank Based and NonBank

Based. A bank based model is one under which every customer has a direct

contractual relationship with a prudentially licensed and supervised financial

institution—all though the customer may deal exclusively with a retail agent who is

equipped to communicate directly with the bank.

In the nonbank based model, customers have no direct contractual relationship with

licensed financial institution. Instead, the customer exchanges cash at a retail agent (or

otherwise transfers, or arranges for the transfer of, funds) in return for an electronic

record of value. This virtual account is stored on the server of a nonbank, such as a

mobile operator or an issuer of stored‐value cards. The balance in the account can be



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used for making payments, storing funds for future use, transferring funds, and

converting back to cash at agents.

Permissible Distribution Channels

BBFSP shall be allowed to provide their services through the following channels:

(i)It can be implemented by using different agency arrangements

between the BBFSP, Bank and Telco/non‐bank and any other similar

service providers as may be approved by RMA.

(ii) Besides, other distribution channels like post office, FCB Agents,

Telephone booth operator, grocery shops/super market, Head of

Cooperatives, retired teachers and other entities as may be approved by

RMA.

Permissible Activities

Under these regulations, following products and services may be offered directly or

indirectly by the BBFSP.

(i) Opening and maintaining a BB Account. A BB account can be opened and

operated by a customer with a bank through the use of BBFSP channels. Banks

may associate such account to a centralized branchless banking unit in its head

office. Opening of such account shall be permitted upon the fulfilment of the

requirement with regard to CDD and KYC procedures as outlined under the

relevant section of this regulation

(ii) Accounttoaccount Fund transfer: Customers may transfer funds to/from

their

BB account from/to their other pre‐registered accounts (current/saving bank accounts,

loan limit accounts, credit card accounts etc.)

(iii) Persontoperson Fund Transfers: Customer can transfer funds from/to their

BB or regular account to/from BB or regular accounts of same or some other

bank (depending on the model capabilities) or to mobile numbers of other

non‐BB account holders.

(iv) Cashin and Cashout: Customers may deposit and withdraw funds to/from

their BB account using a variety of options including bank‐branch counters,

ATM machines and authorized agent locations. Such recipients need to become

a BB account holder after completion of formalities to utilize these funds. The

message (SMS) of funds transfer to such recipients should always be generated

by the FI and must contain necessary procedural details to be followed by the

recipient in order to utilize those funds. The recipients should also be able to



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utilize these funds for making utility (electricity, gas, phone/mobile phone)

payments without becoming formal BB account holder.

(v) Bill Payments: can be used to pay utility bills (e.g. Gas, Electricity, Phone etc.)

(vi) Merchant Payments: can be used to make payments for purchases of goods

and/or services.

(vii) Loan processing/disbursement/recovery follow up: BBFSP may facilitate

collection and processing of loan application and disbursement of small loan

amounts to their borrowers having BB accounts. The same accounts may be

used by customers to repay their loan instalments. The BBFSP, can also follow

up for recovery of loans.

(viii) Remittances: Can be used to send/receive remittances inside and outside

Bhutan, subject to existing regulations. To the extent possible BBFSP shall use

the RMA’s payment system particularly National Electronic Fund Transfer

System (NEFTS), NECS (Debit) and NECS (Credit).

(ix) Other Payments: Can be used to facilitate any other transactions like: receiving

dividend, receiving pension payment and any other third party payments.

However only services under serial (i,ii,iii & iv) shall be offered only by BBFSP directly,

where as other services may be permitted directly by agents/distribution channels of

BBFSP.

Customer Due Diligence and KYC norms (Bank based model) In order to facilitate the outreach of BB to the unbanked poor without undermining the

requirements of AML/CFT, all BBFSP are required to fully comply with the CDD and the

KYC policy outlined below:

KYC requirements:

(i) Filling and signing an account opening application form.


legal documents.

(iii) A biometric finger scan and a digital photo taken by a BBFSP to be

submitted to the bank and the RMA on a regular basis.

(iv) The maximum balance limit in the BB account (debit/credit) shall

be limited to Nu. 50,000.



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(v) The maximum transaction limits (debit/credit) shall be Nu. 20,000

per day and Nu. 60,000 per month and Nu. 350,000 per year.

Besides the above BBFSP must ensure that their transaction processing system is

capable of:

(i) Imposing above limits to avoid any breach.

