Markets towards sustainable economic development: A Study in

Bangladesh

Submitted to:MD. Joynal AbedinCourse instructorDepartment of FinanceAIUB

Subject: Financial Institutions and MarketsSection-C

Submitted by:Group No: 2

1) Ahsan, A F M Mahmudul 13-24651-22) Kanchan, Eleus 13-24002-23) Islam,jahidul 12-22422-34) saha,sudipta 13-24730-2

5) Israt, Fatema 13-23406-1

Date of Submission: 8th December 2015

Introduction

Bangladesh is a development country. This country’s GDP growth rate is about 6-7% and the inflation rate approximately 5-6%. This country’s geographical location is beside the sea. For that reason the south side of this country in relatively low land. Every year the low land flooded by the sea water. For the natural calamity’s the soil and the environment is losing its ecological balance. Every year the sea level is increasing that means it is growing up n up. For that reason the low land flooded permanently. This types of unwanted flood happen for the ecological imbalance. On the other hand, the temperature of the earth is increased by 2-3°c from the last century. For that reason the ice of the north pool of the earth and the sea level is increasing day by day. It is happening for the developed countries/ western countries over use natural resources.

Review of previous empirical literature

For the large production and the pollution of the environment, our earth is losing its balance. The earth has not infinite resources to use in a huge amount and a infinite time. The resources are limited but the institutions are more focused about the generating profit. Now a day we can realize that we should not over use the resources and in improper way. So that institution should know the responsibility to save the nature but taking some relative action .They should create environment friendly (eco friendly) industry. The objective of this research is to identify the contribution of financial institution in achieving sustainable development (Pinter, 2014).

This research told us that what is sustainable development and the way of sustainable development. The definition was like the growth of the organized should incurred by the use of natural resources for the future. This project says that financial institute can introduce the sustainable development by the investors, innovation, valuers, stockholder, polluters etc. This sector can be sustainable by the green banking, energy efficient, clean industry.Sustainable development and the private sector. (European Commission, 1997).

The project says the corporation Andina De Fomen to (CAF) supports the sustainable development. So they took some action in private sector including financial institution. They consider some environmental friendly project. Such as Recycling & purification of the water, corporate social responsibility, investing in education and eco efficiency etc. They did some changes in managerial system or policy to do the sustainable development (Garcia, 1997).

This paper disclose some information about the economic sustainable development and the environmental factor it says that the banks as a financial institution it has no impact on natural environment. If there is any, it is negligible. But they are trying to cover the social responsibility, reputation, harmful risk. They says the monetary stability is the most vital things for the sustainable development. They mention some barriers to create a sustainable development situation. Such as, monetary instabilities, global financial crisis etc.

(Sestakova, 2012).

Financial system in Bangladesh

The Financial System is a set of institutional arrangement through which surplus units transfer their fund to deficit units. At present the financial system in Bangladesh is mainly composed of two types of institutions like banks and non-bank financial institution (NBFIs). The formal financial sector in Bangladesh includes: (a) Bangladesh Bank as the central bank, (b) 48 commercial banks, including 4 Government owned commercial banks, 30 domestic private banks, 9 foreign banks; and 5 government-owned specialized banks (DFIs); (c) 28 non-bank financial institutions (NBFIs) – licensed by the Bangladesh Bank); (d) 2 large government- owned insurance companies (life and general) and 60 private owned (17 life and 43 general) insurance companies; (e) 2 stock exchanges and, (f) some co-operative banks. Besides, a good number of semi-formal micro finance institutions (MFIs) also are operating in Bangladesh.

Regulators of the financial system

Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulate all the banks. It performs the traditional central banking roles of note issuance and of being banker to the government and banks. It formulates and implements monetary policy manages foreign exchange reserves and supervises banks and non-bank financial institutions. Its prudential regulations include minimum capital requirements, limits on loan concentration and insider borrowing and guidelines for asset classification and income recognition. BB has the power to impose penalties for non-compliance and also to intervene in the management of a bank if serious problems arise. It also has the delegated authority of issuing polity directives regarding the foreign exchange regime

Structure of Financial SystemThe main constituents of financial system are :i) Financial Institutionsii) Financial Instruments, andiii) Financial Markets.

