Financial tools: Bangladesh Bank sets the ball rolling

Dhaka,  Monday,   2016-09-19
Published : 19 Sep 2016, 19:10:35

Financial tools: Bangladesh Bank sets the ball rolling

The Bangladesh Bank has evolved guidelines for the financial sector for promoting production, business, and other economic activities through financing activities, writes Shah Md Ahsan Habib in the second of a three-part article on Sustainable financial system

Policymakers/regulators and market players are the key supply-side stakeholders of the sustainable financing initiatives that are mainly related to financial inclusion, agricultural and SME financing, green and sustainable energy financing. These issues have received notable importance in the policy documents of the Bangladesh government's ministries. Several government agencies are also engaged in promoting initiatives of the financial sector market players and field level service providers. Of the financial sector regulators, it is the Bangladesh Bank (BB) that has undertaken a set of remarkable initiatives. 

Though agriculture is a core sector in the country, access to institutional finance is a critical challenge. The National Agriculture Policy rightly identified several targets that include sustainability and profitability in agricultural production, increasing productivity, employment and income generation, competitive farming through commercialisation, adaptability to climate change, developing market, agro-processing and agro-based industries, and promoting export of agricultural products by ensuring adequate credit flows. 

Bangladesh is not only the pioneer in the field of microcredit;  some of its programmes are really successful in addressing the needs of the vulnerable people including the problems of access to finance. Actually, major national and sector-specific policy documents of the country rightly recognised the importance of 'access to finance'. Financing lines from the government budget have been made available against loans to the rural poor for construction of their basic shelter housing under different programmes including 'One Home-One Farm'. The government is providing funds for lending resources to the MFIs (through the Palli Karma Sahayak Foundation i.e. PKSF) for rural on-and off-farm self-employment, micro and SME credit, along with gender bias towards empowering women. The Post Office Department is also taking new initiatives, in association with banks and other external and internal remittance intermediaries, to offer faster remittance deliveries to the recipients.

The National Industrial Policy 2015 rightly identified the priority of SMEs as the driving force for industrialisation. A national taskforce has been formed for planning and a separate cell was established for supporting SMEs under the supervision of the Ministry of Industries. The government has taken an initiative to formulate a separate SME policy to provide entrepreneurs with necessary guidance and strategic support in respect of establishment of SME industries all over the country. The government has already initiated a few industry-friendly policies to support SMEs through SME Foundation, Bangladesh Bank and several other government agencies.

The Environment Conservation Act (ECA) 1995 was adopted to conserve and improve environmental standards and the Environmental Conservation Rules, 1997 was promulgated to broadly define management of toxic and hazardous substances and provide guidelines for disposal of waste from different categories of industries. Under the Environmental Conservation Rules 1997, depending on the environmental impact of specific industries, the industries are classified into green, orange-A, orange-B, red category and red and orange are required to obtain clearance certificates from the concerned ministry to obtain credit facilities. The most relevant policy document in connection with the energy sustainability is the Renewable Energy Policy that targets to meet ten per cent of the total power demand by 2020. In 2012, the government set up the Sustainable and Renewable Energy Development Authority (SREDA) and finalised Sustainable Energy Development Act, 2011. The Ministry of Power, Energy and Mineral Resources and the Ministry of Finance are providing support to strengthening of SREDA to attain the government targets of energy sustainability.

The central bank's policy initiatives are more relevant in the context of designing a sustainable financial system. Conventionally, there are arguments that the objectives of 'financial stability' and 'price stability' may contradict each other and thus the objective of price stability may be hampered.  Thus, policymakers and the segment of the economics professionals interested in central banking are focusing on the task of attaining and preserving price and economic stability. Targeting explicitly 'financial stability' was generally viewed as a distraction and risking the central bank's attention in achieving its price stability mandate. The renewed recognition of the importance of preserving financial stability is entirely appropriate and perhaps long overdue. Some central banks of developing countries like the BB have opted to deviate from the mainstream monetary policy approach of developed economies. These central banks have been following monetary and financial policies towards supporting inclusive and sustainable growth. 

