From stipends to social allowances: How exclusive govt contracts fuelled Nagad's boom

Nagad, the country's second-largest mobile financial service (MFS) provider, created its huge customer base of over nine crore through exclusive government contracts during Sheikh Hasina's autocratic regime.

Despite lacking a Bangladesh Bank licence, Nagad became the fastest-growing MFS provider, driven by the mandate that primary and secondary students open Nagad accounts to receive government stipends.

Similarly, low-income beneficiaries of social safety net programmes were forced to use Nagad accounts to receive their allowances. These government contracts were awarded without any tender, creating an uneven playing field in the market.

With over nine crore customers, more than 70% of whom are government stipend and allowances receivers, Nagad was taken over by the Bangladesh Bank in August last year, days after the political regime change, and it appointed an administrator.

The Bangladesh Bank is now seeking new strategic investors for Nagad.

Nagad holds nearly a 38% share of the country's 23 crore MFS accounts but contributes only 20% of the Tk5,000 crore in daily transactions. This is because it has only 2.70 crore active users, while the rest are occasional users who primarily receive government stipends and allowances.

Third Wave Technologies Limited, which secured the digital financial service contract from the Bangladesh Post Office in 2017, was later rebranded as Nagad.

Despite operating for six years without a full licence, Nagad faced ongoing controversy over its legitimacy. Following the August regime change, the company now faces an ownership crisis, posing economic risks due to its vast customer base.

Nagad operated under a temporary licence, receiving seven extensions over its six-year tenure in the MFS sector.

A senior Bangladesh Bank executive, speaking on condition of anonymity, told TBS that Nagad operated under full supervision and monitoring by the central bank, as it was functioning with a No Objection Certificate (NOC).

He said Nagad took loans against customer deposits in violation of regulations, a practice detected due to the central bank's monitoring. Later, the loans were adjusted following the central bank's instruction.

According to Bangladesh Bank findings, Nagad took a Tk500 crore loan in February 2021 under the name of Third Wave Technologies from Exim Bank, using its "trust fund" – money held in customer accounts – as collateral.

This violated MFS regulations as customer deposits are a liability for the company and should not be used as loan security.

Using customer funds as loan collateral created a shortage in Nagad's account, effectively generating more e-money than the actual funds in its "trust fund".

According to MFS regulations, an MFS company's e-money must always be backed by an equivalent amount of real money in its account.

Electronic money (e-money) refers to a digitally stored monetary value issued against actual funds, which can be used for payments.

Nagad later adjusted the loan as per the central bank's instructions, with the final instalment of Tk25.60 crore due in September 2024, said Tanvir A Mishuk, then managing director of Nagad and a shareholder in both Nagad and Third Wave Technologies, during a virtual event in August.

A senior central bank executive said the only obstacle to Nagad obtaining a full licence was its failure to form a subsidiary, as required by MFS regulations. He added that lacking a licence did not offer any advantage to the company but instead fuelled controversy.

Sharing his experience, Mishuk said Nagad made every effort to form a subsidiary with the Bangladesh Post Office but ultimately failed as postal regulations did not allow it. However, he noted that the company was in the process of forming a subsidiary independently of the postal department.

The rise of Nagad, with political backing?

Inaugurated by then-prime minister Sheikh Hasina, Nagad began its journey in 2019 based on an agreement with the Postal Department. In 2023, Nagad received the "Fastest to Unicorn Award" from Hasina, despite still lacking a formal licence, which raised controversy over its legal status.

With the blessing of Hasina, the company entered into an agreement to become the sole distribution channel for government transactions, ignoring customers' right to choose other MFS options.

The latest agreement Nagad secured with the government was to become the sole distributor of the Prime Minister's Education Assistance Trust Fund, valued at Tk1,000 crore.

Nagad got the distributorship after Hasina became the prime minister for the fourth consecutive term in a controversial general election held in January 2024.

The Secondary and Higher Education Division of the Ministry of Education issued an office order on 30 January 2024, approving Nagad as its sole distributor of stipends for secondary, higher secondary and graduate levels under the trust.

According to the agreement, 34 of 54 lakh beneficiaries under the stipend fund have to transfer their accounts to Nagad from other MFS providers to avail their stipends.

This is how state-backed Nagad grew rapidly, fuelled by rumours that Sajeeb Wazed Joy, the son of ousted prime minister Sheikh Hasina, was closely affiliated with the company.

Joy was the ICT adviser to Hasina when the private company Third Wave Technologies first entered into an agreement with the Postal Department as a payment service provider under a revenue-sharing model.

Third Wave Technologies was incorporated in 2016 and got the digital financial service contract from Bangladesh Post Office in 2017 when Tarana Halim was the then state minister for the Ministry of Post and Telecommunication.

When the contract was awarded, two influential members of parliament from the Awami League – Nahim Razzaq and Razee Mohammad Fakhrul – were major shareholders of Third Wave. Another shareholder was Rezwana Nur, wife of the then-deputy press secretary to Hasina, Ashraful Alam Khokon.

Third Wave Technologies' digital service was later rebranded as Nagad when it was launched by Hasina in 2019.

Nagad began mobile banking operations without a Bangladesh Bank licence. The Postal Department later obtained interim permission, with the condition to form a subsidiary for full licensing. However, Nagad operated for six years, securing seven extensions of its NOC, fuelling controversy over political influence.

Regulations require an MFS company to be a subsidiary of a bank, financial institution, or government entity. To secure a full licence, the Postal Department had to form a subsidiary, but existing law prevented this.

Despite repeated efforts and licences granted to form a financial company as a subsidiary, Bangladesh Bank's support failed to regularise Nagad's operations.