Financial Institutions

An organization which is borrow funds from lenders and lends them to borrowers on terms which are better for both parties than if they dealt directly with each other.Financial institution can be defined into two parts one is Depository Financial Institution and another is Non depository financial institution.Depository Financial Institution includes:

a) Commercial Bankb) Saving & loan association c) Credit units

Non Depository Financial Institution includes:

a) Mutual Fundb) Pension Fundc) Insurance

Financial Instruments

A financial instrument is any contract that’s gives rise to financial asset of one entity and a financial liability or equity instrument of another entity. Example: Cash, Cheque, Commercial Paper, Negotiable Certificate of deposits, Banker Acceptances, Bonds, Stocks, Govt. Securities, Bank & Consumer Commercial Paper, Debentures, Mortgages

Financial Markets

Market is mechanism to facility the exchange value of financial goods and services between two parties one is buyer and another is seller.Financial Market can be classified into three bases

a) Season of claimb) Maturityc) Organization

Season of claim

It is classified into two parts. One is Primary Market and other is Secondary Market.

Primary Market First time, first hand new issue of securities, the funds or money directly go through the company. Example: All the securities of the company that are enlisted with SEC. Initial public offering (IPO).

Secondary Market Second time, second hand, existing securities trades in this market. The funds directly go through the seller. Example: All the securities of the company that are enlisted with SEC. Gp, DBBL etc.

Maturity:

Money MarketIt is short term, less than 1 year which is low risk, low return and high liquidity. Money market securities are primary and debts securities.Example: Treasure bill or T-bill, Commercial paper, Bankers acceptance Capital market It is long term, more than 1 year which is high risk, high return and low liquidity. Capital market securities focus on secondary securities and it is debts and equity securities.

Example: Bond, Stock, Treasure note, Treasure bond.

Organization

Over the counter (OTC) There is no structure, no physical presence no central location. They are connected through ware cable network.Example: National Association of Securities Dealers Automated Quoatitation (NASDAQ).

OrganizedThere is a structure, physical presence and central location. They are connected with both.Example: Dhaka stock exchange, New York stock exchange etc.

Sustainable DevelopmentIn 1987 the world commission on Environment and development (Brundtland Commission), presented a new concept - sustainable development on their report. The concept became one of the most successful approaches to be introduced in many years and also it helped to shape the international agenda and the international community's attitude towards economic, social and environmental development. "Sustainable Development is a development which meets the needs of current generations without compromising the ability of future generations to meet their own needs".According to oxford dictionary “Economic development that is conducted without depletion of natural resources”After analyzing all the definition it can be said that sustainable development is a way of development in which organization consider some benefit at present for the future long term benefit. It is also give benefit for the future generation and the earth.

Theoretical framework between financial system and sustainable development

Flow chart to adopt sustainable development and the result:

COST

COST

TECHNOLOGICAL ADVANCEMENT

PROFIT

MARGIN TOTAL

EFFICIENCY EFFICIENCY

GREEN BANKING

USING DAY LIGHT

CSR VS REVENUE

1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5BDT 0.00

BDT 0.50

BDT 1.00

BDT 1.50

BDT 2.00

BDT 2.50

BDT 3.00

BDT 3.50

REVENUE IN BILLION (TK)

CSR

COST

IN M

ILLIO

N (T

K)

Figure 1: CSR VS REVENUE RELATION

Green Banking vs Cost

Fixed cost and variable cost after adopting green banking, day light use, introducing technology.

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.50

1

2

3

4

5

6

7

8

9

10

Fixed Cost Per Unit

FCPU

Variable Cost Per Unit

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.50

100000

200000

300000

400000

500000

600000

GREEN BANKING VS COST

GREEN BANKING VS COST

Year 1

Year 2

Year 3

Profit in 2014 after adopting green financing, use day light, technoly etc. (assumption)

Revenue ( 1million taka)

Profit Margin (.3 m)

Variable cost(.2 m taka

Fixed Cost (.5 million taka)

Profit in 2015 (Assumption)

Revenue (1.3 m)

Profit margin (.65 m)

Variable cost (.2 m)

Fixed cost (.45 m)

Climate Risk of Bangladesh ( By German Watch)

Bangladesh reached in the 6th position in climate risk index in 2015. This report published on German Watch. In 2013 Bangladesh was not even in 10th position.

The role of financial institution and market in sustainable development Financial sector consist of financial institution and market.

Financial institution is classified into two categories they are:

1. Depository institutions: Examples of depository institutions are commercial banks, savings institutions, credit unions that obtain funds mainly through deposits from the public.

2. Non-depository institutions: : example of non- depository institutions . finance companies, mutual funds, securities firms, insurance companies, pension funds that finance their investment activities from the sale of securities or insurances.

Financial market is classified in five categories

(1) commodity market, (2) money market, (3) capital market, (4) currency market, and (5) derivative market.

sustainable development and financial institution and market

Depository institution: Depository financial institution like commercial banking sector is in its relationship with Small and Medium sized Enterprises, where banks can be very influential through their lending practices and by providing information.

