socially responsible financing for enhancing … responsible financing for enhancing economic and...
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Socially Responsible Financing for Enhancing Economic and Financial Stability-Glimpses from South Asia
Atiur Rahman, Ph.D.Governor, Bangladesh BankEmail: [email protected]
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Asian Institute Technology (AIT)Bangkok-Thailand
Financial stability everywhere a high priority after global financial crisis
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The Global Financial Crisis (GFC, 2007-2009) brought financialstability to the forefront of policy priorities at national, regional andglobal levels.
The GFC highlighted importance of innovative approaches ofprotecting and strengthening financial stability.
Global liquidity expansion out of line with global output growth, akey cause of the GFC, continued in ‘Quantitative Easing’ (QE)pursued to overcome growth slowdown in advanced economies.This caused inflows-driven asset price bubbles and attendantinstability risks in Emerging Market (EM) economies.
The recent tapering of QE in advanced economies is creating newinstability risks by triggering investment outflow surges from EMeconomies.
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Bidden by G24, Basel based financial supervisory standardsetters have revised and expanded macro and micro-prudentialregulations and supervisory norms and standards.
Regulatory reforms alone will not ensure future stabilityhowever, risk buildups triggering the global crisis arose morefrom regulatory compliance negligence in good times ratherthan from gaps and shortcomings in regulations.
Reorienting motivations away from greed driven imprudentrisk taking to a socially responsible business ethos is arequisite for lasting stability, besides regulatory reforms.
Financial stability everywhere a high priority after global financial crisis
Inclusiveness and greening are the two main thrusts of SRF
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Largely ignored until lately by advanced economies, sociallyresponsible financing is growing healthily in bothdeveloping and developed economies, driven by worldwidedemand from civil society coalitions and movements.
Inclusive financing involves reaching out with financial servicesto all economic activities of all population segments in thesociety.
Environment friendly (green) financing involves lending onlyto project proposals that meet acceptable standards inenvironmental impact assessment; and in supportingtransition from traditional output practices to low-carbon,more energy efficient ones.
Inclusive finance now in focus as global priority
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Inclusive financing enhances stability by diversifying credit riskin numerous smaller loans for diverse purposes, and bybringing in stable bases of numerous small deposits from newinclusion clients.
Cooperation and networking among socially responsiblefinancial and nonfinancial businesses and regulators has beenflourishing, under such umbrellas as the UNGC and AFI.
Basel based global standard setters have also lately begunpaying attention to costs and instability risks from financialexclusion.
Inclusive financing not always immediate business cases
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Inclusive financing of client segments in dispersed remotelocations being costly, may often not be immediate businesscases.
Governments and central banks step in to drive down financialservices delivery costs, with such support measures as puttingin place mobile phone/smart card based ICT infrastructure foroff branch financial service delivery, low cost funding/refinancing lines and so forth.
Socially responsible inclusive financing in South Asia
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Inclusive financing has helped South Asian economies upholddomestic output and demand during and after the globalfinancial crisis, amid export growth weakness.
Bangladesh Bank (BB) and other South Asian central bankshave recognized and utilized early on the stability gains frominclusive financing.
South Asian central banks are using the SAARCFINANCEforum for mutual learning and experience sharing onapproaches of socially responsible inclusive financing.
BB is also active in AFI and regional forums promoting inclusivefinancing
Socially Responsible Financing : Bangladesh
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In Bangladesh, socially responsible financing began outsidemainstream banking as microfinance movement of non-government microfinance institutions (MFIs) in the post-liberation 1970s.
Directed lending in the post liberation nationalized banking systemtook care of social priorities in lending. Directed lending becameinfeasible with reappearance of private sector banks, and wasabolished in 1990; raising the need of a new approach for sociallyresponsible financing.
SRF in Bangladesh covers:Agricultural and SME financingGreen financing
Socially Responsible Financing in Bangladesh : Bangladesh Bank
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BB responded by launching an initiative of mainstreamingsocially responsible institutional ethos in the financial sector.
BB has taken on board all banks and financial institutions inBangladesh in a countrywide inclusive financing promotioncampaign, with three main thrusts:
1. Small holder and sharecropper agriculture2. Micro, small and medium scale productive rural and urban enterprises
(MSMEs).3. Renewable energy generation, effluent treatment, and other projects of
adoption of new energy efficient, GHG emission reducing outputpractices.
Socially Responsible Financing in Bangladesh : Bangladesh Bank
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Support and facilitation measures taken by BB in promotingsocially responsible financing include:
Modernization of the payment system and financial servicesICT infrastructure, enabling introduction of mobilephone/smart card based off-branch financial service delivery.
Liberally granting licenses for new rural bank branches,permitting engagement of MFIs for bank loan disbursementand recovery.
