THE DESIGN AND ADOPTION OF GREEN BANKING FRAMEWORK FOR ENVIRONMENT PROTECTION: LESSONS FROM BANGLADESH

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1 THE DESIGN AND ADOPTION OF GREEN BANKING FRAMEWORK FOR ENVIRONMENT PROTECTION: LESSONS FROM BANGLADESH S M Mahfuzur Rahman & Suborna Barua Department of International Business, University of Dhaka, Bangladesh ABSTRACT Bangladesh Bank, the central bank of Bangladesh and a forerunner in pursuing environment-friendly banking, designed a structured three-phase Green Banking Guideline and instructed the scheduled banks to implement it by This paper aims to present a comprehensive picture about where the country stands in terms of adopting green banking practices. Examining 42 of total 54 scheduled banks of Bangladesh, the study finds that most banks are trapped in the lower boundaries of the performance greed. The state owned banks rank low in performance while the foreign banks have considerably better achievements. The paper also identifies a number of reasons for the banks poor performance and proposes corrective measures. The lessons may be useful for redesigning banking practices around the world to save environment. JEL Code: E5, G2, G18, Q56 Key Words: Environment-friendly Banking, Sustainable Business Strategy, Green Finance, Climate Change, Sustainable Development, Social Responsibility. Corresponding Author s Address: sbarua@du.ac.bd INTRODUCTION Global warming and climate change are now having direct impact on biodiversity, agriculture, forestry, dry land, water resources and human health. Bangladesh is one of the most vulnerable countries facing the impacts of climate change and therefore, has the concern in environmental degradation. The country recognizes the fact that the role of the banking sector is very crucial in growth and development activities and therefore, the banks must come forward to play more effective role in mitigating the environmental degradation. Bangladesh Bank has taken the role of a leader in initiating green banking and it is expected that green banking would be a major instrument through which banks can substantially contribute to serve the purpose. As banks comprise major source of finance to the industrial sector, they need to scrutinize that their financing is not used in or does not lead to any activity that cause environmental damage. Green banking requires that financial and business policies are not hazardous to environment and that the banks help to protect environment. Bangladesh Bank has come up as a pioneer in promoting the idea of green banking and has developed a three-phase Green Banking Policy Framework in 2011 (BRPD Circular No.02 dated 27 February 2011) and instructed all scheduled commercial banks of the country to implement the policies in the time period from 2011 to 2013 (Bangladesh Bank, 2011). The phasing of implementation of the 19 policies included in the Green Banking Framework is: Phase I Policy 1.1 to 1.9 (by 31 December 2011), Phase II Policy 2.1 to 2.7 (by 31 December 2012) and Phase III Policy 3.1, 3.2 and 4.0 (by 31 December 2013). However, the experience from on-site and off-site supervision of Bangladesh Bank shows that banks scheduled before 2013 will require more time for implementing Green Banking Policy and therefore time frame for 47 banks (scheduled before 2013) for implementation of green banking activities under Phase-II and Phase-III has been extended to 31 December 2014 and 30 June 2015 respectively (GBCSRD Circular No. 08, 24 December 2013). Based on these circumstances, it has now become relevant to study on how the banks have performed in accomplishing the tasks. As of now, two studies, in the book - Green Banking in Bangladesh; Environmental Risk Management in Banking edited by Chowdhury and Habib (2014) and published by Bangladesh Institute of Bank Management (BIBM), examined the status and impact of green banking initiatives of Bangladesh Bank. Both these studies appear to present a partial scenario. In reference to the existing literatures, the current study is more comprehensive and expected to generate new findings through: (i) covering whole three years of given timeframe, (ii) studying larger number of sample banks, (iii) applying more robust parameters and measurement approach for 1

2 assessing the level of green banking policy implementation, and finally (iv) exploring the specific reasons for partial compliance of the Green Banking Guideline (GBG) by the scheduled banks. Therefore, the present study is an attempt to meet the literature gap and explore in a wider detail the status of green banking policy implementation by the banking sector of the country after whole three years of target timeline and identify areas where Bangladesh Bank can now focus on for improvement in its efforts. REVIEW OF LITERATURE The Concept of Green Banking Green in green banking principally indicates banks environmental accountability and environmental performances in business operation (Bai, 2011). Therefore, the term Green Banking generally refers to banking practices that foster environmentally responsible financing practices and environmentally sustainable internal processes. A green bank is also called ethical bank, environmentally responsible bank, socially responsible bank, or a sustainable bank, and is expected to consider all the social and environmental issues (Habib, 2010; Goyal and Joshi, 2011). It means eco-friendly or environment-friendly banking to stop environmental degradation to make this planet more habitable (Azam, 2012). The approach to green banking varies from bank to bank. A survey of more literatures reveals a few more different interpretations of green banking and can be summarily presented below. Author (s) Schultz (2010) Singh and Singh (2012) Thombre (2011) Bahl (2012) Definition of Green Banking It means promoting environment-friendly practices and reducing carbon footprint from banking activities. Green banking signifies encouraging environment-friendly practices and plummeting carbon footprint by banking activities through various environmentfriendly acts. Green banking is functioning like a normal bank, which considers all the social and environmental/ecological factors with an aim to protect the environment and conserve natural resources. Green banking is a kind of banking conducted in selected area and technique that helps in reduction of internal carbon footprint and external carbon emissions. The Purpose of Green Banking The broad objective of the green banks is to use resources with responsibility, avoid waste and give priority to environment and society (Habib, 2010). Bihari (2011) elucidated that green banking includes promoting social responsibility where banks consider before financing a project whether it is environment-friendly and has any future environmental implications. Green banking is a concept of shifting banks objectives from profit only to profit with responsibility. For example, Verma (2012) stated that Indian banks are gradually coming to realize that there is need for a shift from the profit, profit and profit motive to planet, people and profit which in fact establishes the rationale for green banking (Figure 1). FIGURE 1. THE COVERAGE OF GREEN BANKING Adopted from Presentation of Setijawan E. (2014) 2

