Socially responsible financing continues to play a key role in Bangladesh's financial sector. Focusing on inclusiveness and green funding has allowed the financial inclusion of the poorer segments of the population, while maintaining the country’s economic stability. 

For well over a decade, Bangladesh’s economy has been in a sustained spell of annual average real gross domestic product growth of at least 6%. Amid ups and downs in the global economy, including the global financial crisis, Bangladesh’s consumer price index inflation rate has been maintained at single-digit levels and its fiscal deficit at lower single-digit levels.

The domestic currency, the taka, has been under appreciation pressure for several months now, with a rapid build-up of foreign exchange reserves from balance-of-payments current account surplus. The inclusivity of the growth in the country is shown by a resurgence in the rural economy, where poverty is receding fast through a sharp rise in rural wages.

Besides macroeconomic stability, Bangladesh's financial sector has also remained liquid and stable with no significant systemic stress during and following the global financial crisis. Bangladesh Bank (BB), the country’s monetary and financial sector regulator, has been continually upgrading financial sector management and supervision towards fuller convergence with global best practice, and is working towards building up the strength and resilience of the country's financial system to withstand shocks from the increasing external openness of the Bangladeshi economy.

Social responsibility

BB believes that Bangladesh’s macroeconomic and financial stability is down to its efforts in mainstreaming a socially responsible financing ethos in the financial sector, with inclusivity and environmental sustainability as the two key facets. Sustained motivational efforts have succeeded in enthusing financial institutions in reaching out to the unserved and underserved members of the population and occupational groups with financing support for their initiatives.

These initiatives are yielding larger outputs on the supply side, matched on the demand side by incremental employment and income gains, underpinning the stability of the real sector. Financial sector stability is also supported, on the one hand with the new inclusion client bases diversifying loan portfolios and reducing the credit risk of financial institutions from large exposures to a few big clients, and on the other hand by reducing liquidity risks with the new inclusion clients broadening deposit bases of financiers, reducing their dependence on large deposits from a few big clients.

The attention paid to environmental issues in loan appraisals is likewise mitigating longer term risks to real and financial sector stability by rechannelling financing towards environmentally sustainable practices.

Price stability

Besides this motivational campaign, BB’s socially responsible financing efforts include modest refinancing support from within the monetary growth envelope of its monetary policies, which safeguard price stability and are supplemented by funding from external development partners. Several enabling and facilitating measures have accompanied these socially responsible financing promotion moves.

BB led the modernisation of Bangladesh’s payment system, while new financial services information and communications technology infrastructure has enabled the rapid expansion of mobile phone/smart card-based off-branch financial service delivery. Beginning with fund transfers, including inward remittances from workers abroad, this off-branch service delivery mode is now expanding to deposit taking, loan disbursement and loan recovery. 

In the bank-led model opted for by BB in promoting mobile phone-based and other cost-efficient off-branch financial service delivery modes, banks employ locally active area agents, including microfinance institutions (MFIs) licensed by Bangladesh’s Microcredit Regulatory Authority, for service delivery to clients in the local area with responsibility for all Know Your Client and other 'anti-money laundering' and 'combating the financing of terrorism' due-diligence routines. Client transactions are subject to Know Your Client drills of varying levels, proportionate with transaction size and frequency.

Agricultural mandate

BB requires all banks – state-owned and private sector-owned, local and foreign – to maintain at least 2.5% of total assets in agricultural financing. Foreign-owned banks are using MFIs as agents for their agricultural financing and for providing services to small and medium-sized enterprises (SMEs). BB has recently been using a renowned big MFI in a scheme to channel financing towards sharecroppers, funding it against bank guarantees for on-lending to target groups, which include female borrowers.  

Bank branch expansion into underserved rural areas is also being encouraged, alongside a campaign to open no-frills bank accounts for poor sharecroppers, day labourers and others in the lowest income brackets, with deposits from as low as Tk10 ($0.10). The campaign has been hugely successful, with well over 13 million new bank accounts already opened, a major milestone in financial inclusion. Besides the intended use for receipt of social safety net allowances and farming input subsidies, other payments are also increasing in these accounts.

Available windows compensating for cost disadvantages in promoting inclusive financing include a donor-supported low-cost BB refinance line against the banks' SME financing, subject to at least 15% of the financing having been to female entrepreneurs. A government-funded interest subsidy is available to banks against their low-cost financing to clients growing non-traditional produce such as spices, oilseeds and pulses. State-owned agricultural banks receive occasional refinancing from BB against government guarantees. The proactive promotion of agricultural financing is already paying off handsomely, drastically lowering food import needs in Bangladesh, one factor behind the recent rapid rise of the country's foreign exchange reserves.

Credit information

For MFIs engaged in microfinance supporting the activities of microenterprises, moderately priced funding support is available from PKSF, a government-sponsored wholesale financier tasked with promoting rural employment. For efficiency enhancement in MFI lending, a donor-supported project of setting up a separate credit information bureau for credit information of MFI clientele segments is in under way. 

A refinance line funded by BB and a development partner is available for the financing of renewable energy and other environmentally friendly projects. It is already making substantial progress, for example, in solar and biomass-based renewable energy generation, effluent treatment and the use of new energy-efficient kilns in brick making.

The near-term priority of BB is to bring these initiatives to a successful completion and to ensure sustainability as quickly as possible. Over the medium and longer term, new challenges to financial inclusion will come from future global financial instability, and Bangladesh's vulnerability to this will increase with the increasing economic openness needed if we are to reach our growth aspirations.

One key factor behind the recent global financial crisis – unbridled global liquidity expansion being out of line with real output growth – remains unaddressed. Rather than attempting any meaningful reform in the global monetary order towards tethering global liquidity expansion to real output growth, advanced economies are deliberately pumping in liquidity in an effort to shore up flagging growth.

A successfully ingrained socially responsible ethos will keep Bangladeshi financial institutions and markets well immunised against shocks from future global instabilities, keeping us motivated to continue with our financing inclusion model and away from irresponsible speculative risk taking. Central banks in emerging and developing economies such as Bangladesh are learning from each other’s experiences, and we will contribute to global prosperity and stability.

Atiur Rahman is the governor of Bangladesh Bank.

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