(ii) Sending alerts to the users if they are close to a limit (These

regulations do not suggest that the banks must send such alerts.

However, the capability needs to be there.)

(iii) Identifying suspicious transactions and to report the same to the

FI’s and the RMA.

(iv) BBFSP clients shall have the option to view at least the last 10

transactions free of cost. The BBFSP shall provide printed

statement of account (for a period not more than past 12 months)

by paying a nominal fee.

Customer Due Diligence and KYC norms (NonBank Based) Under the NBB model the BBFSP shall require its customer to open a virtual account

which is stored on the server of the BBFSP.

KYC requirements:

(i) Filling and signing of application form


legal documents

(iii) a digital photo taken by a BBFSP

(iv) The maximum balance limit in the virtual account (debit/credit)

shall be limited to Nu. 25,000

(v) The maximum transaction limit shall be Nu. 20,000 per day and

Nu. 60,000 per month and Nu. 350,000 per year.

Notwithstanding the requirements under section (KYC/CDD) BBFSP are advised to

ensure that they carry out suitable due diligence in respect of the entities proposed to

be appointed as their agents/ distribution channels and also institute additional

safeguards that may be considered appropriate to minimize the agent risk.



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Roles & Responsibility of the BBFSP Management

(i) The management of the BBFSP shall ensure to safeguard itself against

liabilities which might arise out of the actions of its distribution channels, service

providers or partners.

(ii) All BBFSP shall establish a management board with a minimum of four

members, one from the RMA, one from its correspondent bank which has the

highest customer base. This board shall be responsible for strategic decisions

effective oversight and compliance and internal control functions to ensure

adherence to rules regulations and other guidelines.

(iii)The senior management of the BBFSP shall remain responsible for

maintaining an effective system of internal control and for providing active

oversight of the agent’s activities/functions.

(iv)There shall be a contingency plan to mitigate any significant disruption,

discontinuity or gap in agent’s function, particularly for high‐risk areas.

(v)The written engagement contract or service level agreement with the third

party service provider/agent shall, at a minimum:

a) Define the rights, expectations and responsibilities of both parties;

b) Set the scope of, and the fees/revenue sharing structure, the work to be

performed by the agent;

c) State that the outsourced services are subject to regulatory review and

that RMA inspecting officers shall be granted full and timely access to

internal systems, documents, reports, records and staff of the agent;

d) State that the third party service provider/agent will not perform

management functions, make management decisions, or act or appear to

act in a capacity equivalent to that of a member of management or an

employee of the BBFSP;

e) Specify that the third party service provider/agent must ensure

safe‐keeping of all relevant record, data and documents /files for at least

five years; or alternately, such record is shifted to the BBFSP at regular

pre‐specified intervals which will then ensure safe‐keeping of this record

for at least five years.

f) State that all information/data that the third party service provider/agent

collects in relation to branchless banking services, whether from the

customers or the FI or from other sources, is the property of the BBFSP,

and the entity will be provided with copies of related working

papers/files it deems necessary, and any information pertaining to the

institution must be kept confidential; and



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g) Establish a protocol for changing the terms of the service contract and

stipulations for default and termination of the contract.

h) Mention suitable limits on cash holding by agents/distribution channels

as also limits on individual customer payments and receipts.

i) State the requirement that the transactions are accounted for and

reflected in the BBFSP books by end of day or next working day.

Agent Due Diligence (ADD)

(i)All BBFSP shall have clear, well documented ADD policy and procedures

approved by the RMA. Amongst others these policies and procedures shall

include minimum agent selection criteria.

(ii)Due diligence agent checks to be performed at specified intervals and a list of

early warning signals and corrective actions to ensure proactive agent

management. ADD should clearly specify roles and responsibilities of various

functions in the BBFSP with regard to agent management.

(ii)Adequate publicity on the agent in the locality that he/she is going to serve

supplemented by appropriate measures to avoid him/her being misrepresented

about the intermediary engaged by them as Agent and take measures to avoid

being misrepresented.

(iii)Appropriate AML/CFT monitoring process to be complied by the agents.

