Banking System in Bangladesh & its Role in Poverty Reduction

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1 Banking System in Bangladesh & its Role in Poverty Reduction Atiur Rahman, Ph.D. Governor Bangladesh Bank Organized by: Defence Services Command and Staff College 07 November, 2012 Dhaka

2 Outline Introduction Definition and measurement of poverty Poverty profile in Bangladesh Socioeconomic development Bangladesh s progress towards MDGs Poverty reduction strategies Bangladesh s banking system in poverty eradication Financial inclusion in pursuit of inclusive growth Challenges ahead 2

3 How poverty is defined? United Nations: A denial of choices and opportunities, a violation of human dignity. World Bank: A pronounced deprivation in wellbeing, comprising many dimensions including low incomes and inability to acquire basic goods and services necessary for survival with dignity. 3

4 Approaches to measure poverty Direct Calorie Intake (DCI) Household is considered poor if its per capita calorie intake is less than the standard per capita nutritional requirement of 2,122 kcal per day. Food Energy Intake (FEI) Food poverty line is the monetary value of the food expenditure that allows households to just meet the stipulated calorie requirement.[ Cost of Basic Needs (CBN) a basic food basket is identified from the data, consistent with consumption patterns. 4

5 Approaches to measure poverty..(cont d) the quantities in the basket are scaled accordingly to the nutritional requirement. the cost of acquiring the basket is calculated. This results in the food poverty line. A non-food poverty line is calculated by estimating the cost of consuming a basic set of non-food goods for: (i) extreme poor households whose total expenditures equals the food poverty line. (ii) moderate poor households whose food expenditure is at food poverty line. 5

6 Lorenz Curve and Gini Coefficient o Gini coefficient measures the degree of inequality in distribution of family income in a country. o The index is calculated from the Lorenz curve. o The index is ratio of the area between a country's Lorenz curve and the 45 degree helping line (A) to the entire triangular area under the 45 degree line (A+B). o Themorenearlyequalacountry's income distribution, the closer its Lorenz curve to the 45 degree line and the lower its Gini index. 6

7 Causes of Poverty Overpopulation Unequal distribution of resources Lack of education Environmental degradation unemployment Corruption Poor governance High Inflation Income inequality Poor Health 7

8 Poverty Profile in Bangladesh: perception and reality Belying the widely held perception as an international basket case at her birth in 1971, Bangladesh has made remarkable turnaround. Over the 40 years since liberation, Bangladesh has raised per capita income four-fold, cutting poverty by more than half, and is well on course in attaining most of the millennium development goals. Rewarded by UN for achieving one of MDG goals (reduction in child mortality). 8

9 Perception and reality..(cont d) Bangladesh has targeted acceleration of real GDP growth rate to 8.0% per annum by 2015 and to 10.0% by Growth rate averaged around 6.0% per annum on an average, over the past 10 years. The MDG target for reducing poverty head count rates is set at 29.4% at the national level by Monetary and credit policy of Bangladesh Bank seek to ensure price stability and acceleration of inclusive economic growth. Accordingly, BB campaigns on financial inclusion, a key driver of inclusive growth, to include the unserved and underserved poor into the net of basic financial services. 9

10 Poverty profile in Bangladesh o World Bank/BBS estimates are based on the Cost of Basic Needs (CBN) method. Bangladesh: Poverty Headcount Rate (HCR) Upper Poverty Line (2122 Kcal) Lower Poverty Line (1805 Kcal) National Rural Urban Source: Household Income & Expenditure Survey

11 Poverty Profile in Bangladesh..(Cont d)

12 Poverty Profile in Bangladesh..(Cont d) Incidence of Poverty (head count rate) by Divisions National Rural Urban National Rural Urban Lower Poverty Line (Extreme Poverty) National Barisal Chittagong Dhaka Khulna Rajshahi Rangpur Sylhet Upper Poverty Line National Barisal Chittagong Dhaka Khulna Rajshahi Rangpur Sylhet Source: HIES Report, BBS

13 Poverty indicators are improving significantly in Bangladesh o Bangladesh is well on course for attaining most of the MDGs by or before Poverty decline gaining momentum o Poverty (upper poverty line, 2122 kcal food intake) declined from 57% to 49% of population during the 1990s and further to 40% in % of population in poverty o Household Income and Expenditure Survey (HIES 2010) reported poverty at 31.5%

14 Percentage distribution of income accruing to household in groups (Deciles) and Gini coefficient in HIES 2010 and 2005 Household Income Deciles and Gini Coefficient National Rural Urban National Rural Urban Total/Deciles Lower 5% Decile Decile Top 5% Gini co-efficient Source: HIES

15 Percentage distribution of income (cont d..) o Between 2005 and 2010, The percentage share of income of the lowest 5% households has slightly increased to 0.78% from 0.77%. The income share of top 5% households has declined to 24.61% from 26.93%. The income share of households belonging to decile- 10 has decreased. Gini co-efficient of income has decreased to from This indicates that concentration of income has declined. 15

