Sustainable Banking 2018: Innovative Approaches
(Published in the Financial Express)
Dr. Shah Md Ahsan Habib
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.
Some global group initiatives and bankers’ associations are also paying off. The Sustainable Banking Network was established in 2012 and now includes regulators from 20 countries, of which 12 have launched national policies, guidelines, principles, or road maps focused on sustainable banking. Another similar forum – Sustainable Insurance Policy Forum is similarly bringing together regulators, policymakers and industry associations to share learning and best practice on greening the insurance industry. In addition to the efforts by the Mongolian Bankers Association, many other countries are also developing sustainable banking standards, initiatives, policies or regulations. The Colombian government and the representative association of Colombian banks signed the voluntary framework and guidelines (Green Protocol) in 2012. The protocol provides a voluntary framework endorsed by the government. It sets out strategies and guidelines for banks to offer credit lines and investments that are expected to contribute to quality of life and sustainable use of renewable natural resources. The Kenya Bankers Association and the commercial banks in Kenya have developed a set of universal principles to guide banks in balancing their immediate business goals with the economy’s future priorities and socio-environmental concerns. The Central Bank of Kenya and the Kenya Bankers Association are forming a partnership to promote the effective implementation of the market-led Sustainable Finance Principles, and have also recently joined the global Sustainable Banking Network supported by the IFC.
A number of developed and developing countries have been promoting alternative financial institutions such as micro finance institutions, Self Help Groups or other local level units to ensure financial services to reach the excluded part, while others have simplified existing products to overcome the difficulties in accessing financial services. For encouraging banks, specific legal and policy declarations were made to encourage banks for ensuring continuous development and sustained financial inclusion. In the US and Canada, government enacted suitable laws to open personal accounts without minimum opening balances irrespective of the employment or credit history and with minimum requirements. Government also insisted banks to offer credit throughout their entire area of operation and prohibited them targeting only the rich neighborhoods. In United Kingdom, government identified the need for financial literacy and basic financial concepts as a critical success factor for financial inclusion. Subsequently, government started to work with banks, launched separate funds, and introduced taskforce to supervise and monitor the progress. Some banks have already attempted to introduce comprehensive environment, social and governance initiatives. 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. 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’. It released guidance on the Role of Enhanced Due Diligence in the Regulation of Socio-environmental Risk Management for Financial Firms to explain key features of the Regulation. 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 Bank 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. Policy makers in some Latin American countries like Brazil, Peru, Colombia, and Mexico have been very active in promoting agent banking.
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 some instances however, some innovative models are working. Especially, cluster based financing is contributing in several developed and developing countries.
On the way to promote agricultural credit, many emerging agri-economies such as Brazil, Indonesia and Ukraine have adopted warehouse receipts (WR) systems successfully since 2000. For more than two decades, governments and donors have supported projects to promote WR systems in Africa, especially after agricultural and financial markets were liberalized. South Africa launched a silo receipt system, which has become the most successful WR program in Africa and underpins trading on its commodity exchange. While the practice of lending against warehouse receipts is not new to India, it received major impetus in recent time.
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. Kenya has successfully used the technology platform that has lowest cost, but highest coverage. 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.
Green banking has been offering tremendous benefits in the form of offering addressing energy sustainability, financial exclusion and environmental risk management. Specially, it has offered a big push in the production of renewable energy and promotion of energy efficiency in different countries. Greater coordination and linkages amongst policy makers, market players and donor agencies worked in several instances. It is recognized that financial literacy can help to reduce the demand-side barriers to sustainable finance. Improved financial literacy can increase awareness about products and services, as well as confidence and ability in using them. Furthermore, improved financial literacy can potentially strengthen the efficiency of financial markets. School based literacy programs are working and digital way of financial literacy has started contributing in several instances. It has been proven time and again that if it’s simple and effective, technology is a big enabler for the poor. Banking correspondent services that are operating across far flung villages in a country has proved that technology can go a long way to bridge the divide.
Barriers of the sustainable financing are well recognized. The success of sustainable finance initiatives depend upon how effectively the policy makers and market players and handling the challenges and barriers. In this connection, one critical policy challenge is about creating an enabling environment for investment in and by smallholders and rural and agro based small and micro enterprises that constitute the backbone of rural economy. It is also a critical challenge for the policy makers and market players to design and introduce right kind of financial services or products targeting poor and low-income population. Practically, though there are various studies arguing the importance and impediments of inclusive financial system, there is dearth of studies suggesting appropriate designing of the products to develop inclusive financial system by minimizing the limitations of the existing one. It is also true that though there are some fundamental principles, designing generic products for underprivileged in different socio-economic conditions may not serve.
There is no doubt that sustainable finance cannot be ensured without ensuring sound and efficient core credit operation which is vital for economic and financial viability of banks. In the context of banks, the asset quality and corporate governance practices of a section of banks are knowingly concerning which indicates their inefficiency in core banking and credit operation. In broad sense, such inefficient and inappropriate allocations of banking resources are their key barriers for the sustainable financing activities.