(iv)All BBFSP shall execute and submit a service level agreement/ agency

agreement and any amendments thereto, detailing the functions/activities to be

performed, the respective responsibilities of the BBFSP and its third party

service provider/agent and a confidentiality clause. The arrangements with the

agents/distribution channel shall specify:

a) Suitable limits on cash holding by agents/distribution channel and

also limits on individual customer payments and receipts

b) The requirement that the transactions are accounted for and

reflected in the BBSFP books by end of the day or next working day and

c) All agreements/contracts with the customer shall clearly specify

that the BBSFP is responsible to the customer for acts of omission and

commission of the agents/distribution channel.

(v)BBFSP shall engage agents who are well established enjoying good reputation

and having confidence of the local people.

Use of ThirdParty Service Providers



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Third‐party service (TPS) providers shall provide services related only to

technological infrastructure etc. A proper service level agreement (as defined in

Section 7 (v)) must be put in place for all third‐party service arrangements.

Risk Management Program

BB entails various categories of risk, and therefore all BBFSP must have in place

proper risk management program to measure, monitor and address risk at an

appropriate level.

All BBFSP providing non‐bank based branchless services shall open accounts in

commercial banks in Bhutan in its own name. This account shall be used for pooling

and depositing the customer funds. An internal policy of matching the value in

BBFSP virtual accounts on a one‐to‐one basis with funds deposited in its bank

accounts shall be done on a regular basis.

BBFSP shall be liable to each client for the outstanding e–money in the clients

account.

All BBFSB shall deposit in an escrow account with the RMA a sum of money

equivalent to 50% of the total value of transactions in a month. However for a new

BBFSP the initial deposit shall be Nu.1, 000,000 which can be invested in the RMA

approved securities.

All transactions pertaining to this account shall be permitted upon the approval of

the RMA.

Adoption of appropriate technology

(i)BBFSP shall adopt the most appropriate technology while implementing the BB

service,

(ii) All BBFSP shall adhere to the applicable regulations of the RMA as and when

intimated in writing by the RMA.

(iii) BBFSP providing non‐bank BB services shall be required to fulfill the

following requirements:

(a) an electronic money profile containing information on technical

specification as well as e‐money management mechanisms,

(b) first year business projections,

(c) proof of legal instrument readiness (i.e., concepts of the written key

agreements with partners),

(d) proof of operational readiness (e.g. an organizational structure plan and

equipment and business facility plan),



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(e) proof of liquidity risk management readiness,

(f) an information technology audit from an independent auditor,

(g) a disaster recovery plan,

(h) identification of product risk and other risks like operational, legal, and

reputational risks, and

(i) a description of the accounting information system to be applied to the

e‐money issuance.

Customer Protection BBFSP must have in place appropriate customer protection against risks of fraud, loss of

privacy and even loss of service to establish trust among consumers as trust and

customer confidence is the single most necessary ingredient for growth of BB. Besides

in view of the fact that BBFSP will be dealing with a large number of first time

customers with low financial literacy level, they need to ensure that adequate measures

for customer protection, awareness and dispute resolution are in place.

All BBFSP are required to fulfill the following criteria:

(i) To provide adequate financial education to all their clients with regard to

the services provided by them.

(ii) To provide a list of all their distribution channels including their services

on their website and on an annual basis in the media.

(iii) To ensure the privacy & confidentiality of customer information in the

custody or possession of the BBFSP.

(iv) To have in place appropriate grievance mechanism, that should be widely

published and also placed in their website.

(v) The details should be displayed at the premises of their distribution

channels and also be made available by the BBFSP at the request of the

customer.

(vi) All service charges on account of delivery of BB Service directly or

indirectly should be approved by the RMA. This service charges should be

reasonable and be made available on the premises of the distribution

channel on a notice board visible to the customers.

(vii) Agents and persons working on behalf of the BBFSP shall be prohibited

from charging any fee to the customers directly for services rendered by

them on behalf of the BBFSP.



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(viii) All charges/fees to be paid/received by any party involved in the BB

business directly or indirectly shall be fixed at reasonable rates and be

approved by the RMA.

(ix) BBFSP shall develop suitable training modules in the local dialect, in order

to provide proper attitudinal orientation and skills to their

agents/distribution channels.

(x) Customers may also be given the option of obtaining loss insurance.

However, the voluntary nature of this insurance must be clearly

communicated to the customer.

ICT solutions that ensure proper authentication and other security measures may be

adopted to minimize the risk while scaling‐up the models as already advised. Further

BBFSP may ensure that while appointing the above entities as agent, distribution

channels, the fundamental principles that the individuals are residents of the area in

which they propose to operate as agent/distribution channels, stands fulfilled.