Refinance lines against agricultural, SME, and green financing.
Bangladesh: Enabling and facilitating measures in support of SRF
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Policy support from Bangladesh Bank for Green Financing:
BB has set up a Taka 2 billion revolving refinance scheme to supportlenders to green financing initiatives. Under this scheme, banks canclaim refinance facility from BB at the bank rate (5%) against theirdirect finance at 9% for green products and 11% in case of financingthrough MFI linkage. BB has introduced 10 green new products in July01, 2013 and now banks may claim refinance facility from BB for atotal of 16 green products.
The ADB has contributed USD 50 million to this refinancing scheme,to support lending for replacement of traditional smokes brick kilnswith energy efficient modern ones.
BB has introduced detailed Guidelines on Environmental RiskManagement (ERM) and Policy Guidelines for Green Banking in 2011.
Bangladesh: Enabling and facilitating measures in support of SRF
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No-frills accounts for farmers and other underprivilegedpeople
Available windows of low cost BB refinance line
Effective use of Bank-MFIs partnership
Engaging public and private stakeholders for SMEsdevelopment
Progress in financial inclusion
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During the past five years Bangladesh Bank has brought 13.3 millionpeople under banking service which includes farmers, hardcorepoor population, unemployed young men/women, freedom fighters,beneficiaries of social security program, small life insurance policyholders, students of schools etc.
Other than farmers' Tk. 10 account, 3.6 million accounts have beenopened to distribute financial aid to different social securityprogram beneficiaries, unemployed young men/women, hardcorepoor, freedom fighters, destitute beneficiaries under Hindu WelfareTrust, small life insurance policy holders and school students.
47 banks have launched school banking schemes reaching out toyoung school students. Up to December 31 2013, a total of2,86,479 students have opened accounts with savings of Tk. 3.04billion.
Progress in financial inclusion: Sharecroppers loan
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Bangladesh Bank has taken an innovative re-financing scheme of Tk. 5.0 billion revolving fund with BRAC in 2009 at 10 percent interest per year on flat rate for the neglected sharecroppers who have hardly any formal access to finance.
Under the Credit Program for Sharecroppers starting from FY 2009-10, Tk. 11.886 billion has been disbursed to 801,587 sharecroppers up to February 2014.
The outstanding sum is Tk. 7.873 billion. The BRAC has been operating this program in 250 upazillas of 48 districts across the country.
10 Taka bank account for street children
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After introducing various types of banking services for
farmers, sharecroppers and some other unprivileged
segments of the population, Bangladesh Bank has now
extended its initiatives to bring street urchins and street
children under institutional financial support. They have
their own bank account just for Taka 10 (12 cents).
BRPD circular 05 (March 09, 2014)
Landscape of Financial Services: Quasi-formal (Microfinance) market dominatesInformal market still has significant presence
Access to any
financial services in any market
Access to any financial services
(excluding insurance)
Access to formal and
quasi-formal finance
Access to quasi-formal finance
Access to formal
financial services
Access to informal finance
National 76.77 73.34 65.69 43.23 37.02 26.19
Poverty Status
Non-poor 79.39 75.96 68.37 39.67 44.42 27.69
Poor 70.57 67.14 59.32 51.70 19.43 22.63
Region
Rural 75.52 71.89 64.02 46.39 32.8 27.35
Urban 81.68 79.02 72.21 30.88 53.53 21.66
Access to Credit: Lowest in Formal market
Highest in Micro credit marketRural and Poor HHs have more access
Access to credit (Formal, Quasi-formal, and Informal)
Access to formal and quasi-formal credit
Access to formal credit
Access to quasi-formal credit
Access to informal credit
National 54.12 42.75 7.99 36.64 21.78
Urban 46.10 35.37 9.56 27.00 16.83
Rural 56.17 44.64 7.59 39.10 23.05
Non-poor 52.08 40.04 9.06 32.94 22.59
Poor 58.97 49.22 5.44 45.42 19.86
MFS in Bangladesh
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All six mobile phone operators are involved with MFS providers in some capacity. By now, 28 Banks have MFS permission and 19 are in active operation that includes BRAC Bank’s dedicated MFS, bKash.
Key players in MFS are bKash, DBBL Mobile Money and M-Cash of IBBL with 13.3 million registered customers with about 2 lacs agents nationwide generating (on average) more than 1.0 million transactions amounting more than Tk. 2.21 billion per day.
MFS in Bangladesh
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One interesting feature of MFS in Bangladesh is that most of the cash-ins are happening in major metro cities while cash-outs are spreading to the rural areas making significant contribution in terms of financial inclusion and there by inclusive growth.
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Cash In Count Cash Out Count
Agent Banking
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The Bangladesh Bank (BB) has recently announced “agent banking” guideline aimed at providing financial services to the people living in remote villages.
