Socially-responsible banking: insights from Bangladesh

1. Socially-responsible banking: insights from Bangladesh Atiur Rahman, Ph. D. Governor Bangladesh BankOctober 2013

2. Structure • Key development outcomes in Bangladesh • Core goals of Bangladesh Bank and outcomes • The rationale for, and promotion of, socially responsible banking in Bangladesh • Concluding thoughts

3. Steady economic growth leading to higher per capita incomes GNI/capita of around $900 using 1995/96 base and with newer 2005/06 base GNI/capita is now $1044 Note: (p) indicates provisional data Source: Bangladesh Bank

4. Robust Growth Contributing to Significant Poverty Reduction • Population in poverty fell from 61.6 million in 2000 to 44.8 million in 2010 • Inequality measure has stayed constant (consumption Gini 0.33) over ten years promoting social cohesion Source: HIES 2005, 2010

5. Steady Improvement in Social Outcomes due to long-standing Government – NGO partnerships

6. The objectives of Bangladesh Bank • Inflation management through monetary policy • Promote financial sector stability and depth • Ensure adequate foreign exchange reserves and avoid excessive exchange rate volatility • Contribute to economic growth through appropriate mix of macro-prudential policies • Contribute to pro-poor and sustainable growth through socially-responsible policies

7. Responding to Growth and Inflation Risks Using Monetary Policy • Monetary easing in late 2009 due to concerns over impact of global financial crisis • Policy tightening began in late 2010 as inflation began to rise – rate rises gradual and then constant for 1 year • Daily open market operations, monthly Monetary Policy Committee and twice-yearly consultations leading to Monetary Policy Statements Source: Bangladesh Bank

8. Monetary stance has contributed to lowering inflation • Monetary policy tightening started early 2011 with one year lag impact on inflation • Average inflation target of 7.5% for FY13 likely to be met though recent uptick in food inflation needs to be monitored • Overall core objective of restraining inflation being met

9. Stronger External Balances Underpins Macro Stability • The external balance in FY13 reflects mainly the increasing inflows of remittances, sustained export expansion and declining imports • Improved external balances are reflected in the accumulation of international reserves to over $15 billion at the end of FY13, sufficient to cover 4.9 months of projected imports. • The Taka appreciated by 2.6% between January 1st-June 30th 2013 • Overall BB’s objective of maintaining external sector stability is being attained Source: Bangladesh Bank

10. Financial Sector Stable, but Recent Trends Present New Challenges Unusual increase in NPLs (and relative decrease in ROA & ROE) in 2012 was largely due to the implementation of new loan classification policy from 2012 and a fraud in a branch of a state-owned bank All Banks, Capital to RWA Ratio (%) All Banks, Gross NPL Ratio (%) New loan classification / provisioning rules have affected profitability All Banks, Return on Assets (%) All Banks, Return on Equity (%) *This has been calculated in line with Basel II guidelines where credit risk has been calculated more conservative with two new risk factors – (Market Risk and Operational Risk) added to the calculation of CRWA. Therefore CRWA show decrease in 2012 despite no overall fall in asset quality or capitalSource: Bangladesh Bank

11. Measures to Address these Financial Sector Challenges • Revised Bank Companies Act provides BB with greater powers over state-owned commercial banks • New loan classification/provisioning guidelines introduced in FY13 in line with international best practices will improve financial sector transparency • Stepped up inspections by BB have led to increased classification and declining trend in off-balance sheet items • Efforts to strengthen bank supervision include staff capacity building and new e-dashboard which provides real-time information on bank transactions to BB • Quarterly performance plans (“MOUs”) sets differentiated credit ceilings for the various SOBs and Basic Bank depending on their performance • Bangladesh Bank’s anonymous consumer surveys now double-check accuracy of reported data by banks • Overall BB’s objective of maintaining financial sector stability being met

12. Socially responsible financing

13. Context / rationale behind socially responsible financing • Recent global financial crisis showed the consequences of excessive risk-taking and greed • Stronger regulation is one solution (Basle 3 etc) • However underlying ethics, objectives and motivations of financial institutions also need to change to incorporate social returns • Socially inclusive financing key steps related to promoting access to savings/credit/payment systems to disadvantaged groups along with emphasis on ‘green banking’ and CSR