3 It is now no denying an argument that, to save the planet and the people in combination with profit taking motives, green banking calls for dealing with environment-friendly approach of banks in their external activities and environmentally responsible in their internal operations. The Directions of Green Banking Activities Green banking allows banks mobilize money, invest safely and channel the money to productive activities free from deterioration of standard of living and environment. It facilitates and promotes the achievement of sustainable development of banking and finance (Sahoo & Nayak, 2008; Goyal and Joshi, 2011). Bhardwaj and Malhotra (2013) stated that although banks might not directly pollute environment, they might have clients doing or would be doing so in future. Although Schmidheiny and Zorraquin (1996) observed that banks are not hindering the achievement of sustainability outright, Jeucken and Bouma (1999) argued that their role might hamper sustainable development because (1) they choose shorter term payback periods in contrast to long-term investment needed for sustainable development, and (2) investments incorporating environmental side-effects usually have lower rate of return in short-term. Therefore, sustainable investments are unlikely to find sufficient funding within traditional banking. The most likely solution to the problem is to repackage cost and pricing structure, the regulatory and legal framework in a way that profit-driven banks will generate only green financing and investments (Arnsperger, 2012). Thompson and Cowton (2004) concluded that banks may be supportive through environmental disclosure practice either voluntarily or required by regulation. In order to explain the banks activities towards sustainability, Jeucken (2010) identified four stages: defensive, preventive, offensive and sustainable banking where ethical banking and green banking are also subsets of sustainable banking. From a broader perspective, banks can be green through bringing improvement in six main spheres: investment management, deposit management, housekeeping, recruitment and development of human capital, corporate social responsibility, and consciousness of the clients and general mass (Rahman et al., 2013). Cogan (2008) found that (a) banks are increasingly discussing climate change related business opportunities, (b) 28 of the 40 banks he studied disclosed their account of greenhouse gas emissions from operations, and (c) investment banks were taking a leading role in supporting carbon trading mechanisms and introducing new risk management products. Based on the experience of sustainable banking case studies, International Finance Corporation (IFC) (2007) stated that (i) individual banks had to devise their own business case for sustainable banking, (ii) reputation and branding had become the top reason for many banks and (iii) the benefits outweighed the costs, and social and environmental risk management improved the quality of a bank s portfolio and lowered insurance liabilities and compensation claims. The Tools of Green Banking Encouraging environmentally accountable investments and lending must be the prime responsibilities of banks (Thombre, 2011). Banks should play a pro-active role to oblige industries for mandated investment for environmental management, use of appropriate technologies and management systems (Masukujjaman and Aktar, 2013). Thus banks can act as an ethical organization by disbursement of loans only to those organizations, which have environmental concerns (Muhamat et al., 2010; Gyoal & Joshi, 2011; Thombre, 2011). In addition, conversion of internal operations of banks through renewable energy, process automation and reducing carbon footprint are also vital (Millat et al., 2012). Green banking requires that the financial institutions should encourage projects which take care: (i) sustainable development and use of natural renewable natural resources, (ii) protection of human health, bio-diversity, efficient production and use of energy, and (iii) pollution prevention and waste minimization, pollution controls (Biswas, 2011). Such approach necessarily calls for initiatives to (a) reinforce the awareness of employees and other stakeholders on the subject of sustainability, (b) upgrade the tools used by institutions, and (c) improve the transparency in disclosing socio-environmental information (Lins et al., 2008). There can be a number of specific tools including but not limited to Carbon Credit business, Green Credit and Investment, Green Mortgages, Green Credit Cards, Green Deposit Accounts, Mobile Banking, Online Banking, Waste Management, and Roof Gardening (Dharwal & Agarwal, 2013; Islam & Das, 2013). Acceptability of Green Banking Environmental reputation is no doubt an important factor for economic success of the banks today. According to a recent study by Javelin Strategy and Research, around 43% of customers polled preferred banks with green initiatives (Green Wiki, 2013). Interestingly, an experience of top five Romanian banks suggests that banks with higher rating and total assets were also better accountable socially and environmentally (Cosmin, 2008). Now-adays, increasing number of customers of many conventional banks request for green financial products and investment opportunities (Arnsperger, 2012), and many of them also want to be familiar as doing good to 3