Most of the commercial banks have focused on two areas: Firstly. many have made considerable progress in developing internal environmental management systems to reduce their own environmental impact. Secondly, most banks include some environmental analysis into their credit assessment process although this tends to be focused on liability.

Non-depository institutions Non-depository institutions like insurance company achieving sustainable development lies in its ability to price various types of environmental risk and to help pay for environmental damage.Potentially environmental issues can affect risks in a number of areas, but to date the industry has taken an issue based approach and has focused on the environment in two main areas:

Environmental liability: has had a seriously adverse affect on the industry, particularly in the Bangladesh and has resulted in the industry taking a very cautious approach to environmental issues. It is important that in any development of environmental liability in the.

The industry has also become clearly concerned about the potential impact of climate change on its business. Changing climate at best undermines the historic basis for evaluating risk and at worst could significantly increase losses, from increased storms and floods, to the extent that even the very viability of the industry could be threatened. In response, the leaders in the industry have developed a comprehensive set of measures,

ranging from an increasing lobbying at the climate change convention, through working with governments on research and preventative measures, to adjusting premiums and their areas of activity.

Data and Method of Analysis

Barriers to have sustainability

There are many reasons for which the financial institution cannot attracted for sustainable development. I am mentioning some points.

Fixed cost( initial Cost)

For sustainable development, the organization or financial institution have to take new initiations. Those new initiation can be creating technology environment. That means There will be more use of technology instead of paper work. To established this type of technology or new idea like this is too costly. The initial investment will be huge. So the huge amount of money sometimes discourage people to invest for the sustainable development. This fixed cost can be a barrier for sustainable development.

Government Rules and Regulation

In some country, There ar many types of rules and regulation on financial institutions. Such as, the structure of the institution physical or product structure. They have to obey the rules of the government. Some times if the financial institution wants to change their structure or product for the sustainable development, they can not do the changes.

Monetary instability:

It also can be a barrier to introduce sustainable development in financial institution and markets instability basically occur for the supply of the money. If there is no sufficient supply of the money in financial market, if can be happen that the efficiency of the market can fall down. So at this stage the sustainable economic development can not be adopted.

Global financial crisis

In financial crisis the financial market try to stable in terms of profit margin. In this situation the problem is to invest in sustainable development. In this time they ar concern about the current situation instead future.

Technological Risk

It is a problem to implement the technology for the sustainability. Such as the breakdown of the new technology. If there will be no expert then the institutional work will be stop for a certain period of time. Sometime it is a risk of confidential work also.

Driver of sustainability

The financial market can become the positive driver for sustainability. There r many aras to work to change. Such as Green banking, using day light, advance technology, efficient employee, using energy saving interior lighting, using ecofriendly, machine, heater and CSR activities. I am going some description on them.

Green banking

Green banking is a type of strategy in which there ar no paper work. Instead of this paper work bank will use the technology. If it is implemental in the financial institution , they can get the benefit in some way. Such as, the variable cost per unit will decrease, but there is a draw back for the institution and that is the fixed cost but in long run the fixed cost will give the fruitfull return that means the fixed cost per unit will be too low than the current position. It is all about the long run benefit. There is another benefit for our investment. If we do not ude the paper that means we ar not responsible for cutting trees. So the tree will be alive. So the country will be green and this strategy call green banking.

Using day light

Using day light instead of electric light also a good way sustainable development. In financial institution, they need adequad light to work. So the energy expenses is a major factor for that. If want to save this energy, then we have to day light properly. To use the daylight we have to adopt the glass structure in organization. So that we can get the utilize it properly instead of electric light. If we do so, variable cost of electricity will decline and the overall cost will be decrease by good amount.

Advance technology

Advance technology can be a important driver for the sustainability in financial institution. If financial institution adopt the advance technology the work efficiency will be high. So the cost of the institution will decrease. However the cost of adopting advance technology high but it will be capture in long run and it will give the fritful result.

Efficient employee

It means the less time to work and high quality production of product. He That means the performance is good. So the cost and time give benefit ina positive way. It also can be a driver to do sustainable development.

Using energy saving interior tools

It means the value of using electricity is low. If the financial institution use this types of tools, the first benefit will be the cost reduction and the second benefit will be the save electricity. It will using energy saving interior tools is a driver to adopt sustainable development.

Using eco friendly machine

Normal electronic machine produce tremendous amount of Carbon oxide, Cloro floro Carbon ( CFC ) UV ray Which is not good for the human life and environment as well. This type of gas is bad for O3 also. So if financial institution use Eco friendly machine than it will be a big step sustainable development.

