Sustainable finance - from 'regulatory approach' to 'collaborative approach'

Sustainable finance approach in Bangladesh has primarily been driven by regulatory policies. The involvement of Bangladesh Bank (BB) promoted inclusive growth for attaining developmental goals and poverty reduction objectives of the government. These initiatives are clearly linked to sustainable finance activities of the country. Besides maintaining monetary and financial stability, BB has remained proactive in its developmental role. This indicates the role the banking sector has been playing in a social and environmental responsibility-driven financial inclusion strategy. Certain interventions of the government are also concomitant with the sustainable finance drives in the country.

A sound regulatory and supervisory framework is the foundation of sustainable finance framework in a country. If the core credit operation is inefficient, then developmental ventures cannot get due attention. For creating a 'Prudential Supervisory Framework', the central bank has initiated arrangement for monitoring the overall banking sector by using international standards and also by undertaking some innovative measures. To ensure improved customer service, a 'Customer Interest Protection Centre' (CIPC) was established in the head office and regional offices of the BB in March 2012. A department named 'Financial Integrity and Customer Services Department' has been working for dealing with the complaints of the customers and clients of banks and financial institutions more quickly and easily. The banks have recently been asked to submit reports on lawsuits related to sick industries on a fortnightly basis to the Ministry of Finance and the Banking Regulation and Policy Department of Bangladesh Bank. All these initiatives are apparently designed to strengthen corporate governance and transparency in banks.

Though Bangladesh Bank has a specific department, namely 'Sustainable Finance' to take care of the key areas of sustainable finance -- Green Banking and CSR, activities of certain other departments are clearly associated with the broad definition of 'sustainable finance'. These include Agricultural Credit Department, Financial Inclusion Department, SME and Special Programme Department for Banking Regulation and Policy, Department of Off-site supervision, Financial Integrity and Customer Service Department, Payment Systems Department, etc.

Probably, it is now the right time to make a transition from 'regulatory approach' to 'collaborative approach' for giving the right kind of push to sustainable finance. 'Adoption of a set of Sustainable Finance Principles' by the central bank and associations of bankers/banks might be useful in initiating the collaborative approach. In case of renewable energy financing, selected suppliers and maintenance support institutions may be enlisted for offering technical and other maintenance services. There could be specific criteria or certification for getting access to the soft funds of the government. For making refinancing attractive to the banks/NBFIs, BB may think of introducing a system of qualification based on certain criteria for getting access to the fund at a reasonably low interest rate.

 The current green financing market has distorting components that are working as disincentive for some market participants. For ensuring wider participation of banks and NBFIs (non-banking financial institutions), all market distorting factors must be handled with care. Right market segmentation could be useful in this respect.

In spite of some remarkable changes and improvements in certain areas like Solar Home System (SHS), and also bio-gas in certain instances, several areas of green financing have not received due attention. Areas like waste management, bio-diversity and green transportation should get due importance.

BB is working to promote industries and created special funds to support textile, leather and other export-oriented industries. Considering the global experiences, potential of ESCO Model could be considered for ensuring energy efficiency in garments and textile. Fixing of targets for green credit disbursement is helpful. However, for optimum outcome, the central bank may think of fixing different targets of green loan disbursement for different banks/NBFIs with the tagged negative and positive incentive structure.

Direct bank/NBFIs lending to the end users does not seem feasible in most cases of green and small-scale financing. In several instances, using intermediary and partnering organisations are offering better outcomes. Especially, linkage approaches of some NGOs/MFIs at ground level are really encouraging. Thus, linkage might be a preferred model, however, the capacity of the partnering organisation must be enhanced to obtain optimum outcome. For banks/NBFIs, it is not always easy to identify and assess the efficiency of a financial intermediary to channel fund to the rural and semi-urban areas. BB may think of assessing and enlisting some local-level capable NGOs/MFIs to do the job of financing intermediary.

The existing documentation process of different banks/NBFIs and intermediaries is not uniform. Especially, banks follow relatively stringent documentation criteria in the process of loan disbursement. For banks, it is important to make the process less cumbersome to attract customers and create demand for green finance.  Currently, most CSR funds of banks/NBFIs are used for philanthropic purposes. CSR funds of banks may be used to offer subsidy to the sustainable finance and bring CSR funds within the core banking activities. BB may encourage banks/NBFIs in this regard. Appropriate use of Climate Risk Fund considering risk premium might be an upcoming agenda.

In spite of several initiatives, financing and market development in agriculture did not get due push. Though warehouse receipts system by itself or as part of commodity exchange arrangement contributed significantly in ensuring financing to the agricultural sector in several developing and neighbouring countries, Bangladesh could hardly reach near those levels. Micro-insurance has also been very successful in several instances. There are huge potentials of designing and offering credit and insurance products targeting agricultural sector of the country. At the policy level, there could be coordinated approach of BB and Insurance Development and Regulatory Authority (IDRA) to offer policy support for designing need-based micro insurance.

Small enterprise financing received notable policy push in recent years. However, cluster financing approach could be an alternative channel for effective small and micro enterprise financing. Though banks have finances in the SME clusters (in terms of geographic proximity), but cluster approach is missing in SME financing. It is possible to use cluster approach by forming groups and thus ensure access of small enterprises to SME financing. Solar irrigation, a well monitored cluster approach, could benefit a large number of rural farmers by using the service of local agents.

It is evident that technology-driven approach is much more effective in bringing unbanked poor people under the coverage of financial services. Availability of internet facility and mobile phone along with required devices at affordable cost, supply of uninterrupted electricity, etc., are challenges. On the other hand, managing operational risk, including fraud risk, is a barrier in this respect. The penetration level of mobile banking is very high. If the availability and usage can be increased, mobile banking can bring a revolution in financial inclusion. Improving services, arrangement for external evaluation, compensation for fraud and reduction of costs could contribute in expansion. Agent banking activities with the existing products may not bring expected outcome, banks need demand-based products targeting rural low-income population.

Responses for school banking are remarkable, and there are further potential for enhancing financial literacy. Of the special accounts targeting the underprivileged and students, the responses for school banking has been remarkable, as found in a study.

Limited knowledge, lack of awareness and capacity on the green and sustainable finance interventions and products are critical challenges. Bankers, especially those who are engaged at the branch/field levels and the intermediaries/suppliers must be motivated and need exposure on the use, benefits and technical aspects of green products.

Finally, the policy propositions might contribute in addressing social and environmental concerns associated with financing by banks in the country. However, if the key areas of bank financing activities are not sustainable or do not perform in a sound manner, the developmental roles of banks in environmental and social risk management cannot be optimised. 'Sustainable Finance' should be promoted as an approach for having a right kind of balance in an environment of sound corporate governance.

Dr Shah Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM).

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