16 Progress in the social development is even more impressive Over the past 20 years, Bangladesh has made some of the biggest gains in the basic condition of people s lives ever seen anywhere..the Economist, November 3 rd,

17 Life expectancy in Bangladesh is four years longer than in India despite the Indians being twice as rich Between 1990 and 2010, life expectancy in Bangladesh rose by 10 years, from 59 to 69, whereas in India it rose by 7 years. Improvement in life expectancy has been as great among the poor as the rich. 17

18 With comparably lower growth, Bangladesh s gain in social development and poverty reduction is quite noteworthy, confronting the Washington consensus Primary school enrolment of girls has doubled. Infant mortality has more than halved. Child mortality fell by two-thirds and maternal mortality fell by threequarters. 18

19 Major factors behind this success.. making women central to development Family planning has empowered women, contributing to reduction in fertility rate, better health and more autonomy and eventually to poverty alleviation. 19

20 Major factors behind this success Rural Household Income Bangladesh managed to restrain fall in rural household incomes that usually increases extreme poverty. Between 1971 and 2010, rice harvest more than trebled. According to World Bank estimates, real agricultural wages rose by 59.0% between 2000 and 2010, compared with 42.0% for all sectors. Around 6.0 million Bangladeshis work abroad; In FY they sent back USD 13.0 billion, about 14.0% of the national income. 20

21 Major factors behind this success Social Safety Net About 12% of public spending (1.8% of GDP) goes on social safety-nets to protect the poorest: food for work, cash transfers and direct feeding programs, whichmost developing countries do not have. Public spending on education and health amount to 2.2% and 3.5% of GDP respectively. Budgetary allocation of Taka billion in FY for direct and indirect poverty reduction programs which is 53.1% of the total budget. Taka billion allocated for various programs under Social Safety Net. 21

22 Improving trends in human development indicators Trends in Human Development Index in South Asia % change Bangladesh India Pakistan Sri Lanka Source: UNDP o Between 1980 & 2010, HDI has improved 81.1% in Bangladesh, against 62.2%, 57.6% and 28.3% respectively in India, Pakistan and Sri Lanka. 22

23 Bangladesh s Progress Towards MDGs Bangladesh has made huge advances with regards to many of the goals some goals will be reached ahead of schedule while a few have been achieved already. Attaining and where possible surpassing the MDGs will be key to graduation of Bangladesh out of her current LDC status. Bangladesh received UN award for her outstanding achievements in attaining MDGs particularly in reducing child mortality. 23

24 Bangladesh s progress towards MDGs o Rapid reduction in child mortality (recently awarded by UN). o Among the top 10 performers in achieving gender equality. o o Gender equality in primary school enrollment already achieved. Improved maternal health. 24

25 Goal 1: Eradicate Extreme Poverty and Hunger Incidence of Poverty National Rural Urban Bangladesh is well on its way to reach the MDG target for poverty head count rates by 2013, two years ahead of the schedule. 25

26 Goal 2: Achieve Universal primary Education Source: Bangladesh Progress Report 2009 Bangladesh is well on track in bringing school age children to school, however with a slower pace in other targets of Goal 2. 26

27 Goal 3: Promote Gender Equality and Empower Women Bangladesh has already achieved gender parity in primary and secondary education at the national level. 27

28 Goal 4: Reduce Child Mortality There has been remarkable decline in the infant, child and under-five mortality rate since

29 Poverty Reduction Strategies in Bangladesh FFYP ( ) PRSP I (2005) NSAPR II ( ) NSAPR II-Revised ( ) SFYP ( )

30 Poverty Reduction Strategy Papers First PRSP: Unlocking the Potential: National Strategy for Accelerated Poverty Reduction 30

31 Second PRS: Moving Ahead Second PRSP is prepared for achieving accelerated growth and poverty reduction during FY

32 Difference between First and Second PRSP Conceptual: More conceptual clarity on propoor growth and sources and strategies for propoor growth. Process: 18 thematic groups were formed instead of 12 thematic groups in the First National Strategy for Accelerated Poverty Reduction (NSAPR). Contents: Indicative costs of implementation of the PRS is provided which was not given in the First NSAPR. 32

33 Bangladesh s Banking System in Poverty Eradication 33

34 THE BANGLADESH BANK ORDER, 1972 Whereas it is necessary to establish a central bank in Bangladesh to manage the monetary and credit system of Bangladesh with a view to stabilizing domestic monetary value and maintaining a competitive external par value of the Bangladesh Taka towards fostering growth and development of country s productive resources in the best national interest 1. 1 Substituted by the Bangladesh Bank (Amendment) Act,

35 Banking system in poverty eradication Sharp decline in poverty in Bangladesh stems largely from buoyant employment growth in farm and non-farm micro and small enterprises at grassroots level, underpinned by steady GDP growth, averaging around 6.0 percent annually in real terms. Bangladesh Bank(BB) pursues broad based monetary policy to achieve sustainable and equitable economic growth targeted at rapid poverty alleviation. 35

36 Effective monetary policy keeps Inflation In-Check 14 CPI Inflation (% change y-o-y) CPI 0 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Inflation is under control with tightening monetary policy achieving its desired effect of reducing inflation from a high of 12.0% in September 2011 to 7.22% in October

