Inclusive and innovative financing practices in Bangladesh

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1 Inclusive and innovative financing practices in Bangladesh UN Secretariat UNDESA, New York 05 November 2015 Dr. Atiur Rahman Governor, Bangladesh Bank It is a great pleasure and honor for me to be invited at UN secretariat to talk about 'inclusive and innovative financing practices in Bangladesh'. I would like to thank UNDESA, in particular, Dr. Hamid Rashid for creating this opportunity for me. Distinguished participants and officials from UNDESA, a very Good Afternoon to you all. Incorporating Inclusive Financing in Financial Sector Bangladesh Bank (BB), the monetary and financial sector regulator in Bangladesh, strongly believes that conventional monetary and financial policy approaches focused on - business as usual - short term stabilization over business cycles are not enough to address the longer term needs of inclusivity and sustainability. The reality is that there is a huge investment gap for the Sustainable Development Goals (SDGs) despite hundreds of trillions worth of assets held in other traditional sectors. Directionless pumping of liquidity by the name of quantitative easing (QE) is yielding little in sustained growth optimism while heightening instability risks as very little of these reaching growth generating startups and SME businesses in the real economy. The bulk of QE funds is going into supporting environmentally hurtful traditional output and consumption patterns and into speculative outlays in asset and commodity markets. Very recent WEO update about downward growth and looming deflationary projection particularly for Russia, the euro area, and Japan strongly substantiate this argument. Besides, anthropogenic climate change threats are adding further to the potential destabilization risks. Mandated by its charter to support output and employment growth besides controlling inflation, BB stepped into impart a deliberate directional bias channeling financial flows towards inclusive financing of environmentally sustainable domestic demand driven output initiatives. To this end BB is pursuing a host of concerted initiatives drawn up consultatively with financial intermediaries and target client bases (i.e., NGOs, private and public 1

2 stakeholders) in the relevant market segments. An ongoing campaign of ingraining socially responsible corporate ethos is helping instill the right motivations in support of the policy initiatives. This motivational consultative approach has drawn all banks and financial institutions in Bangladesh into enthusiastic engagement in the various sustainability initiatives; with their innovations of cost efficient new modes of reaching out to their new client bases with financial services. Setting Priorities and Targets for Socially Responsible Financing Environmentally sustainable approaches for rapid poverty eradication by narrowing down inequalities in advancement of opportunities, food and energy securities are our policy priorities in promoting socially responsible, inclusive and sustainable financing on four broad fronts, viz., underserved segments of agriculture, SMEs, modernization of payment system, and adoption of environmentally benign green output practices including renewable energy generation, waste treatment, adoption of low carbon output options. Priority of rural agriculture and women entrepreneurs in financing access also figured importantly in our initiatives. The consultatively set targets are incremental, aimed at raising and stabilizing sustainable financing to adequate levels. Agriculture yielding less than a fifth of annual GDP gets less than 5 percent share of total bank credit, mostly from the state owned banks. Private sector banks have therefore been tasked to enhance their agricultural financing to at least 2.5 percent of their total lending. SMEs contributing around 29 percent of GDP get about 26 percent of total credit; the targets here are intended mainly to maintain stable growth in financing. Like agricultural financing, total green financing in Bangladesh is still insignificant, with low single digit percentage share in total credit. The disbursement targets set for green financing are therefore higher, at 5% of total credit disbursements for older banks, at 3% for newly licensed banks, and at 4% for non bank financial institutions. Going forward, the target levels for green financing will heighten steadily as financing promotion in agriculture and SMEs focus increasingly on the newer green alternatives to the traditional high carbon options. By the end of 2016 every financial institution has to make sure to allocate at least 5% of its loan portfolio to green finance. Another element of BB s initiative of mainstreaming socially responsible inclusive financing is the promotion of the financial sector s CSR engagements in the communities they operate 2

3 in. As per BB guideline all banks and non-bank financial institutions have to allocate at least 2.5 percent of their net profit for CSR activities towards fostering inclusive, equitable and sustainable socioeconomic growth and development. These include inter alia grant supports to socially and environmentally beneficial projects, importantly enhancing viability of these in the take-off stage. Ingraining Developmental Policy Support by Bangladesh Bank Refinance scheme for agriculture and SME sector: Refinance windows at BB provide low cost financing lines for banks and financial institutions against their sustainable financing in the above mentioned sectors. Development partners like the ADB and JICA are co-financing alongside BB the refinance lines for SMEs and green projects. Lately, idle cash surpluses of Shariah based banks and financial institutions have also been inducted into new refinance lines to support Shariah based SME and green financing. The refinance lines are intended to be transient support at take-off stage, to be phased off as the supported initiatives gain more viability through lenders spontaneous financing in them. For agriculture typically loaded with high output risk and price risk, mitigating mechanisms in the form of functional crop insurance schemes will however be also necessary. Inclusive financing support for underserved population: Sharecropper farmers had long been excluded from formal financial system because of lack of collateral. In FY10, BB launched a refinance scheme worth Taka 5.0 billion for landless sharecroppers in partnership with BRAC, the largest non-bank MFI in Bangladesh. This is a first ever initiative for this productive group of farmers. The scheme is promoting social collateral where peer pressure ensures loan repayments and mitigates default risks. Under this scheme, BRAC has provided loans to almost 906 thousand sharecroppers in 250 upazilas in 48 districts and refinanced Taka billion till September Apart from this, state-owned banks also extend loans to sharecroppers, a sizable number of whom are women farmers. Some privately owned banks too are also coming forward to provide such loans to the sharecroppers recently, prompted by their CSR obligations. Mobile financial services, no-frill account and school banking: In order to provide banking services to the rural areas, Bangladesh Bank started the mobile banking services for the first time in Twenty six (26) banks have been licensed so far to run the mobile financial services with their agents. The number of mobile phone based accounts rose to about 28.6 million by the end of FY15, and the number of no frills Taka 10 deposit 3

