Opinions
5 years ago

Quality green bond to help attract FDI

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The potential for foreign investment in Bangladesh is bright if the country floats quality green bond in the country. A joint study team on green bond opportunities in the country suggested this. The study was conducted by the Bangladesh Bank (BB) and the International Finance Corporation (IFC).

The green bond study was undertaken aiming at expediting the long-term financing scope for sustainable business practices. Such bonds are an effective instrument for mobilising capital for green investment.

Although the market for green bonds emerged only a few years ago, it has already achieved the ability to decisively contribute to closing existing financing shortfalls in environmental and climate protection.

Bangladesh requires investments of $608 billion over the next two decades to meet its infrastructure needs. While $417 billion of this amount is manageable, there is still a shortfall of $ 191 billion.

Presently long-term financing in Bangladesh is dependent on the banking system, which is not viable. Such dependence on the banking system can be replaced with bonds by attracting foreign investments.

With Bangladesh's foreign exchange reserves remaining stable for several years, if banks which  practise green financing, launch good quality bonds, overseas entrepreneurs are likely to be interested to invest in the country.

Since there is no bond market in Bangladesh, the joint study team is expected to assess the types of incentives needed to encourage launching green bond in the country. In the process, the country has to stop long-term financing from the banking sector first and launch a bond market in the country.

If state-owned banks come up with green bonds, there are reasons to believe that both local and foreign investors will be interested to subscribe. But the rate of interest must be a bit higher than that of fixed deposit receipt (FDR) in banks.

Large corporate bodies having considerable reputation and private sector banks and financial institutions also can launch bonds. Globally, corporate bonds are lucrative.

There is, however, still a lack of consensus on a generally applicable working definition of green bonds and on the application of mobilised capital. In order to address such a situation, many countries are mulling taking up a study that will first examine the development and functioning of green bond markets in nine selected countries.

The study will further analyse and appraise various options for deciding upon and establishing uniform standards. It will be based upon comprehensive research and interviews with representatives of national and international financial institutions. On that basis, the study will propose policy recommendations on strengthening green bond markets.

Many countries around the world have launched green bonds to fund projects that have positive environmental and climate benefits. The majority of the green bonds issued are green 'use of proceeds' or asset-linked bonds. Proceeds from these bonds are earmarked for green projects. Such bond investors do not have to pay income tax on interest from the green bonds they hold. As such, issuers can get lower interest rate.

The World Bank has, on the other hand, developed a bond that meets investors' specific demand. For investors, this green bond brings an opportunity to invest in climate solutions through a triple-A rated fixed income product. The credit quality of the green bonds is the same as for any other World Bank bonds.

All said and done, Bangladesh needs to develop alternative sources of financing including bonds to meet its future infrastructure investment needs.

 

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