4 environmental concerns among Citizens. Therefore, mainstream banks do not want to miss out the greening of customer preferences (Münchow et al., 2011). Even stock market investors also are now equally concerned and they are ready to act against institutions not complying with environmental norms (Gupta, 2003; Goldar, 2007). It is mentionable that enthusiasm of financial institutions and markets is a primary driver to move towards sustainability supportive financing (Rahman, 2014). The Risk and the Impact of Green Banking Many businesses may be exposed to the risk that they might have to bear direct or indirect cost of environment protection initiatives (e.g. stringent regulatory compliance requirement) taken by stakeholders (Bhardwaj & Malhotra, 2013). In the United Kingdom, the breach of terms of the license given by integrated pollution prevention control would lead to prohibition, financial penalties and enforcement notice against the polluting companies (Bhardwaj & Malhotra, 2013). A study finds that the European Union had to incur a loss of 14 billion pound and 200 million working days due to the productivity losses and medical costs arising out of only air pollution (Stavros, 2005). Such negative impact is also evident on banks own performance too. Some classic studies found that environmental performance is highly correlated with financial performance and banks suffer from financial risk due to lack of environmental considerations in business practice (Hamilton, 1995; Blacconiere & Pattern, 1994). Such an example is the enforcement of The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in USA in 1980s due to which many banks were outright held responsible for the environmental degradation by their clients and banks had to pay for the remedial measures. Thus, it is essential for banks to consider environmental issues while investing in companies or advise clients to do so in their business (Sahoo & Nayak, 2008). However, Arnsperger (2012) stated that many organizations including banks that have already greened their products and/or processes are doing quite well financially. Green Banking Initiatives at the Global Level In the context of sustainable growth especially in emerging economies, banking management system based on sustainable principles is a provocation of these days (Raluca, 2012). There have been a number of initiatives to make financial institutions more environmentally responsible. In the Earth Summit 1992, the United Nations Environment Program (UNEP) initiative on the environment and sustainable development was established in order to initiate interactions between UNEP and Financial Institutions and their joint efforts. In another effort, IFC s environmental unit was established in 1991 for reviewing each project for environmental assessment. In 2002, global NGOs created a coalition named BankTract to promote sustainable finance in the commercial sector which has been endorsed by more than 200 organizations. In 2003, a group of banks along with IFC initiated Equator Principle that is accepted by 46 financial institutions of 16 countries with operation in more than 100 countries as of now. IFC along with the Financial Times also initiated Sustainable Banking Award since The number of banks applying was up by more than 100% compared to the previous year's 48 banks from 28 countries. International Standards Organization is also another global initiative which is a series of voluntary compliance standards for environmental practices (Murray et al., 1997). European banks seem to be leaders in the international green market compared to other continents as a whole and have developed a unique environmental philosophy (Papastergiou & Blanas, 2011). Rosenfeld (2007) studied two major banks of Sweden and found that they were well aware about global greening efforts and were interested in doing eco-friendly banking. However, Greek banks were fragmentary on this issue demonstrating low compliance (less than 50% score) with the Global Reporting Initiative (GRI) and the Deloitte Touché Tohmatsu (DTT) guidelines (Evangelinos, 2009). In USA, Socially Responsible Investment (SRI) funds are so highly acclaimed that SRI assets there amounted to $2.29 trillion in 2005 (Starogiannis, 2006). Going further, the Dutch government has made formal request to banks to devise their operation towards achieving sustainable development. Recently, India is also giving greater importance to sustainable banking and many are focusing on environment-friendly investment projects (Pulicheri & Rajashekhar, 2013). The State Bank of India (SBI) is the first bank in the country to put money into generation of green power through windmills (Dharwal & Agarwal, 2013) while more than 20 banks have already initiated green products (Nath et al., 2014). However, as found by Rajput et al. (2013), implementing green banking in India encounters numerous challenges such as fear of business loss to peers, lack of central bank s mandate, lack of interest of customers and investors, complex reporting framework, insufficient budget for training, and lack of skilled manpower etc. 4

