Sustainable Banking 2018: Bangladesh Context
(Published in the Financial Express)
Dr. Shah Md Ahsan Habib
In the context of Bangladesh, sustainable finance approach has basically been driven by the regulatory or policy initiatives. Especially, involvement of Bangladesh Bank (BB) in attaining developmental goals by supporting attainment of the inclusive growth and poverty reduction objectives of the government can clearly be linked with sustainable finance activities of the country. Besides preserving monetary and financial stability, BB has remained proactive in its developmental role that might indicate engagement of the country’s banking sector with a social and environmental responsibility driven financial inclusion strategy. Certain interventions of the government are also concomitant with the sustainable finance drives in the country.
A sound regulatory and supervisory framework is the foundation for a sustainable finance framework in a country. If the core credit operation is inefficient then developmental ventures cannot get due attention. For creating a ‘Prudential Supervisory Framework’, the Central Bank has initiated arrangement for monitoring the overall banking sector by using international standards and also by undertaking some innovative measures. To ensure improved customer service, a key area of addressing sustainable finance’ a ‘Customer Interest Protection Centre’ (CIPC) was established in the head office and regional offices of BB in March 2012. Since the inception of the CIPC, complaints have been coming to this center everyday through telephones, mobile phones, e-mail and by post. A department named ‘Financial Integrity and Customer Services Department’ has been working for dealing with the complaints of the customers and clients of banks and financial institutions more quickly and easily. All these destined to efficient Corporate Governance and expected level of Transparency in banks. In a recent initiative, banks are asked to submit report on information of lawsuits related to Sick Industries on fortnightly basis to Ministry of Finance as well as to Banking Regulation and Policy Department of Bangladesh Bank. This is expected to improve the accountability and transparency on litigated NPLs which ultimately help banks to keep the borrowers under close monitoring with increasing chance of recover the blocked money.
BB remained proactive in its mandated developmental role, with monetary and credit policy stance supporting attainment of the government’s inclusive growth and poverty reduction goals based on national aspirations and global visions like the UN SDGs. Though Bangladesh Bank has a specific department ‘Sustainable Finance’ to take care of the key relevant areas of sustainable finance- Green Banking and CSR, activities of certain other departments of Bangladesh Bank are clearly associated with the broad definition of ‘sustainable finance’. These include Agricultural credit department, Financial Inclusion department, SME and special Program department Banking Regulation and Policy Department, Department of Off-site supervision, Financial Integrity and Customer Service Department, Payment Systems Department etc.
An integrated approach of the policy maker and the industry is the key to promote sustainable and green financing. Probably, in 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 finance. ‘Adoption of a set of Sustainable Finance Principles’ by the Central Bank and 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 continue 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. 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 System (SHS), 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. Considering the global experiences, potentials of ESCO Model could be considered for ensuring energy efficiency in garments and textile. Fixing of targets for green credit disbursement is contributing. However, 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.
Direct bank/NBFIs lending to the end users does not seem feasible in most 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 intermediary.
The existing documentation process of different banks/NBFIs and intermediaries are not same. Especially, banks follow relatively stringent documentation criteria in the process of loan disbursement. For banks, it is important to make the process less cumbersome to attract customers and create demand for green finance. 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 finance and to bring CSR funds within the core banking activities. BB may encourage banks/NBFIs in this regard. Appropriate use of Climate Risk Fund considering risk premium might be an upcoming agenda.
In spite of several initiatives, financing and market development in agriculture did not get due push. 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 push 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.
It is evident that technology driven approach is much more effective to bring unbanked poor people under the coverage of financial services. Availability of internet facility and mobile along with required devices at affordable cost, supply of uninterrupted electricity, etc. are challenges. On the other hand, managing operational risk including fraud risk is another barriers in this respect. The penetration level of mobile banking is very high. If the availability and usage can be increased, mobile banking can bring a revolution in financial inclusion. Improving services, arrangement for external evaluation, compensation for fraud and reduction of costs could contribute in expansion. Agent banking activities with the existing products may not bring expected outcome, banks need demand based products targeting rural low income population.
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.
Limited knowledge, awareness, and capacity on the green and sustainable finance interventions and products are critical challenges. Bankers, especially who 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, the policy propositions might contribute in addressing social and environmental concerns associated with financing by banks in the country. However, 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 Finance’ 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.