Corporate social Responsibility

CSR activities are the activities by which organization can serve the people for the people of the society and themselves as well. Tree plantation, aware about environmental condition, recycling some wastage can be that type of work. CSR activities are not only important for the environmental and earth also for the business itself. So financial institution do the CSR activities the people will be benefited, the environmental also benefit and the profit margin and the revenue also be increased.

Incentives to have sustainable development

There are many types of incentives could be applied to promote more long-term sustainability such as reducing interest rate , tax deduction as sustainable development tools.

Government investment

government can invest on financial institution to promote sustainable development since financial institution is one of the backbone of country’s economy, it will be an important beneficial decision to invest on financial institution to promote sustainable development.

Tax exemption in financial sector to introduce sustainable development:

IF the government exempted some portion of tax, it will be more appreciable step to have sustainable developments to others .discourage to use those types of structure .so government can deduct the tax on tempered glass for the sustainable development in financial institutions. It would be an incentive to sustainable development.

TDS (Tax Deduction at Source) decrease in bank who adopted green banking

To Compensate the financial institution who already adopted the green banking , government can reduce the tds rate .so that the the customer will attracted to those institution .as a result those institution revenue will be increase automatically it can be an indirect to financial institution .

Deduction rate for the central bank revenue:

those five adopted the sustainable development, bb can reduce the deposit rate.

Tax deduction on solar plant

Solar Plant is an innovation by which the pressure on traditional electricity reduce . It is a plant which is use sunlight and convert the sun power into electricity . With the solar plant the financial institution can reduce the cost and can help to create help to create healthy environment for the future so government can deduct the tax on solar plant so that the financial institution can purchase and use it.

Tax deduction on ecology friendly machine and energy and light

The Ecology friendly machine and energy price will be decreased then financial intuition will attracted to adopted that types of machines and lights . It can be possible if government deduct the tax on ecology friendly machine and energy saving light.

Tax reduction on tempered glass

To Use the daylight in an organization . They need to use glass structure, if the glass price is expensive then they will be very depressed.

Encouraging instrument to have sustainable development

There are many way to have sustainable development such as.

Aware about the problem of climate change

If there is no sustainable work in the world, the world will be destroy soon because we do not use the resources properly and without thinking about the future generation. So this awareness should introduce in the market.

Aware about the need of sustainable development:

To promote the sustainable development of financial institutions have to know the importance of the sustainable development. They should aware about the sustainable development. They should aware about the sustainable development goal positive side. So, they can adopt the sustainable development for their own needs and the environment as well.

Introduce business ethics

Business ethics can change every person perspective .so it should introduce in the organization. As a result the organization will do for the long term instead of short of term instead of short for the future generation. So the sustainable development will introduce in the financial institution.

Empirical results and discussionSince sustainable development is needed for the whole world to survive and present the resource for the future and future generation so the all types of organization and institution and markets should adopt the sustainable development. These types of step are very much necessary for those countries who are already in danger. Bangladesh is one of those

countries which is in the sixth position of global climate risk index 2015. But in 2013 Bangladesh was not any position in top ten. So from these report it can be said that Bangladesh is in the climate risk for the global warming. The western counties are basically responsible for that. From 2012 to 2015 there were many natural calamities in Bangladesh. So the whole world should adopt sustainable development for the long run. From the conceptual literature review, it also can be implemented by the investors’ innovators, values, and stakeholder etc. if the companies do so, the efficiency will be increase gradually. As a climate risky country the financial institution and markets also can play a vital role for the sustainable economic development in Bangladesh. To promote the sustainable development financial institutions need to introduce some ideas. Such as green banking, using day light, advance technology using efficient employee, using energy saving interior tools, using eco friendly machine and some CSR activities. If financial institution adept those activities then they can do enjoy benefits. The benefit will be the reducing variable cost, efficient intems of time and quantity, energy saving environment well being and increase the revenue as well. But there are many problems to promote the sustainable development in financial sectors in Bangladesh. Such as the initial cost to promote is a very big factor. It can be a barrier to promote sustainable development in financial institutions and markets. The monetary instability also can be a problem to sustainable economic development. If the monetary position is instable then the financial sector also should instable and in instability the sustainable development cannot be adopted. The global financial crisis also that type of problem. There is a vital risk is the technological risk in financial institutions and markets to promote sustainable development. Bangladesh is not too much aware about the technological crime and they are not that much strong and knowledgeable in IT sector. So it will be major barrier to promote sustainable development by the technology. To remove the barriers there are some incentive which can be promoted by the government. Bangladesh bank and the financial institutions and markets, government can invest in some green project for the sustainable development. Government can reduce the tax in solar plant, energy saving machine eco friendly machine, tempered glass etc. Government can also exempted some portion of tax those who adopt the sustainable development. Bangladesh bank can reduce the reserve rate those who adopt the sustainable development. To encourage in sustainable development government and other organization have to let those people or organization aware about the sustainable development. Government should also aware about the problem about the climate change and the sustainable development needs.