5 It must be noted that most international initiatives are voluntary in nature and are meant to promote a common good of a better ecosystem. Voluntary commitment has its shortcoming in a competitive market. The Green Banking Initiative in Bangladesh For developing countries like Bangladesh, environmental sustainability and climate change resilience are key elements of inclusive socioeconomic development (Rahman, 2013). In Bangladesh, in addition to lending, internal banking operations have considerably increased the carbon discharge due to their massive use of energy through lighting, air-conditioning, electrical equipment etc. (Rahman et al., 2013). Bangladesh Bank is quite concerned on the environmental degradation situation and therefore has been providing continuous support and directions to all scheduled banks (Khan, 2012). Bangladesh Bank issued a circular for the scheduled banks of the country asking them to adopt green strategic planning for 2013 and beyond (BRPD Circular No.02 dated 27 February 2011). Banks are asked to integrate internal green banking operation and external green financing practices. As Millat et al. (2012) reported Bangladesh Bank has instructed all scheduled banks to formulate comprehensive policies for green lending and investment after rigorous and adequate analysis of environmental risks incorporating national environmental rules and acts. According to a recent study Ullah (2012), along with GBG, Bangladesh Bank also extends technical assistance. The study, based on a very small sample of 4 banks, observes that state-owned banks demonstrate nearly zero compliance with the GBG, continue to finance harmful projects, and have achieved little in introducing paperless banking while private banks have better compliance. These and some other dimensions of green banking in Bangladesh have been discussed in the works of Rashid (2010), Schultz (2010), Fenn (2012), and Millat (2012). Along with the GBG enacted by Bangladesh Bank, two comprehensive studies were conducted and published by Bangladesh Institute of Bank Management in a book edited by Chowdhury & Habib (2014). The first study found that as of June 2011, among 25 surveyed banks about 80 to 85% were still in planning stage, about 75% banks had green finance schemes although many did not finance even a single project, some 32% of the banks had some promotional and customer awareness efforts on their green activities while about 50% had no training initiatives. The study also revealed that most of the banks were scattered and at early planning stage in having inoffice green initiatives. The second study in mid-2013 on 20 selected commercial banks found substantial progress and revealed that 92% of the banks had some initiatives of utilizing their green finance fund but fall far short in Climate Risk Fund (19% had no such allocation, 72% could not utilize allocated fund). However, all banks developed own green banking policy and separate green banking cell but in-house environment management initiatives were still in a very limited scale. The study shows although 75% of them developed one or two sector specific environmental guidelines, only 11% of the fund for green marketing was utilized and merely 2 trainings per bank were organized in Moreover, a recent Bangladesh Bank Quarterly Review Report on Green Banking published in December, 2013 records a notable progress of banks in almost every aspect of the green banking with evidence of some improvements in the overall scenario in the quarter ending in December, A latest picture of green banking activities by banks in December 2013 has been presented below (Table 1). TABLE 1. GREEN BANKING ACTIVITIES AT A GLANCE (DECEMBER, 2013) Subject March- June- September- December No. of Rated Projects No. of Rated Projects Financed Amount Disbursed against Rated Projects (Taka in Million) No. of Branches Powered by Solar Energy No. of ATM/SME Unit Offices Powered by Solar Energy No. of Online Branches Utilization of Green Finance (Taka in Million)

6 Utilization of Climate Risk Fund (Taka in Million) Utilization of Green Marketing, Training and Development (Taka in Million) Source: Quarterly Review Report on Green Bangladesh, December 2013, Bangladesh Bank It should be noted that Bangladesh Bank, is one of the global forerunners in bringing green banking policy guideline in a so structured and formal way. Therefore, the findings of this study may substantially help the financial services regulators of other countries in introducing and implementing the green banking or environment-friendly banking policy smoothly. OBJECTIVE OF THE STUDY The study primarily aims at finding out the status of green banking policy implementation by the commercial banks operating in Bangladesh and identifying the factors leading to success and failure of the banks in green banking so that some ideas can be generated for planning future interventions of Bangladesh Bank to ensure more effective green banking activities. In other words, the objectives of this study are: - To look into how the green banking policies of Bangladesh Bank are implemented in practice and thus incorporate into Strategy by the scheduled banks of the country; - To understand the factors leading to success and failure of the scheduled banks in implementing the Bangladesh Bank s green banking policies; - To identify areas of further intervention for better implementation of the policies. METHODOLOGY OF THE STUDY The key approach of this present study is to measure the progress of the banks in Bangladesh in implementation of the Bangladesh Bank s Green Banking Guideline (GBG). The assessment is made primarily by using the following criteria: (i) bank-wise weighted average progress level across all policies of the GBG and (ii) policy-wise level of progress across all banks. Bank-Wise Weighted Average Progress Level across All Policies To measure the level of progress in implementing the GBG, percentage score has been assigned policy-wise. There are 19 policies in the GBG Phase I: policies 1.1 to 1.9, Phase II: policies 2.1 to 2.7 and Phase III: policies 3.1, 3.2 and 4.0. The policy no. 4.0 is basically a post-implementation routine activity namely Reporting Green Banking Practices on Quarterly Basis and the major Green Banking Policies in Phase I, II, and III are shown in Chart - A. For each of these individual policies, each of the banks under examination is rated out of 100% compliance level based on on the field observation and experience in a bank. Later, bank-wise weighted average level of progress ( ) has been calculated combining all 19 policies by using the following formula: Where, n = number of policies, = weighted average score of a given bank = wight for policy I, = score assigned for policy i The weighted average overall progress result for each bank has then been used to test two important aspects: (a) Category-wise weighted average overall progress, (b) Overall weighted average progress by bank type (state owned, private, and foreign). As the three-year period to implement all three phases of GB guideline set by the Bangladesh Bank has already passed, banks are expected to achieve full progress level by Based on the importance of the policies and necessity for implementation in banking operation, weights have been assigned. The weight structure is shown below in Table 2. 6