The people would get the opportunity to carry out financial transaction through banking channel after introduction of the system, as the bank would employ agent in the remote areas where it has no branch, according to the guideline.
The people of remote and geographically separated areas would be the target of agent banking, as the regular banking is not yet possible in that areas considering business aspects. They could deposit and withdraw money, collect remittance and loan as well as pay utility bills through the agent banking.
Corporate Social Responsibility (CSR)
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Bangladesh Bank (BB), as the regulator of the financial sector, is guiding the commercial banks in providing necessary support to poor, underprivileged, meritorious and rural background students under their Corporate Social Responsibility (CSR) activities.
Already a few commercial banks have introduced a number of schemes to help the most deserving students at the secondary and higher secondary levels of their studies.
As per the latest data, education sector got the highest proportion (32.29%) of total CSR expenditure.
Bangladesh Bank has recently provided about 4.25 crore Taka to nine institutions for social and humanitarian development from its own CSR fund.
Mandatory agricultural credit
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The contribution of agriculture is around 19 % to the national GDP supplying required food to feed around 160 million population in the country.
Bangladesh Bank made it mandatory for all commercial banks domestic and foreign to disburse at least 2 % percent of their total loan and advances, which is a bit higher i.e., 5 % for newly licensed banks in Bangladesh.
As of January 2014, outstanding loan disbursement to agriculture stood at a total Tk. 320.7 billion.
Credit to SME
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SME sector is another thrust area for our SRF activities. A total of Tk. 853.2 billion has been disbursed to more than 700 thousand entrepreneurs in 2013 reaching to an outstanding amount of Tk. 1156.3 billion at the end of December 2013.
More than 50 % of the total disbursed amount went to purely small enterprise sector.
SRF Outcome in Bangladesh: SME Credit
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0
100
200
300
400
500
600
700
800
900
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
2010 2011 2012 2013No. of Ent.Amount of Disb
No. of Enterpris
Disb. in Billion Tk.
Credit to SME & Agriculture as % of Domestic Credit is increasing
25
19.5817.69
20.65
23.00 22.86 22.52 22.98 23.27
0
5
10
15
20
25
FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13
%
Share of large scale industries (LSI) in credit disbursement fell from 73% in FY09 to 66% in FY13
Medium scale industries’ (MSI) share increased from 23% to 27% during this period while small scale industry share went up from 4% to 7% (overall SME increased from 27% to 37%)
Small and medium scale industries share of industrial term credit has increased
0
10
20
30
40
50
60
70
80
FY09 FY10 FY11 FY12 FY13 2013 (Dec.)
LSI
MSI
SSI
Inclusive financing has upheld output growth stability in Bangladesh economy
27
5.266.27 5.96
6.63 6.43 6.195.74 6.07
6.71 6.236.13
012345678
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Real GDP growth trend
Six-plus percent annual average real GDP growth for over a decade
Output response from inclusive financing has helped stabilize CPI inflation
28
7.2 7.2
9.9
6.77.3
8.8 8.6 8.0 7.5
0
2
4
6
8
10
12
CPI inflation trend
Inflation moderate at single digit
Rural and urban branches per 100,000 adults (source CGAP)
0.48
6.48
6.41
6.39
6.40
11.11
1.10
2.43
7.46
4.05
3.24
2.63
0 2 4 6 8 10 12
Afghanistan
Bangladesh
India
Pakistan
SA
Developing
Number of branches per 100,000 adults (commercial banks)
Rural Branches/ Rural Population Urban Branches/ Urban Population
Impressive bank account access with low gender and income gaps relative to other South Asian countries
30
50%55%
33%
40%35%
10%
69%
47%52%
25%
35%
26%
3%
67%
41% 39%
26%
35%
27%
4%
58%
0%
20%
40%
60%
80%
World East Asia andPacific
South Asia Bangladesh India Pakistan Sri Lanka
Account at a formal financial institution (% age 15+)Account at a formal financial institution, female (% age 15+)Account at a formal financial institution, income, bottom 40% (% age 15+)
Source: Global Financial Inclusion (Global Findex) Database, World Bank, April 2012
Accounts at a Formal Financial Institution (% age 15+)
… but more remains to be done, especially for the extreme poor
% of population below the lower poverty line
Poverty declined substantially in the preceding decades…
% of population below the upper poverty line
56.6
48.9
40
31.5
58.7
52.3
43.8
35.2
42.7
35.2
28.4
21.3
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
1991-92 2000 2005 2010
National Rural Urban
Substantial poverty decline evidences inclusiveness of growth
Source: HIES 2005, 2010
Population in poverty fell from 61.6 million in 2000 to 44.8 million in 2010
Consumption Gini coeff. unchanged at 0.33 over ten years, evidencing social cohesion
41
34.3
25.1
17.6
43.7
37.9
28.6
21.123.6
20
14.6
7.7
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
1991-92 2000 2005 2010
National Rural Urban
31
Other South Asian Economy: India
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The RBI has its Financial Inclusion Advisory Committee withmembers from RBI board directors, market intermediaries,experts and civil society for deliberations and suggestions ondeveloping viable:
Sustainable banking service delivery models to provide accessible,affordable financial services for population segments outside the bankingnetwork;
Also on creating an appropriate regulatory framework for financialinclusion and stability to move together.
