Developing Countries are in the Forefront in Sustainable Banking
(Published in the Financial Express in October 2019)
Dr. Shah Md Ahsan Habib
Central banks of the developing countries have come up very strongly with various developmental and sustainability roles. The Nigeria Sustainable Banking Principles were developed by the country’s bankers committee, made up of the Central Bank of Nigeria and leading commercial banks; and Peru’s Superintendence of Banking, Insurance and Private Pension Fund Administrators launched the ‘Regulation for Social and Environmental Risk Management’ in March 2015 as a form of ‘Equator Principles Plus’. In March of 2012, the Argentinean Parliament approved a new charter for the Central Bank of Argentina that embodies some key goals of developmental central banking according to which ‘the purpose of the central bank is to promote monetary stability, financial stability, employment and economic development with social equity, within the scope of its powers and under the framework of the policies determined by the national government’. In Malaysia, the central bank played an active role in promoting financial education and ensuring fair treatment of consumers. In the Philippines, the central bank helped to double the number of access points (banking offices and ATMs) in just over 10 years. The enabling regulatory approach by the central banks of Kenya and Tanzania have resulted in tremendous expansion of mobile financial services amounts low income communities. In India, the Reserve Bank of India (RBI) has also been spearheading the movement for financial inclusion and described financial inclusion as the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular. On the way to address environmental risk management the Banco Central do Brasil was the World’s first banking regulator to ask banks to monitor environmental risks as part of the implementation of Basel III’s Internal Review for Capital Adequacy in 2011. China’s Banking Regulatory Commission began in 2007 by developing Green Credit Guidelines that evolved from an initial principle-based approach to a standardized, metrics-driven performance assessment. Indonesia’s financial regulator launched its Roadmap for Sustainable Finance, the country’s first attempt to map out the developments needed to advance sustainable finance through 2019. In Africa, Morocco’s Central Bank has committed to sustainable development as part of its formal strategy and is taking its first steps in the field of green finance. Policy makers in some Latin American countries like Brazil, Peru, Colombia, and Mexico have been very active in promoting agent banking.
In the context of developing countries, the sustainable finance initiatives varied in terms of approaches where different stakeholders play the key roles: Regulatory Approach, Industry Led Approach, and Collaborative Approach. Regulatory approach is led by financial or banking regulators, such as in China, Indonesia, Morocco, Peru and Vietnam; Industry-led Voluntary approach is led by banking associations such as in Colombia, Ecuador, Kenya, Mexico, Mongolia, Turkey and South Africa; and Collaborative approach combining industry-led initiatives and policy leadership. The collaborative approach commonly started with voluntary principles led by the banking association, then reinforced through regulatory actions led by regulators such as Brazil and Nigeria.
All these approaches are enforced using the four broad categories of banking services/products: Savings, Payment, Credit, and Insurance. A key inclusive productin broadest demand globally is safe savings. A good number of specially designed innovative credit products were made available in last two decades targeting low-income and vulnerable people. Technological advancement has brought remarkable changes in the payment services in terms of speed, safety, and feasibility. Insurance is a crucial financial service for the poor, but one that has thus far found a smaller market among poor and low-income populations than credit and savings.
In the last decade, developing countries around the world have tried to address the issues of financial exclusion through various innovative models with varying degree of success. Some developing countries have noteworthy experiences in designing and implementing inclusive products that offers invaluable lessons and information. Several models for promoting small savings worked perfectly in many instances. However, real challenges are associated with credit services. In few cases some innovative models are working. For example, cluster based financing is contributing in several developed and developing countries. In addition, Credit Guarantee Schemes is assisting small enterprises to get due financial access in many instances. For example, despite the significance and dominance of SMEs in the Turkish economy, it has not been possible to resolve their access to finance problems over the years. This led the Turkish government to undertake initiatives in 2017 with special emphasis on assisting SME financing. The Turkish experience illustrates that credit guarantee fund should be more actively involved in easing access to finance for SMEs, especially in countries where banks dominate the financial system.
Warehouse receipt financing has been benefiting farmers remarkably in almost all global regions. It offers protection against uncertainties in supply and demand, and takes advantage of economies of scale which can also be negotiable and transferable in paper or electronic form. To minimize food price volatility, farmers could use the warehouse receipt system by depositing the commodities in a warehouse after harvesting, and selling them at a later time at relatively more profitable prices. Countries like Romania, Hungary, South Africa, Zambia, Ghana, Russia, Slovakia, Bulgaria, Chechnya, Poland, Kazakhstan, Turkey, Mexico, Bulgaria, Kazakhstan, Hungary, Slovakia, Lithuania, Moldova, Uganda, Ghana, and Tanzania have successfully implemented and using warehouse receipt systems to support farmers through agricultural financing. While the practice of lending against warehouse receipts is not new to India, it received major impetus after the enactment of the Warehousing of 2007, which came into force from 2010. To promote warehouse receipt and relevant regulations UNCITRAL is working on a model regulation. Alongside warehouse receipt, micro-insurance is another crucial tool to address risk in agricultural financing to the smallholders.
It is recognized that digital financial services have the potential to bring this population, concentrated in developing countries, into the financial system. In the area of mobile banking, South Africa is among pioneering country in introducing innovative financial inclusion models by using mobile technology and Mzansi and Wizzit are their two representative products. They aimed at reducing high financial service cost by introducing ‘no-frill’ bank accounts. M-PESA and M-KESHO are cited as two successful financial inclusion products originated from Kenya that use mobile phone technology to enable financial transactions. A successful example of a mobile operator driven model can be found in Philippines named G-cash. Various financial services like mobile wallets, non-bank accounts, cash transfers etc. are offered. In India, development of lead bank system and mobile banking are noticeable. Indian central bank- RBI was the main driver behind these initiatives. In China, Uniopay introduced card services in rural areas as a part of the Chinese drive to promote inclusive finance. In some Latin American countries, Brazil, Mexico, Columbia, Peru have experimented Agent banking models in the form of banking correspondents to address the challenge of financial exclusion. They used post offices and lottery points as a delivery mechanism and operated with the concept of ‘Branchless Banking’. This model helped to simply double the number of active bank account holders in several countries of Latin America. In 2018, a study on the economics of financial services agent networks demonstrates that agent networks can flourish in areas that support healthy numbers of transactions, and in those locales, the transaction fees earned by agents more than compensate for the financial costs and operational burdens of the business.
Green banking has been offering tremendous benefits in the form of offering addressing energy sustainability, financial exclusion and environmental risk management in several developing countries. Specially, it has offered a big push in the production of renewable energy and promotion of energy efficiency. Building on this successful program and to further support finance mobilization in Chile, the Solutions Center supported the government of Chile in assessing the viability of publicly backed guarantees to manage commercial risk for RE projects in an unregulated environment. UNEP-supported Solar Home System (SHS) has contributed in this regard. The partnership between the vendors and the banks, and the subsidized loans, helped to increase the sales of SHSs. The UNEP interest rate subsidy did not cover the interest rate per se, but was calculated as an amount to buy down the interest rate over the term of the loan. The calculated subsidy amount, equal to two to six monthly loan payments on a five-year loan, is placed on deposit with the bank and applied to offset the borrower’s last monthly payments. Hence, the customer would get the subsidy only after successfully repaying the loan. ESCO is a proved model to support energy efficiency. Greater coordination and linkages amongst policy makers, market players and donor agencies worked in several instances. In the context of green and climate financing, bond market is expanding very rapidly.