7 TABLE 2. APPLIED WEIGHT STRUCTURE ON PARAMETERS Parameter Weight Phase I (To be implemented by ) 1.1 Policy Formulation and Governance 8.00% 1.2 Incorporation of Environmental Risk in CRM 8.00% 1.3 Initiating In-house Environment Management 5.00% 1.4 Introducing Green finance 8.00% 1.5 Creation of Climate Risk Fund 2.50% 1.6 Introducing Green Marketing 2.50% 1.7 Online Banking 5.00% 1.8 Supporting Employee Training, Consumer Awareness and Green Event 5.00% 1.9 Disclosure and Reporting of Green Banking Activities 2.50% Phase II (To be implemented by ) 2.1 Sector Specific Environmental Policies 8.00% 2.2 Green Strategic Planning 8.00% 2.3 Setting up Green Branches 8.00% 2.4 Improved In-house Environment Management 2.50% 2.5 Formulation of Bank Specific Environmental Risk Management Plan and Guidelines 4.00% 2.6 Rigorous Programs to Educate Clients 2.50% 2.7 Disclosure and Reporting of GB Activities 2.50% Phase III (To be implemented by ) 3.1 Designing and Introducing Innovative Products 8.00% 3.2 Reporting in Standard Format with External Verification 5.00% 4 Reporting GB Practices on Quarterly Basis 5.00% Total Weight % The category-wise weighted average overall progress based on the level of progress that a bank should have had in the three-year period has been ranked in a five point scale as under: % Implementation* Label of Progress < 20 Insignificant Progress Less than Satisfactory Satisfactory Progress Substantial progress Close to Full Implementation *Note: any fractional value rounded to next natural number The above categories and their label definitions are constructed based on discussions with green banking experts including both professionals and academicians in Bangladesh context. Individual Policy-Wise Level of Progress across All Banks However, in the cases of average progress by policy across all banks, simple average is used. Since policies are formulated in three different phases, phase-wise level of overall progress of individual policy across all banks has later been examined by using these simple average scores. 7

8 Data Sources The study carried out intensive survey of 42 scheduled banks (out of total 56, 75% sample coverage) operating in Bangladesh where each bank (Table 3) was studied for 15 days separately during March TABLE 3. BANKS AND THEIR WEIGHTED AVERAGE PROGRESS LEVEL ACROSS ALL POLICIES Domestic Private Commercial Banks Bank Name % Progress Bank Name % % Bank Name Progress Progress AB 62 EXIM 63 Premier 37 Al Arafah 55 First Security 70 Prime 60 Bank Asia 71 IBBL 45 Pubali 43 Basic 42 IFIC 44 Shahjalal 47 BCBL 15 Jamuna 29 SIBL 48 BRAC 74 Mercantile 75 Southeast 61 City 34 MTBL 73 Standard 37 DBBL 40 NBL 35 Trust 67 DBL 47 NCC 36 UCB 61 EBL 64 One Bank 35 Uttara 55 State Owned Banks % Progress Foreign Commercial % Banks Progress Agrani 33 Alfalah 33 BDBL 22 HSBC 62 BKB 25 CITI N A 77 Janata 64 CBCL 48 Rupali 29 SBI 58 Sonali 38 SCB 85 Among the banks, 30 are Domestic Private Commercial Banks, 6 are State Owned Banks, and 6 are Foreign Commercial Banks. Based on the data explored, necessary descriptive and tabular analysis has been made to assess the status of green banking policy implementation, and develop insights on the reasons for success/failure in the process of implementation. Apart from this field level data, secondary information has been collected from banks annual reports and their green banking reports periodically submitted to the central bank. The GBG and its related materials have been accumulated from the Green Banking division of Bangladesh Bank. GREEN BANKING PRACTICES: ANALYSIS AND RESULTS Overall Implementation of GB Policy The level of overall implementation is presented in Chart 1 showing the bank-wise weighted average score combining all 19 policies and their weights, and the position of the 42 surveyed banks in a descending order of the score for implementation. 8

9 CHART 1. WEIGHTED AVERAGE LEVEL OF IMPLEMENTATION The chart shows that the top performers are Standard Chartered Bank, Citi N A, Mercantile Bank, Brac Bank, and Mutual Trust Bank while the poorest five are Bangladesh Commerce Bank, Bangladesh Development Bank, Bangladesh Krishi Bank, Jamuna Bank, and Rupali Bank..and significantly low in government owned banks (Sonali, Agrani, and Rupali) and government s specialized financial institutions like Bangladesh Krishi Bank (BKB) and Bangladesh Development Bank (BDBL).The average level of implementation of green banking policies across bank type is shown in Chart 2. CHART 2. AVERAGE LEVEL OF POLICY IMPLEMENTATION (%) The chart reflects that the foreign commercial banks demonstrated a fairly high level in implementation (61% i.e. substantial progress) while the state owned banks have a much lower rate (only 35%). However, the position of domestic private commercial banks is more or less satisfactory (51%). The full data set for banks, grouped as domestic private commercial banks, state owned banks and foreign commercial banks, is presented in Table -4. All 42 banks under review have been grouped on the basis of a ranking by the overall weighted average implementation level and the results are presented in Chart 3. 9