Branchless banking setting up procedures

Preparation Only authorized BBFSP can provide Branchless Banking services as stipulated in these

regulations. The authorization shall be given upon fulfillment of the requirement

under this regulation.

Authorization procedure

BBSFP desirous in providing BB services shall submit to the RMA, an application

describing the services to be offered and its infrastructure. The application shall be

accompanied by a certification signed by proposer to the effect that the proposed

BBFSB has complied with the minimum pre‐conditions requirement as provided in

this regulation.

A non‐refundable application fee of Nu. 50,000 (Ngultrum Fifty Thousand) in

cash/draft/cheque shall be deposited in licensing/registration account maintained

with the RMA and shall be used for expenses incurred for licensing of such providers.

A licensing processing committee shall be formed comprising of members from the

following organizations:

• FRSD, RMA

• Representative from Ministry of Economic Affairs ( Registrar of Companies)

• Representative from Commercial Bank

• Representative from Telecom Company



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General ongoing requirements

(i) All BBFSP shall report to the RMA on regular basis information pertaining to their

transactions. Besides, the BBFSP shall also provide the financial statements on a

yearly basis. This statement shall include at the minimum the balance sheet, P&L

statement & the summary of transactions.

(ii)All BBFSP shall be subject to on‐site inspection and off‐site supervision as

deemed necessary by RMA.

(iii)All BBFSP are required to appoint/open distribution channels/agents in at least

in two gewogs of each Dzongkhag, within the first two years of operation.

(iv)All relevant officers and employees of BBFSP who are directly involved in the cash

operation must undergo the training in AML/CFT regulations conducted by the RMA.

Subsequently, they must train their agents/distribution channels on a continues basis

(v)All BBFSP/agents/distribution channels must:

• For each remittance (inward as well as outward) complete a KYC/CDD

process on the sender /receiver which entails an application form and

presenting a government issued identity document along with two

passport size photograph/digital photo.

Preparing the Strengthening Economic Interim Report

Management Program (SEMP) II Appendix C

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Appendix C Bhutan Telecom Ltd B-Wallet Statistics

Total # Total Value

Trans


January 0 0 8394 552,303 0 0 0 0 0 0 567 3,558,385 8,961 4,110,688

Febuary 0 0 8270 583,071 0 0 0 0 0 0 456 3,402,041 8,726 3,985,112

March 0 0 8966 609,178 0 0 0 0 0 0 570 3,416,242 9,536 4,025,420

April 0 0 10353 724,622 0 0 0 0 0 0 713 4,910,957 11,066 5,635,579

May 0 0 13169 981,116 0 0 0 0 0 0 751 4,538,712 13,920 5,519,828

June 47 1,486 11988 804,176 0 0 0 0 18 11,565 701 4,025,572 12,754 4,842,799

July 11917 676,105 12242 851,568 0 0 0 0 1098 5,608,596 769 4,385,120 26,026 11,521,389

August 38986 2,374,040 15189 1,115,932 0 0 0 0 3431 16,495,372 786 4,893,300 58,392 24,878,644

September 62393 3,552,311 14729 950,039 0 0 0 0 5228 22,640,675 772 4,472,614 83,122 31,615,639

October 79789 4,583,300 14413 951,965 7 513 0 0 6843 31,512,098 868 4,829,616 101,920 41,877,492

November 86630 5,262,110 16517 1,180,585 12 707 0 0 7689 36,210,841 799 4,533,049 111,647 47,187,292

December 88852 5,391,149 15797 1,100,625 31 3,091 0 0 8025 41,253,322 958 5,695,023 113,663 53,443,210

Total 368,614 21,840,501 150,027 10,405,180 50 4,311 0 0 32,332 153,732,469 8,710 52,660,631 559,733 238,643,092


January 82,831 5,023,927 15,671 1,042,229 21 2,475 0 0 6,637 38,558,242 1,061 7,712,697 106,221 52,339,570

Febuary 71,323 4,489,774 16,614 1,193,542 24 4,603 0 0 6,546 37,501,967 919 6,132,779 95,426 49,322,665

March 101,972 6,288,519 17,170 1,196,047 22 4,491 0 0 10,469 55,167,826 1,207 7,960,162 130,840 70,617,045