4 (equivalent to about 12 cents) bank accounts for the farmers, hapless freedom fighters, garments workers, stressed street orphans and the poverty-stricken people now exceed fifteen million. BB s policy measures and support initiatives have thus created a vast inclusivity momentum for inclusive and sustainable growth. Another inclusion program called 'School Banking' registered 905 thousand account holders whose total amount of deposits stood at Taka 8.25 billion ($105.8 million) in FY15. Environmental risk grading: Macro-prudential support measures like lower equity margin requirements are being employed to favor the socially and environmentally beneficial initiatives and options. For example, financing for mass transit vehicles requires lower equity margin than for personal and family cars. BB is also among the few central banks that are pioneering environmental risk grading of financing proposals by the lenders; towards eventual adoption of differential loan pricing and differential equity margin according to environmental risk grading; lowering financing costs for lower environmental risk projects and encouraging risk mitigating modifications in the higher risk rated proposals. Besides the above outlined support and enablement measures, good performers in sustainable financing earn better BB supervisory (CAMELS) rating, with attendant preferential edge in permissions for business expansion. Automation in financial sector: BB is providing the financial sector with necessary enabling infrastructure and detailed guidance for adoption of low carbon, energy efficient internal processes and practices, including carbon footprint measurement and use of paperless e-processes. Countrywide BB led massive modernization of the financial sector IT infrastructure including fully automated online clearing and settlement of fund transfers has spawned exponential growth of off branch mobile phone based financial services, vastly benefitting the underserved and rural poor. Recent initiation of Bangladesh Real Time Gross Settlement (BD RTGS) system - the first ever milestone to real time, high value, and gross settlement based clearing system promote our payment infrastructure to a new height. Now, we proudly compare our payment and settlement system to any other payment system around the globe. Sustainability enhancing outcome Outcomes of BB s initiatives promoting socially responsible inclusive, green financing are thus far quite heartening, upholding macroeconomic stability in terms of price and financial stability supported by stable pace of inclusive output growth. Amid prolonged global growth 4

5 slowdown the Bangladesh economy is on a six plus percent average annual real GDP growth for well over a decade now, with single digit inflation on a steady declining path. The socially responsible orientation of financing has kept agriculture, SMEs and green projects in Bangladesh free from credit crunch during and following the global financial crisis. Incremental output from inclusive financing of agriculture and SMEs has helped uphold output and price stability in the real economy; while also bolstering institutional stability in the financial sector by widening and diversifying their asset and liability in the new inclusion client bases. Directed lending to rural agriculture and new SME initiatives are creating new farm and offfarm employment in hundreds of thousands every year. Countrywide spread of green finance activities and mobile phone based financial service outlets are likewise creating new employment in manufacture, assembly, maintenance and other support services. Output growth and price stability in Bangladesh are strongest in the South Asia region, with the lowest volatility. Poverty is receding fast, quite a few of the key MDGs have been attained well ahead of timeline, and Bangladesh is now ahead of her higher income large neighbor on many counts of human and social development indicators. External sector position of Bangladesh economy has strengthened substantially; with debt-gdp ratio declining to around thirty five percent, rising foreign exchange reserves now sufficient to cover six months imports, and stable strong exchange rate of Taka. South Asia s growth projections for up to 2019 indicate that Bangladesh s stable growth rate will be the highest in the region from 2017 onward, probably among the best global growth performances. Way forward in green financing promotion: Debt finance by non-financial corporates is still insignificant in Bangladesh s underdeveloped capital market. Green initiatives like other inclusive growth and development projects, therefore, remain overly dependent on financing from banks and financial institutions. Also, all the local inclusive and green initiatives are short-term in nature and generally too small in size. BB is therefore looking for ways of developing liaison between networks of local green project entrepreneurs and multilaterals like the WB, IFC that raise green bond funds on their own high credentials for investments in eligible green project initiatives. xxxxxxxxxxxxxxxxxxx 5