Recommendation

For financial institution and markets

a) All the financial institution (Bank) should introduce the green banking.b) Financial institution should adopt the technology with a proper backup (security)c) All financial institution should use the day light instead of using electricity (glass

structure)d) Financial institution should let government aware/understandable about the sustainable

development and should attract to invest on it.e) Financial institution should use eco friendly equipment.

For Government

a) Government should aware the people or industry or financial institution about the sustainable development.

b) Government should insist financial institution to adopt sustainabilityc) Government can impose more tax those institution do not adopt sustainable

developmentd) Government can reduce tax rate on those financial institution which implement

sustainable development e) Government should deduct tax on solar plant

For Bangladesh bank

a) Bangladesh bank should new rules and regulation to adopt the sustainable development in institution.

b) Bangladesh bank should reduce the reserve rate or deposit who adopt sustainable development

Conclusion

For the development financial institution plays a vital role in the economy. So a developing country Bangladesh government has to care about the financial institution and markets. To grow the financial institution adoption of a sustainable development can be a key factor. Since the humidity, Temperature, Rainfall is changing gradually due to the global warming. So the sustainable development of the industry is very important. Global climate risk index 2015 says that Bangladesh also in a risk and Bangladesh position is 16 th where as in 2013 Bangladesh was not even in 10th position. So it can be said that the climate risk is increasing gradually. In Bangladesh, there are many financial institutions. So government should encourage financial institution to promote the sustainable development. Financial institution can use the green banking, use day light, energy saving machines for the future generation that means for sustainable development. To do this adoption there are many barriers exist in our country such the initial investment, government rules, monitory instability, Inflation risk, Technological risk etc. Financial institution can reduce those types of risk by using technological securities. But they need government help also. Such as tax exemption of green banks sector, technology, energy saving machine sectors. So that financial institution will be encouraged to do sustainable development. If financial institution does so there will be win situation for the govt., people and financial institution as well. When financial institution adopt sustainable development, though their initial cost will be increased by a big amount but in long run the FCPU will be decrease in a big amount. Their variable cost will reduce and sometime their revenue will also increase. So they can enjoy a stable profit margin. People will get a fresh environment and some times the cost of govt. also decrease. Bangladesh bank and govt. of Bangladesh already give emphasis on sustainable development. Bangladesh bank gives the guide to Islamic bank to finance in green projects (IDLC Amount Report). Govt. also awarding people to have sustainable development by the tree plantation, energy saving machine use and some rules

regulation. Such as , In summer govt. officer have to wear half sleve shirt in office. Since how a days the sustainable development is becoming mandatory things . So govt. should aware people about the changing climate , the problem of changing climate etc . If the sustainable development is adoped by the financial institution properly then all of the people , institution and the overall country will be benifited . So it can be said that the sustainable economic development can be adopted by the financial institutionof Bangladesh and it will be a better start to have sustainable development for all the country. And financial institution will be the pioneer for this initiatives.

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development and marketing in green banking,Social science research network, 1-10.

Lele, S.M. (1991), Sustainable development: a critical review , World development. Vol 19(6), 607-621.

Attah, N.V.(2010), Environmental sustainability and sustainable growth: a global outlook, University of pennsylviniascholary commons, 1-65.

Pisano, U., Martinuzzi, A,. Bruckner, B. (2012). Financial sector and sustainable development: logistics, principles and actors. ESDN quarterly report N27, 6-53.

Garcia, L.E (1997), Sustainable development and private sector: A financial institution perspective, Bridges to sustainability, 130-141.

Sestakova, M. (2012). Financial sector and sustainable economic development, 6-17.

European Commission, (1997). The role of financial institutions in achieving sustainable development. 1-137.

Global climate risk index (2015). Brifing paper. Retrieved from German watch. Website: https://germanwatch.org at 6th December 2015.

Development of four decade long climate scenario and trend temperature, rainfall, sunshine and humidity, (2014). Ministry of disaster management and relief.

Sustainable development, Retrieved from Oxford dictionary http://www.oxforddictionaries.com/definition/english/sustainable-development , at 9th december.