Privileges granted to Nagad investors

After failing to form a subsidiary with the postal department, Nagad owners were awarded a licence of NBFI (Non-Bank Financial Institution) under which it can form the subsidiary.

Prior to this, the Bangladesh Bank had to amend its MFS Regulations 2022 to add a new provision by allowing non-bank financial institutions to open subsidiaries or associate companies for MFS.

However, Nagad changed its mind just two months after getting the NBFI licence and surrendered it to the central bank in July 2023 to get another licence for a Digital bank.

The Bangladesh Bank had to formulate Digital Bank guidelines for the first time, a new banking concept in the country, under the persuasion of Nagad.

Soon after approving the Digital Bank guideline in June 2023, Nagad applied for a Digital Bank licence under which it will form a subsidiary to legitimise its operation.

Though 52 companies applied for a Digital Bank licence, only two – Nagad and Kori – got the licence to form a Digital Bank. Even the application of the largest MFS provider, bKash, was turned down.

Moreover, Nagad's Digital Bank investors were given an exemption from the Bank Companies Act ownership limit allowing them to hold more than 10% shares.  

At the request of the Bangladesh Bank, the finance ministry approved the exemption. The Bangladesh Bank had to deviate from the law only for Nagad but not Kori.

Three companies hold ownership of Nagad Digital Bank exceeding the typical 10% limit: Osiris Capital Partners LLC (US), Blue Haven Ventures LLC (US) and Finclusion Ventures Pte Ltd (Singapore).

The US-based company Osiris Capital Partners LLC owns the largest stake, at 6.225 crore shares, representing nearly half (49.80%) of the bank's total shares. Tanvir Ahamad Mishuk, who holds a share of Nagad and is also the managing director of the company, serves as their representative.

Blue Haven Ventures LLC, another US company, holds 3.125 crore shares, equivalent to 24.90% ownership. Their representative is Muhammad Farid Khan, a director at Summit Group of Companies.

The Singapore-based firm Finclusion Ventures Pte Ltd owns 1.375 crore shares, translating to an 11% stake in Nagad Digital Bank. Nakib Chowdhury, a Nagad official, represents Finclusion Ventures.

In response to a question about Joy's close relationship with Nagad, Mishuk said, "I met him three times regarding postal department work and I am sure that he does not even know my name."

Mishuk, who left the country for Singapore during last year's student protest met startup founders and journalists virtually on 18 August to address questions.

In the virtual event, he said, "Companies like Paytm and Huawei would not even count me. But when they saw my photo with the then prime minister's son during the inauguration event, Huawei used to come to my office every day. So, yes, I definitely enjoyed it."

Though Nagad obtained a Digital Bank licence to form a subsidiary for its MFS operations, it later changed its approach.

In the virtual discussion, Mishuk stated, "Nagad can obtain its own licence. Why should we give shares to Digital Bank? Nagad owns 11% of Digital Bank, while outsiders hold the remaining 89%. I decided not to give shares to Digital Bank. I brought Nagad to this position through hard work, so I will run it independently and secure the licence. That's why Bangladesh Bank granted the latest NOC until June 2025. I believe I can apply for the licence by September at the latest."

He also admitted, "There's nothing preventing us from fulfilling the licensing requirements for Nagad."

Why was an administrator appointed to Nagad?

On 22 August, a week after taking office as the central bank governor under the interim government, Ahsan H Mansur appointed an administrator to Nagad, leading to the dissolution of the company's board of directors.

Additionally, six other Bangladesh Bank officials were sent to Nagad to assist the administrator – Muhammad Badiuzzaman Dider, a director of the central bank.

Prior to this, on 18 August, Mansur suspended Nagad's digital banking licence to review the licensing process.

The Bangladesh Bank has also requested information about the five US- and Singapore-based companies that hold 94% of the shares in Nagad Digital Bank PLC. This includes details about the companies' current owners' citizenship, registrations, addresses, and other business information, according to sources within the central bank.

All five foreign shareholder companies were registered between 2019 and 2023.

The appointment of an administrator halted Nagad's business growth, raising concerns among customers about the continuation of its operations.

At the same time, the strict move to take over the company revived bKash's market monopoly, leading to questions about Bangladesh Bank's intentions behind appointing the administrator.

On 17 September, the High Court issued a ruling questioning why Bangladesh Bank's decision to appoint an administrator for Nagad should not be declared illegal.

The ruling came in response to a writ petition filed by Nagad's former executive director Md Shafayet Alam.

Explaining the decision, the central bank governor stated in a press conference, "Due to various irregularities and corruption, an administrator has been appointed to the institution."

"The organisation was previously managed under the name of the Postal Department, but it was taken over by the government for public interest. Therefore, Nagad is now a fully government-owned entity," Mansur said.

In the press conference held on 22 August, Abu Taleb, director of the Directorate of Posts, said, "Over the last five years, Nagad's operations have been consistent with other specialised digital financial services, with no discrepancies observed."

During the press conference, Bangladesh Bank's Director Badiuzzaman Dider, the newly appointed administrator at Nagad, said, "The central bank's goal is to support the improvement of the mobile financial service provider, not to shut it down."

Amid rising confusion over Nagad's fate, the central bank governor in a recent event, said that they are now looking for a new strategic investor for Nagad.

He said the Bangladesh Bank will work with Nagad's new management in a bid to ready it for new strategic investors and make it a real worthy competitor of bKash.

"Our objective is not to destroy Nagad, rather it is to rebuild it much stronger," he said.

"We have lots of problems in the MFS sector. Basically, we have one player – bKash. Nagad is considered number two. But it has lots of other issues, including transparency, accountability, not having proper licence, not following the regulatory guideline and so on," he added.