10 CHART 3. NUMBER OF BANKS BY LEVEL OF PROGRESS The chart depicts that only 1 bank is close to full implementation (SCB, 85%) while 14 are not satisfactory (less than 40%), 12 may be graded as satisfactory (40-60%), and 15 have showed substantial progress. The findings suggest that the Bangladesh Bank s target of fully implementing the GBG by 2013 remains substantially unattained. The specific values of weighted average implementation level of the different banks of these five rank categories are presented in Table 4. TABLE 4. WEIGHTED AVERAGE GBG IMPLEMENTATION LEVEL OF THE RANKED BANKS Domestic Private Commercial Banks Bank Name % Progress Bank Name % Progress Bank Name % Progress AB 62 EXIM 63 Premier 37 Al Arafah 55 First Security 70 Prime 60 Bank Asia 71 IBBL 45 Pubali 43 Basic 42 IFIC 44 Shahjalal 47 BCBL 15 Jamuna 29 SIBL 48 BRAC 74 Mercantile 75 Sotheast 61 City 34 MTBL 73 Standard 37 DBBL 40 NBL 35 Trust 67 DBL 47 NCC 36 UCB 61 EBL 64 One Bank 35 Uttara 55 State Owned Banks % Progress Foreign Commercial Banks % Progress Agrani 33 Alfalah 33 BDBL 22 HSBC 62 BKB 25 CITI N A 77 Janata 64 CBCL 48 Rupali 29 SBI 58 Sonali 38 SCB 85 10

11 Implementation by Individual Policy The level of progress by each of the 19 policies by all banks taken together is presented in Chart-4 which depicts confusing figures. Banks were asked to implement the policies in phases and the schedule given was - Phase I: policies 1.1 to 1.9 by 31 December 2011, Phase II: policies 2.1 to 2.7 by 31 December 2012, and Phase III: policies 3.1, 3.2 and 4.0 by 31 December The banks do not seem to have followed the phasing and they rather appeared to ignore the sequence (which might have some logic) and undertake simultaneous implementation of activities under the policies of different phases (Chart 4). Many policies of Phase-I remained significantly under implemented while a few policies of Phase-II and Phase-III were implemented at a relatively better level than expected. CHART 4. LEVEL OF INDIVIDUAL POLICY IMPLEMENTATION (%, AVERAGE) Further, it is apprehended that (i) the banks chose or preferred to implement policies that seemed easier for them and involved minimum amount of cost in terms of time, money, and human efforts, and (ii) out of the 12 policies that came out as more or less satisfactorily implemented (>40%) as shown in Chart 4 and Table 5, 7 are basically related to documentation and reporting implying that banks are more active in paper-work than field level implementation. 11

12 Policy No. TABLE 5. INDIVIDUAL POLICY-WISE AVERAGE IMPLEMENTATION Policy Title Average % Implementatio n 4.0 Reporting GB Practices on Quarterly Basis Policy Formulation and Governance Disclosure and Reporting of Green Banking Activities Incorporation of Environmental Risk in CRM Online Banking Supporting Employee Training, Consumer Awareness and Green Event Initiating In-house Environment Management Sector Specific Environmental Policies Introducing Green finance Formulation of Bank Specific Environmental Risk Management Plan and Guidelines Creation of Climate Risk Fund Disclosure and Reporting of GB Activities Green Strategic Planning Improved In-house Environment Management Setting up Green Branches Introducing Green Marketing Designing and Introducing Innovative Products Rigorous Programs to Educate Clients Reporting in Standard Format with External Verification 24 However, the banks did not perform well even in documentation and reporting as evidenced by the fact that their progress in implementation of disclosure and reporting of Green Banking Activities and Green Strategic Planning is only around 40%. Observations in phase-wise comparison of GBG policies against the categories of progress as defined suggest that most banks show relatively good progress in implementing Phase - I policies while Insignificant or Less than Satisfactory implementation rate for Phase - II and Phase - III policies (Table 6) and there are banks with even as low as 5% or lower level of progress of different policies. TABLE 6. LEVEL OF RANKED PROGRESS BY INDIVIDUAL POLICY Phase I Insignificant Progress Less than Satisfactory Satisfactory Progress Substantial progress Close to Full Implementation Policy No. <=20 > > >60-80 >

13 Phase 2 Phase It is alarming to find that the modal value for the average rate of implementation of GB guideline by banks is 5% for all the Phase II and Phase III policies which otherwise means that most banks have only 5% progress in implementing these policies although for some policies, the highest rate of implementation has been found to be 100% (Table 7). TABLE 7. DESCRIPTIVE STATISTICS OF LEVEL OF RANKED PROGRESS BY POLICY Pha se I Pha se 2 Pha se 3 Policy Me Mo Standard Maxi Mini Policy Title No. an de Deviation mum mum 1.1 Policy Formulation and Governance Incorporation of Environmental Risk in CRM Initiating In-house Environment Management Introducing Green finance Creation of Climate Risk Fund Introducing Green Marketing Online Banking Supporting Employee Training, Consumer 58 Awareness and Green Event Disclosure and Reporting of Green Banking 68 Activities Sector Specific Environmental Policies Green Strategic Planning Setting up Green Branches Improved In-house Environment Management Formulation of Bank Specific Environmental Risk Management Plan and Guidelines Rigorous Programs to Educate Clients Disclosure and Reporting of GB Activities Designing and Introducing Innovative Products Reporting in Standard Format with External Verification Reporting GB Practices on Quarterly Basis