37 Effective monetary policy ensures exchange rate stability Greater exchange rate flexibility is being exercised to ensure stable foreign exchange markets and help facilitate external adjustment over the medium term. 37

38 Remittances have been contributing significantly in reducing rural poverty 38

39 Foreign Exchange reserves remain buoyant International Reserves (US$ bn) Jul/11 Aug/11 Sep/11 Oct/11 Nov/11 Dec/11 Jan/12 Feb/12 Mar/12 Apr/12 May/12 Jun/12 Jul/12 Aug/12 Sep/12 Oct/12 Bangladesh has record levels of international reserves with US$12.3 billion as of October 2012, enough to cover around five months of imports. 39

40 Foreign Exchange reserves remain buoyant..(cont d) FX Reserve (USD billion) Jun-09 Jun-10 Jun-11 Jun-12 Oct-12 Since June 2009, foreign exchange reserves have increased more than 1.5 times from USD 7.47 billion in June 2009, to USD billion in October

41 Exports remain a key pillar of growth continuing to support economic prospects and poverty alleviation Export growth is a key area where Bangladesh holds many competitive advantages that will continue to strengthen as labor and materials costs rise in many other emerging Asian nations. 41

42 Financial inclusion campaign of BB is contributing significantly to poverty eradication o BB has been strongly pursuing financial inclusion to hasten inclusive growth and poverty eradication. Conscious targeting of bank credit flows to agriculture and SMEs have been supplemented by substantial volumes of self employment credit from Micro Finance Institutions (MFIs) spread countrywide. o BB has launched a countrywide financial inclusion campaign motivating banks in reaching out cost effectively to the underserved rural and urban poor. 42

43 Refinance support for productive economic sector continues o Against their SME and agricultural financing, banks are getting refinance support from BB to meet occasional liquidity needs; the refinance lines are funded by development partners, government of Bangladesh (GOB), and BB. o Over the past two years, banks in Bangladesh have opened nearly 13 million no-frills accounts with nominal initial deposits as low as 10 Taka in names of hitherto unbanked small landholder/tenant farmers, floating urban laborers, and poor social safety net benefit recipients. 43

44 A glance on BB s Financial Inclusion programs Agricultural Credit Policy and Program: Target for FY was set Taka billion and actual disbursement was Taka billion. Target for FY has been set at Taka billion. In FY , more than 3.0 million farmers received agricultural credit. 44

45 A glance on BB s Financial Inclusion programs..(cont d) Credit Facilities for Sharecroppers: In 2009, BB launched Taka 5.0 billion refinance line for landless sharecroppers in partnership with BRAC, a non-bank MFI. Till June 2012, BB has provided BRAC with refinance facility of Taka 4.9 billion with which BRAC has provided loans to 415,000 sharecroppers in 250 subdistricts of 48 districts. 45

46 A glance on BB s Financial Inclusion programs..(cont d) SME Credit Policy and Program: For the first time in 2010, banks and financial institutions set target of Taka billion for SME finance; Disbursement was 138% of the target; Around 0.4 million SMEs were financed. SME lending target were set at Taka billion and Taka billion in 2011 and 2012 respectively. A refinance scheme with funds from Bangladesh Bank, IDA, ADB and JICA is available at BB at reduced interest rate; 15% of the total fund is reserved for women entrepreneurs. 46

47 A glance on BB s Financial Inclusion programs..(cont d) Mobile Banking: o With fast expanding mobile telephony and great enthusiasm of the banks in offering financial services through mobile phones, BB issued guidelines on mobile financial services in o 23 banks have been given license thus fur to provide mobile financial services (MFS) of which 14 banks have already started their operations. o These banks are presently providing MFS to around 1.5 million customers; average transaction volume is around Taka 330 million per day. 47

48 Countrywide microcredit movement has broadened financial inclusion, supporting productive economic activities and upholding domestic consumption o As of 30 June 2011, MFIs had outstanding loans of Tk billion to more than 20 million poor borrowers. o Besides MFIs, state-owned commercial banks and specialized government programs also extended microcredit. o MFIs are licensed and supervised by the Microcredit Regulatory Authority (MRA) established in

49 Microcredit operations in Bangladesh 49

50 Challenges ahead The rate of poverty reduction has been quite satisfactory so far. However, a large pool of population still lives in absolute poverty. The global commodity price hike poses potential threats to the pace of poverty reduction through its impact on purchasing power particularly for the middle and fixed income group. High vulnerability to the climate change threatens Bangladesh s future progress in poverty eradication. 50

51 Concluding Remarks Bangladesh has made commendable success in poverty eradication so far. However, more emphasis are needed in areas where MDG progress are still slow. Special attention to removing the growth constraints in the lagging regions in terms of human development, infrastructure, and finances will enhance growth prospects for Bangladesh. Bangladesh Bank will continue its developmental role towards acceleration of inclusive growth and alleviation of poverty in Bangladesh. 51

52 Many thanks 52