April 117,326 6,987,998 15,665 1,081,109 22 4,830 0 0 12,254 64,115,192 1,092 6,032,482 146,359 78,221,611

May 135,863 8,352,063 15,495 1,222,121 27 10,604 4 1,596 14,270 70,807,731 958 5,912,636 166,617 86,306,751

June 139,628 8,413,674 16,637 1,144,644 27 5,165 35 17,265 16,531 78,628,446 1,171 6,471,721 174,029 94,680,915

July 135,535 8,156,548 16,876 1,142,854 21 4,378 102 46,098 14,739 81,068,452 1,182 7,738,049 168,455 98,156,379

August 160,118 10,114,411 18,804 1,361,808 70 15,077 161 68,639 25,545 138,513,464 1,179 7,385,467 205,877 157,458,866

September 158,862 10,032,252 21,170 1,550,876 71 18,718 237 103,562 22,491 113,174,109 1,368 8,166,552 204,199 133,046,069

October 159,535 10,098,909 20,706 1,543,546 73 17,466 231 98,370 23,622 116,468,499 1,540 9,624,644 205,707 137,851,434

November 143,555 8,973,614 21,482 1,688,326 74 16,239 269 119,756 22,657 117,350,089 1,541 9,541,055 189,578 137,689,079

December 162,377 10,550,852 22,245 1,720,582 97 24,880 310 132,091 23,857 126,466,666 1,640 12,074,426 210,526 150,969,497

Total 1,568,925 97,482,541 218,535 15,887,684 549 128,926 1,349 587,377 199,618 1,037,820,683 14,858 94,752,670 2,003,834 1,246,659,881

Amount

BOBL BNBL

Bwallet Report 2013

Bwallet Report 2014

Month


BOBL BNBL

# of Trans Amount # of Trans

# of TransMonth


BOBL BNBL

Amount # of Trans Amount

BOBL BNBL


Management Program (SEMP) II Appendix D

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Appendix D

Hub and Spoke Concept

Bank

Head Office

Branch Branch

Branch

CIC CIC

CIC CIC

CIC

CIC

CIC

CIC

Customer

Customer

Mobile

Service


Management Program (SEMP) II Appendix E

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Appendix E

Bhutan Banking Distribution Analysis

Bank Branch & ATM Coverage by District

Updated 14 January, 2015

DistrictDistrict

Population

Ranking by

District

Population (lowest to

Highest)

Total

Branches

Future BDBL

Financial

Services

CIC's by

District

Combined

Total

Branches

+ CIC's

Total

ATM's

Ratio

Branch :

HOP

Ratio

Combined

Branches +

CICs : HOP

Ratio ATM :

HOP

Gasa 3,579 1 2 4 6 1 1,790 597 3,579

Haa 12,600 2 3 6 9 3 4,200 1,400 4,200

Trongsa 14,700 3 6 5 11 2 2,450 1,336 7,350

Lhuntse 17,200 4 2 8 10 1 8,600 1,720 17,200

Bumthang 18,411 5 3 4 7 4 6,137 2,630 4,603

Trashi Yangtse 20,266 6 3 8 11 1 6,755 1,842 20,266

Zhemgang 20,957 7 5 8 13 2 4,191 1,612 10,479

Tsirang 21,209 8 3 12 15 2 7,070 1,414 10,605

Pema Gatshel 24,645 9 4 11 15 2 6,161 1,643 12,323

Dagana 25,100 10 7 14 21 1 3,586 1,195 25,100

Punakha 26,981 11 3 11 14 2 8,994 1,927 13,491

Wangdue-P 34,300 12 6 15 21 8 5,717 1,633 4,288

Samdrup-J 37,300 13 7 11 18 3 5,329 2,072 12,433

Paro 41,850 14 7 10 17 7 5,979 2,462 5,979

Monggar 41,852 15 5 17 22 5 8,370 1,902 8,370

Sarpang 43,915 16 8 12 20 5 5,489 2,196 8,783

Trashigang 54,768 17 9 15 24 7 6,085 2,282 7,824

Samtse 68,575 18 8 15 23 5 8,572 2,982 13,715

Chhukha 85,609 19 11 11 22 17 7,783 3,891 5,036

Thimphu 111,306 20 17 8 25 45 6,547 4,452 2,473

Total 725,123 119 205 324 123

Gew ogs

Effect of

Adding CICs

to Branch

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