14 The average level of implementation of the Bangladesh Bank s policies of different phases is shown in Chart 5. The chart shows that although Phase-I policies were scheduled to be fully implemented within 31 December 2011, the actual implementation rate was only 57% and yet this has been the highest rate of implementation. The implementation rate of policies of Phase-II (scheduled to be implemented by 31 December 2012) was 40% and that for policies under Phase-III with (scheduled to be done by 31 December 2013) was only 47%. CHART 5. AVERAGE LEVEL OF IMPLEMENTATION (%) BY PHASE It has been further observed that as time has elapsed in implementing the GBG policies by phases (Chart 6). CHART 6. NUMBER OF BANKS AND LEVEL OF PROGRESS BY PHASE The number of banks ranked less than satisfactory category (>20% and 20 40% implementation rate) grew substantially higher. At the same time, the number of banks ranked satisfactory and substantial progress categories has decreased significantly. This implies that most banks have failed to maintain the pace of implementation of GBG regardless of phase. Moreover, instead of implementing the policies phase by phase, they selected their course at their own choice leading to a failure in meeting the time bound targets of achievement. The result is also shown in Table 8. 14

15 Level of Policy Implementation (%) TABLE 8. LEVEL OF RANKED PROGRESS BY PHASES Insignificant Progress Less than Satisfactory Satisfactory Progress Substantial progress Close to Full Implementation Policy Phase <=20 > > >60-80 > Phase I ( ) Phase II ( ) Phase IIII ( ) REASONS FOR RELATIVELY POOR PERFORMANCE IN IMPLEMENTATION OF GBG An in-depth examination carried out to find the factors that led to the partial implementation of the Bangladesh Bank s green banking policies of the different phases revealed a number of reasons that can be summarized into five major categories as recorded in Chart 7. CHART 7. REASONS FOR PARTIAL IMPLEMENTATION (% BANKS) Lack of Awareness As found, there is a severe lack of awareness and concept of green banking in around 45% of the banks. Most employees of different sections/departments and of levels in different banks failed to interpret what green banking actually means and do not realize its importance, nature of such practices and their implications. Also, the clients/customers of many banks were found confused about the concept and lack awareness. High Cost of Implementation Executives of around 38% banks opine that the explicit and implicit cost of adopting GB policy is very high; new infrastructure, setting solar panel, developing green branch etc. involve high explicit cost while GB policy-oriented rigorous loan approval process, compliances in new dimensions for customers ultimately create substantial implicit cost. In addition, there are implicit costs in terms of revenue or business loss also because of failure of clients in meeting requirements and suspension of lending due to insufficient number/types of green efforts. However, many banks also find green banking with very slow return opportunity. 15

16 Too New an Idea to Implement Fast The employees and management in around 36% of the banks studied have reported that they perceive green banking as a completely new concept and therefore more time is needed to be familiar with and conversant in the concept and adopt it in practice. According to their view, more time is needed to understand the impacts of green banking and therefore to adopt it properly in practice for a sustainable future of the economy. Less Priority by the Board and Management Officers in charge of green banking activities in a number of banks (around 24%) have reported that the top management is reluctant in green banking and they do not concentrate on, even put a very low priority. The bank executives are busy with other regular banking operations and usually avoid spending time and energy in complying with the GBG activities put forward by Bangladesh Bank. Due to lesser priority, funds go more to the traditional projects and even if some green banking concepts are considered in some lending as well as in internal functions of the banks, the fund allocated remains small and the process become unnecessarily complex and lengthy. Lack of Resources/Shared Commitment of Resources Around 14% of the banks have been found having no dedicated employees or assigned employees with charge for green banking activities/division. The concept of green banking services among bank officers continue to get low priority and are therefore, not recognized as responsible or high profile job. Too often, the activities are assigned to employees performing below average in their regular desks and their work in green banking is poorly monitored. In addition, employees assigned with the charge of green banking activities are also transferred from one desk to another and therefore, frequently changed. In many cases, the green banking policy implementation activities are distributed to multiple departments creating operational complexity and fragmentation of the process and progress. Apart from the major reasons explained above, banks also indicated few other reasons such as broadening range of services by banks because of adopting green banking created additional pressure on the time and work load of the bank employees and also, some banks consider that the Bangladesh Bank s GBG and the requirements of international standards are difficult to simultaneously comply, and therefore, there should be a mechanism for addressing the issue, especially in the interest of foreign banks operating in Bangladesh and the relatively large national banks operating abroad. CONCLUSION The study finds that performance of banks in Bangladesh GBG implementation is not very satisfactory although a substantial progress was expected at the end of the three phase period in December A recent Bangladesh Bank report on green banking records that the performance of scheduled banks has not been very impressive but the banks did fairly well in terms of use of funds allocated for the purpose in the last few quarters (Bangladesh Bank, 2013). The findings of the present study on the phase-wise implementation data show that the implementation of the 19 policies in three phases remained fragmented and policies related to paper-work or desk-based work have been implemented quickly while field level implementation related policies are less prioritized by the scheduled banks. Moreover, it is evident that state-owned banks are the worst performers with the lowest implementation level of the GBG while foreign banks are the top performers and the domestic private banks are in the second place. This finding on state-owned and private banks confirms the findings of Ullah (2012) using on around 10 times larger sample size and a more rigorous and differentiated method. However, evaluation of foreign commercial banks is a completely new addition by this study in this context. This study also finds the level of GBG compliance for each of the policy separately some of which were studied by Habib et al. (2011) and Habib et al. (2013). The findings of this current study closely support the earlier findings by Habib et al. (2013) as of mid-2013 in terms of very limited advancement in: in-house environmental activities, actual financing to environment-friendly projects, green marketing and branches, climate risk fund creation, and training and awareness initiatives. The better progress in paper-work based works such as policy governance, environmental risk incorporation in CRM, regular disclosure and reporting framework also support the findings of the above mentioned earlier studies by Habib et al. (2011; 2013) but this study generates more new findings and has used more rigorous method to assess the compliance level following policy-by-policy approach. Moreover, unlike Habib et al. (2011; 2013), this study also sheds light on reasons for failure to comply with GBG. The banks have reported a number of factors causing partial implementation of GBG. Among them, lack of awareness, high implementation cost, unfamiliarity of the concept, and relatively poor utilization of human 16

