Disaster Risk in Banking: Policy and Regulatory Environment
(Published in the Financial Express in 2018)
Dr. Shah Md Ahsan Habib[1]
Bangladesh is one of the most disaster-prone countries in the world. Physical hazards that could potentially cause considerable loss of life and catastrophic physical damage and disruption to society and the national economy include exceptionally widespread riverine flooding, severe tropical cyclones and associated coastal storm surges, drought and earthquakes. In addition, rapid on-set flash flooding, tornadoes and riverbank erosion are frequent causes of more localized, but nevertheless intense human suffering and losses. According to the survey of German Watch, Bangladesh is in the top third climate disaster affected country in number of events and in terms of losses per unit of GDP, Bangladesh is in fourth position in the Globe. Bangladesh has also been experiencing several manmade disasters in the form of political unrest and clash, fire and other accidents that caused huge business, economic and reputation loss over the years.
Bangladesh is experiencing climate related hazards like floods, droughts, cyclones and others for a long period of times which are being aggravating following climate change. Especially a significant part of the coastal region is threatened by salinity intrusion and submersion due to sea level rise. The general predictions are: more floods, untimely floods, more droughts, drainage congestion, salinity intrusion, more cyclones with higher intensities with extreme severity of hazards. To treat risks originating from disasters, one needs to identify the hazards in the context of livelihood systems and their level of impacts. Following independence, Bangladesh experienced deadly cyclones in 1962, 1970 and 1985. Drought in 1971, 1974 and 1982 were mentionable when price level of daily commodities raised two to three folds. The cyclone Sidr in 2007 caused damage worth 2.6 percent of GDP. The direct annual cost to the national economy of natural disasters over the last decade (damage and lost production) is estimated between 0.5 percent and 1 percent of GDP. It is well-known that the political conflicts during early 2013 resulted notable life and asset loss and GDP losses in the country. In regard to some recent incidences, in June 2017 floods and landslides in the Chittagong Hill Tract region and surrounding areas have killed 156 people. There are some recent examples of manmade disasters which cost a number of lives and infrastructures (soft and hard) losses like- Rana plaza in 2013, Tazreen Fashion in 2012, boiler explosion in garments in 2017. These are a few examples of so many. Though there is no precise estimation, there is no doubt that alongside affecting life, asset and GDP of the country, banking and financial sector was severally impacted by these incidences.
In regard to the national level disaster risk management, at the top, a body is working on disaster risks named ‘National Disaster Management Council’ headed by the Prime minister. In line with the constitutional obligations and international commitments to human rights, Bangladesh targets to be a country in which sustainability of development is ensured through better protection from climate change and natural disasters, as mentioned in ‘Perspective Plan of Bangladesh 2010-2021’. As part of the plan, the government has developed Bangladesh Climate Change Strategy and Action Plan and National Adaptation Program of Action in 2009 to respond to climate change induced development risks and National Plan for Disaster Management in 2010 to respond to disaster risks. Considering the importance of climate change financing in public financial management, a ‘Climate Fiscal Framework’ was created in 2014 jointly by the Finance Division and the Planning Commission. Focusing on the ongoing severity of different types of disaster, GoB has adopted the Disaster Management Plan 2016-20 to tackle disasters in an integrated manner under its ‘Disaster Management and Relief’ initiatives. Over the past years, the Government of Bangladesh has invested over USD billion to make the country less vulnerable to natural disasters. Besides, Government is engaged to build Flood Shelters and Relief Silos and construct and renovate Mujib Killas in disaster prone districts. These investments, in many cases supported by development partners, include flood management schemes, coastal polders, cyclone and flood shelters, and the raising of roads and highways above flood level. As per the budget document, GoB decides to develop a policy on Disaster Risk Reduction financing, considering different financing models, and allocate sufficient national budget to initiate action whilst welcoming international contributions in support of national efforts to deliver sustainable enhancement of disaster resilience.
Intergovernmental organization and donors have been playing notable roles in addressing disasters in Bangladesh. UNDP has been providing policy advisory services and capacity development to the Government of Bangladesh in risk mitigation and effective humanitarian response. After cyclone Sidr in 2007, the World Bank and the Asian Development Bank worked with the Government to repair embankments and construct new cyclone shelters. DFID has been contributing to the Climate Change Multi-donor Trust Fund which was initiated by GoB. USAID works with a number of NGOs and universities to support institutional capacity building activities as well as community disaster response simulation drills. AUSAid is in the process of integrating Disaster Risk Reduction in all their aid programs and supporting advocacy and programming for disaster risk reduction.
At the institutional level, financial institutions have some initiatives to address disaster risks. Micro Finance Institutions (MFIs) offer a number of services, which can help clients in coping with the impact of catastrophes. The services include provision of temporary loans, loan forgiveness, rescheduling of loan, asset replacement, housing loans, and loans for starting new activities. Several leading MFIs have implemented small- scale livestock micro insurance programs to protect their investment loans for dairy cattle and water buffalo livestock producers. Generally, the MFIs operate their own internal livestock indemnity funds without any form of catastrophe reinsurance protection. In a recent development, there is a ‘meso-level’ index-based flood insurance being piloted in some districts with the support of some donor agencies. A few other index-based insurance products are also being piloted by international donors. Though the country has a good number of insurance companies, a vast majority of the population, especially in rural areas, is left outside the insurance coverage in Bangladesh. In reality, insurance sector yet to move to a long way to address the required associated risks reliably.
Banking industry of the country encountered notable financial losses due to the natural and manmade disasters over the years. There are evidences that though at slow pace, the banking sector is responding to the disaster risks. Several relevant issues have been incorporated in the policy and supervisory documents of the Central Bank in recent time; and banking sector have been engaged in addressing disaster risks mainly as part of their social responsibility activities. However, the growing challenges and concerns demand much more for optimizing the risk management initiatives for sustainability of the banking industry.
[1] Professor and Director (Training), BIBM ([email protected]).