RBI’s priority sectors
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The priority sectors include agriculture and weaker sections of population, education, housing, export financing.
From 2010, RBI is requiring banks to draw up their middle term (3-yr) financial inclusion action plans, guiding and facilitating their action agenda of both branch expansion based and ICT based off-branch service delivery in an agent banking model through Business Correspondents (BCs)
RBI’s approach
34
In general RBI approach to financial inclusion is similar toBangladesh with exception of agent banking and channelingsupport measures for MFIs.
In Bangladesh the choice of and responsibility for KYC andother AML CFT due diligence drills on area agents for off-branch service delivery rests with banks themselves.
In India, apparently banks can appoint agents only from list of‘Business Correspondents’ prequalified, preselected by RBIitself.
RBI’s approach
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For MFIs in Bangladesh, MRA is for some years now thestatutory authority for regulatory oversight, with PKSFextending some wholesale fund support lines.
In India, regulatory and support interventions for MFIscontinue to rest with NABARD, the state owned bank foragricultural and rural development.
Socially Responsible Financing: Pakistan
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In Pakistan, agriculture and SMEs are the main thrust areas ofcentral bank’s (SBP’s) interventions promoting sociallyresponsible financing, with significant role for SBP licensedformal Micro Finance Banks (MFBs) and the still largely selfregulated MFIs, alongside mainstream banks.
A large number of bank branches in Pakistan are ‘agriculturedesignated’
Socially Responsible Financing: Pakistan
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SBP’s Financial Inclusion Program has put in place supportmeasures for boosting SME as well.
Both MFIs and MFBs in Pakistan are active inmicrofinance, the MFIs can access wholesale funding fromPakistan Poverty Alleviation Fund (PPFAF).
Socially Responsible Financing: Pakistan
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SBP has also taken up initiative for promoting housing finance,
SBP’s branchless banking regulations encourage banks todevelop alternative service delivery channels, especially usingmobile phone technology.
Unlike BB’s choice of on bank led model for mobile phonebanking in Bangladesh, SBP’s stance on this point seems to beone of neutral indifference.
Socially Responsible Financing: Nepal
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In Nepal, the government and the Nepal Rastra Bank (NRB,the central bank) are both engaged in promotion of inclusivefinancing, as elsewhere in South Asia.
NRB and the government’s Micro-Enterprise DevelopmentProgram (MEDP) have pooled together resources forchanneling credit to productive micro-enterprises from a RuralSelf-Reliance Fund (RSRF), through cooperatives and nongovernment MFIs.
Socially Responsible Financing: Nepal
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NRB under its financial inclusion program encouragesopening of new branches by banks and financialinstitutions in the under-served geographically remoteareas, offering incentives and relaxations in requirements.
NRB also sets target levels of lending to be maintained bybanks and financial institutions in specified prioritysectors.
Socially Responsible Financing: Sri Lanka
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In Sri Lanka, inclusiveness of financing is arguably already thebest in South Asia both in coverage and depth
The microfinance sector in Sri Lanka is considered to haveattained greater community orientation than elsewhere in theregion.
CBSL is also implementing several donor funded andgovernment funded programs of lending through participatingfinancial institutions in key economic sectors, includingagriculture, fisheries and livestock, SMEs and microfinance.
Summary
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We see both commonality and diversity of approaches inSouth Asian initiatives for promoting socially responsibleinclusive financing, arising from similarities and differences inlocal environments.
Near term priorities on the way forward are to bringongoing initiatives to successful completion, and to ensuretheir sustainability by earliest attainment of viability, reaping allpossible efficiency gains.
Over the longer term new challenges to inclusiveness willemerge from new global financial instability, as unbridled globalliquidity expansion disproportionate with real output growthcontinues.
Summary
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Successfully ingrained socially responsible ethos will keep ourfinancial institutions and markets well immunized andmotivated in inclusive financing and away from irresponsiblespeculative risk taking.
Perspectives from South Asia focused forums of academics likethis one at Harvard will be valuable in charting the path aheadfor steady enhancement of South Asia’s contribution to globalprosperity and stability.