17 resources are consistent with findings by Rajput et al. (2013), and few more have been added newly by this study (i.e. less prioritization by board and management, conflicting regulatory requirements). Therefore, a range of education and awareness campaign should be organized by Bangladesh Bank and scheduled banks for employees and customers. Moreover, separate dialogue sessions should be arranged by Bangladesh Bank with the boards and top managements of the scheduled banks, and instruct them to place top priority on green banking activities. Bangladesh Bank may also periodically examine the resources committed for GBG implementation in the scheduled banks that can ensure self-sufficient green banking divisions in banks. Moreover, Bangladesh Bank has to initiate education and training programs to convince the boards or top management on the implicit benefits of green banking compared to its costs. Benefits in terms of environmental sustainability in the long certainly will best protect the society, community, economy and the country as a whole. Therefore, for suitable existence of the future earth, a sacrifice today is needed, and this has to be properly communicated to the scheduled bank authorities. REFERENCES Arnsperger, C 2014, Social and Sustainable Banking and the Green Economy project Part I: A Hypothetical Diachronic Scenario, Paper for the 2014 Annual Conference of the Society for the Advancement of Socio- Economics (SASE), Chicago, IL. Azam, S 2012, Green Corporate Environment Thru' Green Banking and Green Financing, The Financial Express July 04, Viewed on March 2014, Available at_ Bahl, S 2012, Role of Green Banking in Sustainable Growth, International Journal of Marketing. Financial Services and Management Research, vol. 2, no. 1, pp Bai, Y 2011, Financing a Green Future. MS thesis: Lund, Sweden, IIIEE Theses 2011: 02, Accessed on 15 September, 2012 from: Bangladesh Bank 2011, BRPD Circular No. 02. dated: 27 February, Accessed: on June 2013 Bangladesh Bank 2013, GBCSRD Circular No. 08. dated: 24 December, 2013, Accessed in April, 2014 from Bangladesh Bank 2013, Quarterly Review Report on Green Banking Activities of Banks and Financial Institutions. Green Banking and CSR Department, Retrieved in April 2014 from Bhardwaj, BR, & Malhotra, A 2013, Green Banking Strategies: Sustainability through Corporate Entrepreneurship, Greener Journal of Business and Management Studies, vol. 3, no. 4, pp Bihari, SC 2011, Green Banking-Towards Socially Responsible Banking in India, International Journal of Business Insights and Transformation, October March 2011 Issue, vol. 4, no. 1, pp Biswas, N 2011, Sustainable Green Banking Approach: The Need of the Hour, Business Spectrum, vol. 1, no. 1, pp Blacconiere, W, & Pattern, D 1994, Environment Disclosure, Regulatory Costs and Changes in Firm Values, Journal of Accounting and Economics, December Issue, vol. 18, no. 3, pp Chowdhury, TA, & Habib, SMA (eds.) 2014, Green Banking in Bangladesh; Environmental Risk Management in Banking, Bangladesh Institute of Bank Management (BIBM), Dhaka, Bangladesh, ISBN: Cogan, DG 2008, Corporate Governance and Climate Change: The Banking Sector, A Ceres Report, January, RiskMetrics Group Inc., New York. Accessed in June 2015 at Cosmin, J, Mihaela, B, & Irina-Eugenia, I 2008, Corporate Social Responsibility in the Romanian Banking Sector, Economic Sciences Series; Issue II Economy and Business Administration, Volume XVII: , Oradea University Publishing House, Romania. Dharwal, M, & Agarwal, A 2013, Green Banking: An Innovative Initiative for Sustainable Development, ACCMAN Institute of Management Article, Retrieved from (2).doc 17

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