Banking on Sustainability

A central bank integrates financing for economic, environmental and social ends
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BB’s key priorities are sustainable approaches to rapid poverty reduction through narrowing down inequalities in advancement opportunities and in food and energy security.

High-profile international and global discourses and negotiations on combating threats to sustainability from anthropogenic climate change present an impressive collective response to a looming existential threat. But they tend to make it seem that responses must necessarily be on global and megabuck scales, overshadowing the need for smaller-scale national initiatives promoting transition to sustainable, inclusive societal lifestyle norms.

Such initiatives of transition to sustainable development paths mainly entail inclusive rechanneling of existing resources towards sustainable production and consumption options rather than the massive infusion of additional resources. Substantial engagement in such rechanneling is affordable for all economies, regardless of income levels.

Central banks, regulating monetary and financial policies, have a crucial handle on bringing about shifts of central resources towards inclusive, environmentally sustainable development options. Carefully crafted policy interventions uphold and enhance macroeconomic and financial stability within and beyond the usual time horizons of conventional monetary and financial policies, focused on business cycles. Rechanneling financing towards promoting inclusive, environmentally sustainable growth need no longer be viewed as heretical by monetarist orthodoxies now that QE and other unconventional easing measures are being tried out to prop up growth in major advanced economies. Arguably, these measures would work better with a deliberate sustainability-supportive directional bias, reducing spillovers of liquidity into the creation of destabilizing asset price bubbles.

As the country’s monetary and financial-sector regulatory authority, Bangladesh Bank (BB) is statutorily mandated to maintain price and financial system stability, while supporting the government’s objective of fostering inclusive, environmentally sustainable economic growth. It shapes and pursues monetary and financial sector policies, taking this full mandate holistically into account. Within overall envelopes of monetary expansion consistent with price and output stability, its financial sector policies promote and facilitate inclusive financing of output initiatives of all population segments, alongside promoting financing for “green” options in output processes and practices.

Growth slowdown threats from the 2008–2009 global financial crisis prompted a massive heightening of BB’s inclusive, green-financing promotion initiatives. Countrywide sustained and ongoing sensitization and motivation campaigns included all banks and financial institutions—state and privately owned, local and foreign—and clientele groups, and paid off richly in forging their enthusiastic engagement.

BB’s key priorities are sustainable approaches to rapid poverty reduction through narrowing down inequalities in advancement opportunities and in food and energy security. Targets, in terms of percentage share of total new lending, are set consultatively for agriculture, SMEs and green projects—including renewable energy, waste treatment and the adoption of environmentally benign output practices—with the aim of enhancing and stabilizing adequate sustainable financing.
Agriculture gets less than one twentieth of total bank credit, mainly from state-owned banks, despite producing around a fifth of total GDP. Given agriculture’s importance for food security, private-sector banks have been tasked to enhance their agricultural financing to at least 2.5 per cent of their total lending. SMEs, contributing around 29 per cent of GDP, get about 26 per cent of total credit; the targets are mainly to maintain stable growth in financing.
The volume of green financing is still paltry, in low single-digit percentages of total lending; the targets set are therefore higher, at 5 per cent of total new loans for older banks, 3 per cent for newly licensed banks, and 4 per cent for non-bank financial institutions. These will increase steadily, with growing emphasis on financing the green options for agriculture and SMEs.

BB now offers low-cost refinance lines to lenders against their SME and green financing. Some development partners (e.g. Asian Development Bank and Japan International Cooperation Agency) co-finance these lines, while Islamic sharia-based banks and financial institutions fund a separate line at BB that supports sharia-based SME and green financing. Macro-prudential measures, like lower equity margin requirements for socially and environmentally beneficial lending options, are also being used (e.g. loans for procuring buses require a lower equity margin than those for cars).

Environmental risk grading guidelines are being used to foster practices of differential loan pricing and equity margins, lowering financing costs for low environmental risk projects and prompting mitigating modifications in the higher risk rated ones. BB has also provided enabling infrastructure for inclusive financing, and issued guidance for adopting low-carbon, energy-efficient internal processes and practices. It led modernization of the payments system, and the financial sector IT infrastructure has spawned an exponential growth of financial service delivery based on mobile phones and smart cards, thus vastly benefiting the under-served poor. Banks without branches in rural communities lend for agriculture through microfinance institutions (MFIs) and other agents: sharecroppers can access agricultural loans from a BB-funded window, disbursed by a reputable MFI.

Inclusive and green financing initiatives of the Bangladesh financial sector include the following:
A cluster of over 1,000 handicraft-making SMEs of Jamalpur district were given Taka 1.12 billion in finance and e-commerce training by 15 banks and financial institutions in 2014, enabling them to sell their products online, locally and abroad.
Trust Bank, a private-sector commercial bank, has extended Taka 0.55 billion financing for installing 1,900 cow-dung biogas plants in rural households. These reduce dependence on fossil fuels, produce organic manure to enhance soil fertility, and foster profitable cattle rearing—all raising rural income and well-being. Financing has also been extended for installing larger biogas units, producing fuel for electricity generation.
IFIC Bank, another private-sector commercial bank, has extended Taka 0.2 billion financing for constructing a “green” knitted garment factory compliant with USGBC/LEED standards.
IDCOL, a non-bank financial institution, has financed the installation of over three million household solar PV systems in remote off-grid rural areas of Bangladesh, with a huge beneficial impact on quality of life.

BB initiatives are yielding positive outcomes in terms of macroeconomic and financial stability, domestic demand-driven broad-based inclusive growth in output and a faster decline in poverty. While the global slowdown lingers, Bangladesh’s real GDP has been growing at a steady 6+ per cent annual average rate, with declining single-digit inflation. Bangladesh’s agriculture, SMEs and green projects have faced no credit crunch at home, either during or following the global financial crisis.
Incremental output from agricultural and SME financing has helped uphold stability in output and prices in the real economy, while bolstering institutional stability in the financial sector by diversifying and broadening asset and liability portfolios in the new inclusion client bases. External sector viability of the Bangladesh economy has steadily gained strength, with strong domestic currency and foreign exchange reserves at a level covering 23 per cent of the domestic monetary base, sufficient to finance six months’ imports.

BB’s sustainability-supportive financing promotion is mainly working by rechanneling existing liquidity towards the desired directions; the modest net new liquidity infusions by way of refinance from its own funds are always kept within margins permitted by its annual monetary programmes, consistent with price stability.

Its experiences thus far with sustainable development finance promotion initiatives indicate that such initiatives can indeed be used as tools to enhance stability, rather than undermine it. The positive outcomes from these initiatives are deepening the ingraining of a socially and environmentally responsible financing institutional ethos in Bangladesh’s financial sector. ▲