[The concluding part of a four-part series on Sustainability in banking]
As in most developing countries, policy makers and banks in Bangladesh are pursuing sustainable banking activities. However, social and environmental issues may draw attention of the stakeholders when banks are profitable and stable. For ensuring sustained profitability, the key institutional issues, especially corporate governance of the banking industry, must be given due impetus. Addressing financial crimes and ensuring high compliance are critical issues to banks and are also costly affairs. It is good that a number of banks in the country are responding fast with modern technology-- a vital precondition to be competitive in the market. Being the most important source of financing, banking industry must maintain soundness and improve asset quality for ensuring sustainable growth of the financial sector and the economy.
The policy and strategic interventions of Bangladesh Bank reflect its intention of supporting government's moves through realising sustainable banking agenda in the country. Finalisation and enforcement of 'National Financial Inclusion Strategy' would add a new dimension to the drives that may escalate the role and involvement of banks.
Probably, it is now the right time for Bangladesh to shift from 'Regulatory Approach' to 'Collaborative Approach' for ensuring ownership of market participants and giving the right kind of push to sustainable banking. 'Adoption of a set of Sustainable Banking Principles' by the association of bankers/banks might be useful in initiating such collaborative approach.
For sound market development and business, it is crucial to have undistorted and competitive market structure. The current green financing market has distorting components that are working as disincentive for some market participants. For ensuring wider participation of banks and non-banking financial institution (NBFIs), all market distorting factors must be handled with care. In this existing scenario, right market segmentation could address the problem. Undertaking research on market segmentation might be helpful.
In spite of some remarkable changes and improvements in certain areas like solar home systems, and also bio-gas, several areas of green financing remain trifling or untouched. Some of these are important and relevant from the point of view of green growth. Areas like waste management, bio-diversity and green transportation should get due emphasis to obtain required benefit in near future. BB is working to promote industries and created special funds to support textile, leather and other export oriented industries on green and safety fronts. Considering the global experiences, potentials of ESCO model could be considered for ensuring energy efficiency in garments and textile. Attainment of targets of 5 per cent green credit disbursement might be tough for banks. For optimum outcomes, the central bank may think of fixing different targets of green loan disbursement for different banks/NBFIs.
A coordinated approach for green financing is needed. The financing model for renewable energy for the country might include five integrated set-ups: BB as the guiding/monitoring/refinancing agency; SREDA (Sustainable and Renewable Energy Development Authority (SREDA) as standardisation/monitoring/technical guidance agency; financing and maintenance-support agencies as intermediaries; banks/NBFIs as wholesale financing agency; and donors to perform the marketing and awareness development functions.
Direct bank/NBFIs' lending to the end users does not seem feasible in all scenarios of green and small-scale financing. In several instances, using intermediary and partnering organistions are offering better outcomes. Especially, linkage approaches of some NGOs/MFIs at ground level are really encouraging. Thus linkage might be a preferred model. 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 capable NGOs/MFIs to do the job of financing as the intermediaries of banks/NBFIs.
Contribution through CSR funds improved remarkably in terms of the volume allocated by banks. BB may encourage banks/NBFIs in this regard. BB's Disaster Management and Social Responsibility Fund is a good addition to it. 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 financing activities to incorporate the use of CSR funds within the core banking functions.
In spite of several initiatives, financing and market development in agriculture has remained less attended. 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 is a huge potential of designing and offering credit and insurance products targeting agricultural sector of the country. At the policy level there can 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 support in recent years. However, cluster financing approach could be an alternative channel for effective small and micro enterprise financing. Though banks finance 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. In case of solar irrigation, a well monitored cluster approach could benefit a large number of rural farmers by using the service of local agents. For effective micro and small financing, 'Credit Registry Bureau' or 'Micro Credit Information Bureau' might be helpful.
It is evident that technology-driven approach is much more effective to bring unbanked poor people under the coverage of financial services. The penetration level of mobile banking is very high. Exploration of mobile banking can bring a revolution in financial inclusion. Improving services, compensation for fraud and reduction of costs could contribute to desired expansion. Agent banking has started revealing market potentials. Complete enforcement of e-KYC might bring remarkable positive benefits in giving a big push to the mobile, agent and other sustainable banking moves.
Responses for school banking are positive. Involvement of all types of banks has been very helpful in pushing this inclusive and literacy drive instrument. Appropriate use of technology could offer notable efficiency in this regard. There are also potentials of exploring the model of using students as local agents which may be very helpful for them by improving financial understanding and obtaining scholarships for education. BB is working on a Financial Literacy Guideline which may escalate the efforts.
Sustainability reporting practices by banks can be the main foundation of effective disclosure and transparency. However, only a few banks could manage to achieve some milestones in this regard. In the area of capacity development, limited knowledge and awareness on the green and sustainable finance interventions and products are critical challenges.
Finally, if the key areas of bank financing activities do not sustain or do not perform in a sound manner, the developmental roles of banks for environmental and social risk management cannot be optimised. 'Sustainable Banking' should be promoted as an approach for having the right kind of balance between efficient banking operation in an environment of sound corporate governance and addressing the needs of the society.
Dr. Shah Md Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM).
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