Sustainability in Banking: Way Forward
(Published in the Financial Express in 2019)
Dr. Shah Md Ahsan Habib
As in most developing countries, policy makers and banks in Bangladesh are pursuing sustainable banking activities and development agendas. However, social and environmental issues may easily draw attention of the stakeholders when banks are profitable and stable. For ensuring sustained profitability the key institutional issues especially corporate governance of the banking industry must receive due impetus. Addressing financial crimes and ensuring high compliance requirements are amongst critical issues to banks and costly affairs. However, these are crucial to address to ensure sustainability and stability. It is good that a number of banks are responding fast with modern technology- a vital precondition to be competitive in the market. Being the most important source of financing, banking industry must maintain soundness and improve asset quality for ensuring sustainable growth of the country.
The policy and strategic interventions reflect BB’s intention of supporting government’s moves through realizing sustainable banking agenda in the country. Finalization and enforcement of ‘National Financial Inclusion Strategy’ would add an additional dimension to the drives that may escalate the role and involvement of banks. Coordination on this line with banks might be BB’s one of the important upcoming agenda.
Probably, for Bangladesh, it is now right time of transformation from ‘Regulatory Approach’ to ‘Collaborative Approach’ for ensuring ownership of market participants and giving the right kind of push to sustainable banking. ‘Adoption of a set of Sustainable Banking Principles’ by the associations of bankers/banks might be useful in initiating the collaborative approach. In case of renewable energy financing, selected suppliers and maintenance support institutions may be enlisted by SREDA for offering technical and other maintenance services. There could be specific criteria or certification for getting access to the soft funds of government. For making refinancing attractive to the banks/NBFIs, BB may think of introducing a system of qualification based on certain criteria for getting access to the fund at a reasonably low interest rate.Donors are expected to contribute with the marketing, awareness and capacity development program.
For sound market development and business, it is crucial to have undistorted and competitive market structure. The current green financing market has distorting components that are working as disincentive for some market participants. Some NBFIs have relatively better access to the concessional and donor funds for on-lending. It is good for the economy; however, for ensuring wider participation of banks and NBFIs, all market distorting factors must be handled with care. In this existing scenario, right market segmentation could handle the matter. Undertaking a separate research on the market segmentation might serve.
In spite of some remarkable changes and improvements in certain areas like solar home systems, and also bio-gas in certain instances, several areas of green financing remained trifling or untouched. Some of these are important and relevant from the point of view of green growth. Areas like waste management, bio-diversity, and green transportation should get due emphasis to obtain required benefits in near future. BB is working to promote industries and created special funds to support textile, leather and other export oriented industries on green and safety fronts. Considering the global experiences, potentials of ESCO Model could be considered for ensuring energy efficiency in garments and textile. Attainment of targets of 5 percent green credit disbursement might be tough for banks. For optimum outcomes, the central bank may think of fixing different targets of green loan disbursement for different banks/NBFIs with the tagged negative and positive incentive structure.
A coordinated approach for green financing might work. The financing model for renewable energy for the country might include five integrated set-up: BB as guiding/monitoring/ refinancing agency; SREDA as standardization/monitoring/technical guidance agency; intermediary as financing and maintenance support agency; banks/NBFIs as wholesale financing agency; and donors to perform the marketing and awareness development functions. In regard to SHS and bio-gas, there are evidences that users are obtaining substantial benefits mainly in the off-grid areas, and replication of these financing models could benefit a good number of rural populations.
Direct bank/NBFIs lending to the end users does not seem feasible in all scenarios of green and small scale financing. In several instances, using intermediary and partnering organizations are offering better outcomes. Especially, linkage approaches of some NGOs/MFIs at ground level are really encouraging. Thus, linkage might be preferred model, however, the capacity of the partnering organization must be enhanced to obtain optimum outcome. For banks/NBFIs, it is not always easy to identify and assess the efficiency of a financial intermediary to channel fund to the rural and semi urban areas. BB may think of assessing and enlisting some local level capable NGOs/MFIs to do the job of financing as the intermediaries of banks/NBFIs.
Contribution through CSR funds improved remarkably in terms of the volume allocated by banks. BB may encourage banks/NBFIs in this regard. BB’s Disaster Management and Social Responsibility Fund is a good addition to it. Currently, most CSR funds of banks/NBFIs are used for philanthropic purposes. CSR funds of banks may be used to offer subsidy to the sustainable financing activities to incorporate the use of CSR funds within the core banking functions.
In spite of several initiatives, financing and market development in agriculture remained less attended. Though warehouse receipts system by itself or as part of commodity exchange arrangement contributed significantly in ensuring financing to the agricultural sector in several developing and neighboring countries, Bangladesh could hardly reach near those levels. Micro insurance has also been very successful in several instances. There are huge potentials of designing and offering credit and insurance products targeting agricultural sector of the country. At the policy level there could be coordinated approach of BB and Insurance Development and Regulatory Authority (IDRA) to offer policy supports for designing need based micro insurance.
Small enterprise financing received notable policy support in recent years, however, cluster financing approach could be an alternative channel for effective small and micro enterprise financing. Though banks have finances in the SME clusters (in terms of geographic proximity), but cluster approach is missing in SME financing. It is possible to use cluster approach by forming groups and thus ensure access of small enterprises to SME financing. In case of solar irrigation, a well monitored cluster approach could benefit a large number of rural farmers by using the service of local agents. For effective micro and small financing, ‘Credit Registry Bureau’ or ‘Micro Credit Information Bureau’ might be contributory.
It is evident that technology driven approach is much more effective to bring unbanked poor people under the coverage of financial services. The penetration level of mobile banking is very high. Exploration of mobile banking can bring a revolution in financial inclusion. Improving services, compensation for fraud and reduction of costs could contribute in expansion. Agent banking started revealing market potentials. Complete enforcement of e-KYC might bring remarkable positive benefits in giving a big push to the mobile, agent and other sustainable banking moves.
Responses for school banking are remarkable, and there are further potential for enhancing financial literacy. Of the special accounts targeting underprivileged and students, the responses for school banking has been remarkable, as found in the study. Especially involvements of all types of banks have been very helpful in pushing this inclusive and literacy drive instrument. Appropriate use of technology could offer notable efficiency in this regards. There are also potentials of exploring the models of using students as local agents which may be very helpful for them by improving financial understanding and obtaining scholarships for educations. BB is working on a Financial Literacy Guideline which may escalate the efforts.
Sustainability reporting practices by banks would be true foundation of effective disclosure and transparency, however, only a few banks could manage to achieve some milestones. In the area of capacity development, limited knowledge and awareness on the green and sustainable finance interventions and products are critical challenges. Bankers, especially that are engaged at the branch/field level and the intermediaries/suppliers must be motivated and need exposure on the use, benefits and technical aspects of green products. It is likely that the customers do not have familiarity with the products and it is even possible that they haven’t heard of a green product at all. To overcome the challenge, it is important to invest more resources in outreach, demonstrations, training and awareness building.
Finally, if the key areas of bank financing activities do not sustain or do not perform in a sound manner, the developmental roles of banks for environmental and social risk management cannot be optimized. ‘Sustainable Banking’ should be promoted as an approach for having a right kind of balance between efficient banking operation in an environment of sound corporate governance and addressing the needs of the society.