To promote its developmental goals, the central bank has upgraded the country's financial market infrastructure by setting up fully-automated nationwide online clearing system and hastening automation in banks. Notable initiates have been taken up to ensure appropriate regulatory and supervisory regimes for effective oversight of risk management, internal controls and customer interest protections. Several incentives like refinance lines from the BB and limited interest subsidies have been made available to promote lending to farmers, small enterprises and poor households. For mainstreaming corporate social responsibility (CSR) in banks and financial institutions and to move in the way of equitable and sustainable development, the BB issued several motivational instructions to go for voluntary CSR activities. Moreover, the BB kicked off its own CSR activities.

Adoption of innovative technology has injected new impetus in the financial inclusion drive of the BB. Online access to the Credit Information Bureau (CIB) has been successfully started by the initiative of the central bank. Installation of Bangladesh Automated Clearing House, Bangladesh Electronic Fund Transfer Network and National Payment Switch are other remarkable events in the history of our financial sector. Technology has brought efficiency in the supervisory arrangement of the central bank. Considering the paramount importance of information systems security in banks, the BB has issued ICT Security Guidelines for banking and financial institutions. With the initiative of the Bill and Melinda Gates Foundation, and joint participation of the BB and the Microcredit Regulatory Authority (MRA), an interactive website,, was opened in 2013 for expanding the reach of financial inclusion. By using this website, a potential customer can gather the locations of financial service providers such as bank branches, ATMs, microfinance institutions, cooperatives, mobile money agents, and post offices. 

In line with the pro-poor agriculture and farmer-friendly policy of the government, every financial year the BB formulates 'Agricultural and Rural Credit Policy and Programmes'. Under the policy and the programme, all scheduled banks disburse agricultural and rural credit to the farmers using simple terms and conditions and relatively lower interest rate.  Agricultural credit at concessional interest rate is being extended by banks to farmers. Banks get interest subsidy from the government through the BB against these loans. To support sharecropper farmers, the BB launched a refinance scheme. Moreover, a donor-assisted crop diversification credit project is extending credit for growing of higher value crops in the country's poverty-ridden region. A separate department named 'SME and Special Programme Department' has been created in the BB to accelerate SME activities and provide effective monitoring. The BB has formulated elaborate guidelines for SME credit and introduced several refinancing schemes to support small enterprises. 

Adoption of greater transparency and democratic approach in policy making and strategies is a notable change in the approach of the central bank. By publishing 'Financial Stability' report each year, the BB gives information of the financial market to the stakeholders. Alongside employing modern communication channels and tools, the BB is motivating the entire financial sector to take advantage of the latest technology. In a recent initiative, the Social Media Communication Gateway has been launched in the BB officially so that the people can see the activities of the central bank through Facebook, YouTube, and Twitter. The central bank has been giving special priority to financial literacy programmes to bring the population of the country under the coverage of financial services and achieve poverty reduction and financial inclusion. In order to acknowledge the important contribution of migrant, non-resident Bangladeshi nationals and related institutions towards the economic progress of Bangladesh, the BB has started the 'Bangladesh Bank Remittance Award' programme. 

A separate department in the name of Sustainable Financing Department is responsible to take care of the green initiatives of the BB. Green banking initiative by the central bank is a remarkable step on the way to attain environmental and energy sustainability. The comprehensive circular of the BB titled 'Policy Guidelines for Green Banking' was circulated in February 2011. The policy and relevant strategies were to be attained in three phases covering in-house environment management, environmental financing and reporting. The BB prepared and circulated a guideline on environmental risk management also in 2011 to streamline solutions for managing the environmental risks in financing that has recently been updated. To encourage paperless transactions, instruction was given to banks and NBFIs to go for E-procurement by December 2016. The BB undertook the Environmental and Social Management Framework Financial Sector Support Project in March 2015 to spur investment and growth by scaling up access to affordable financing and enhance markets for long-term debt in order to meet the long-term financing needs of manufacturing industries including SMEs. 

To encourage renewable energy use in the financial sector, the BB switched over to solar-powered lighting by setting up a 20-kilowatt solar panel in 2010, and banks have been advised to finance solar energy, bio-gas plant, Effluent Treatment Plant (ETP) and Hybrid Hoffman Kiln (HHK) in brick fields under the refinance programme of the BB. To promote green financing, the central bank has introduced three types of refinancing facility--BB Refinance Scheme, ADB-supported Refinance Scheme and Refinance Scheme funded by Shariah-based banks and financial institutions.

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

Editor : A.H.M Moazzem Hossain
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