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Reorienting financial intermediation towards sustainable financing: Bangladesh Bank’s approach

The Bangladesh central bank has a long tradition of favouring socially sustainable financing behavior. It was thus natural to extend its mission to the question of climate change mitigation and adaptation investments, both internally and externally in the global financial system.
By M.A.M. Kazemi
 Post, September 18, 2015

This article is part of a special series discussing the economic dimensions of environmental issues ahead of the - COP 21 Climate change Conference held in Paris on 30 November-11 December 2015. Read more about it here.
M.A.M. Kazemi is Senior Advisor to Governor and former Deputy Governor of the Bangladesh Bank.

Bangladesh’s climate change vulnerabilities and mitigation responses
A densely populated South Asian developing countrywith extended low lying coastal belt, Bangladesh is particularly vulnerable to global warming driven sea level rise and other climate change threats created by high carbon emissions of industrial economies, although her own per capita carbon emission remains minuscule.

The Government of Bangladesh (GOB)is aiming at reducing this vulnerability by embracing low carbon climate resilient options in development strategies and initiatives, the intended transition from conventional high carbon emission output practices and lifestyles to the low emission sustainable alternatives largely entails rechannelling of existing financing flows away from traditional options into the sustainable new options, rather than infusion of vast sums in net new financing.

Bangladesh Bank (BB), the central bank regulating Bangladesh’s monetary and financial system, has focused on catalyzing the needed shift of financing flows in the domestic market towards adoption of sustainable low carbon output practices and lifestyles. While the government is mobilizing fiscal resources for major new public sector climate action initiatives, BB’s reorientation efforts in the financial sector are helping adoption of sustainable low carbon options in the private sector, which constitutes over four fifth of the economy.

Main thrusts of BB’s reorientation initiatives in the financial sector

- Sensitizing and motivating towards socially responsible sustainable financing
BB began by launching a sustained sensitization and motivation initiative to ingrain a socially responsible institutional ethos of inclusive, environmentally responsible financing in the country’s financial sector. BB holds regular consultative engagements with the banks and financial institutions in setting mutually agreed incremental targets for ‘green’ and inclusive financing in specified priority productive sectors (in percent of annual total new financing). High performers earn token awards by way of recognition/commendation, better supervisory rating score, etc.

BB’s motivation initiatives have resonated well in the entire financial sector; all banks and financial institutions of all descriptions, local and foreign, publicly and privately owned, have embraced green and inclusive financing promotion without demur, devising innovative cost efficient service delivery modes for attaining the targets. Just as importantly, the motivation initiative has kept the financial sector dissuaded from financing speculation and wasteful ostentatious consumption; augmenting financing availability for environmentally sustainable output activities.
- Enablement
Necessary enablement support comes hand in hand with BB’s motivation initiatives. Environmental Risk Management (ERM) Guidelines issued by BB in 2011 have provided local lenders with assessment frameworks on which to base their sustainable financing decisions.

Reform initiatives are ongoing in the local capital and financial markets to foster fund raising by issuance of corporate bonds, including green bonds.

BB has also encouraged forgingof mutual learning and cooperation platforms for local green project entrepreneurs and lenders, facilitating their liaison and linking up with climate action TA and financing support networks abroad.
- Policy support
Low cost local currency refinance support lines are available from a BB window against sustainable financing for low carbon emission project initiatives in 47 specified areas including renewable energy generation, effluent treatment, and energy efficient output practices. Initiated with BB’s own modest funding within margins of reserve money growth permissible in BB’s monetary programs, development partners like ADB, WB and JICA have subsequently joined hands in augmenting and expanding the refinance lines supporting green financing and SME financing.

A new foreign currency refinance line of up to USD 500 million from BB’s resources is being lined up specifically to support financing for adoption of environmentally sustainable practices in water management and other areas of output activities in the export oriented textiles, leather and apparels sectors.

BB has also been tweaking with macro prudential ruleslike debt equity ratios etc. to impart more favorable bias in financing low carbon ‘green’ options over the polluting conventional ones.
Outcomes, way forward
It will be too early now to attempt impact assessment of the BB initiatives in terms of final outcome in carbon footprint reduction; as green financing in the domestic market is yet to attain the critical mass needed inbringing out clearly discernible outcomes. However, gains in momentum in the financial sector towards sustainable green financing are already clearly perceptible; and so are the very favorable macroeconomic stability outcomes of BB’s socially responsible inclusive, sustainable financing initiatives. Bangladesh is in a sustained stable spell of six plus percent annual average real GDP growth for well over twelve years now, amid prolonged global growth slowdown. The domestic currency is in sustained appreciation pressure from strong gains in external sector viability and foreign exchange reserve build up.

All banks and financial institutions in the domestic market are steadily building up their portfolios of green financing assets. IDCOL, a public sector infrastructure financing company, has already amassed a large enough green financing portfolio to enable raising new green bond funds there against. Besides promoting green transition of the domestic financial sector, BB is also affirming its commitment to low carbon transition of global finance by acquisition and holding of green bonds in its foreign exchange reserve asset portfolio. BB intends to proactively pursue rapid progress in all these trends, aiming in the near to medium term at a substantial ascendance of low carbon green financing over the conventional alternatives in Bangladesh’s financial sector.
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