14. Policy step 1: Rural-urban branch permission policy recently amended to redress existing imbalances

15. Policy step 2 – promoting access to savings • “Ten-taka” accounts • No fees, no minimum balance with initial deposits of only Taka 10 • 13.1 million (of which 9.6 million are farmers) accounts opened up to March 2013 • Some subsidy payments are made via these accounts • School banking also being promoted with 2.2 million accounts

16. Overall impressive bank account access with low gender and income gaps relative to other South Asian countries Source: Global Financial Inclusion (Global Findex) Database, World Bank, April 2012 RESTRICTED

17. Policy step 3: Promotion of faster money transfer via mobile phone banking • BB specified this would be a bank-led model in its regulatory guidelines • Spectacular growth over past year with around 7 million accounts now from only around 1 million a year ago • Many well known benefits (timely transfers, security etc) • Risks relate to financial integrity (lower KYC requirements) and consumer protection issues – but no risk to financial stability • Over time as customers gain confidence in system these will become more like virtual bank accounts with savings build-up • BB is trying to promote greater number of providers to ensure competition in the industry

18. Policy step 4 – Provision of credit to sharecropper farmers • BB set up Taka 5.00 billion (US$70 million) refinancing line for loans to landless sharecroppers via BRAC (NGO) • Loan provided without collateral, at a subsidized rate and jointly with extension services to households who previously had little access to formal credit • Impact assessment shows positive impact of program on technology adoption and farm productivity • Program is in line with promoting pro-poor growth by allocating credit to productive purposes and does not adversely affect other central bank core functions or financial sector stability

19. Policy step 5 – promotion of agriculture and SME lending • Agricultural credit targets for commercial banks (2.5% of outstanding with penalties for non-fulfillment) • SME lending growth also being actively promoted by BB with concessional refinance lines of credit available and some concessions for classification/provisioning • Special emphasis on women entrepreneurs • Medium scale industries gained most with their share growing from 23% to 30% FY09-12 while small scale industry share went up from 4% to 7% (overall SME increased from 27% to 37%) • Gradually banks are realizing that these market segments are also profitable and over time will not require mandates/targets from BB

20. Financial stability and inclusion links • Overall development outcomes, financial stability and inclusion have all improved steadily over time • Financial inclusion can contribute to financial stability by strengthening the depositor base, reducing credit concentration etc • While micro-credit access is large, both deposits and loans are small relative to overall financial sector minimizing any systemic risks to overall financial stability • Supply-side contribution of financial inclusion can also promote financial stability

21. Policy Formulation & Governance Incorporation of Environmental Risk in CRM Initiating In-house Environment Management Introducing Green finance Online Banking Phase-I Timeline: December 31, 2011 Supporting Employee Training, Consumer Awareness & Green Event Creation of Climate Risk Fund Introducing Green Marketing Reporting Green Banking Practices Green Banking - policy adoption phases

22. Sector Specific Environmental Policies Green Strategic Planning Setting up Green Branches Rigorous Programs to Educate Clients Improved In-house Environment Management Phase-II Timeline: December 31, 2012 Disclosure & Reporting of Green Banking Activities Formulation of Bank Specific Environmental Risk Management Plan &Guidelines Phases of policy adoption..(Cont’d)

23. Incentives for banks to engage in ‘green banking’ • Improved CAMELS rating. • BB publishes the names of the top 10 banks regarding their overall performance in green banking activities. • BB considers green banking activities of banks while giving permission for opening new branch. • BB gives permission for SME branch subject to installation of solar panel in place. • Separate treatment in existing guidelines of RBCA for Environmental Risks in computation of Adequate Capital by BB.

24. ‘Green financing’ sectoral distribution

25. Corporate social responsibility in banking sector • CSR is actively promoted by BB and CSR guidelines indicate the type of activities banks can classify as CSR (eg elite club contributions are not CSR!) • Annual CSR report launched in front of all bank MDs and media ranks banks according to CSR contributions – this creates healthy competition • As a result our annual tracking shows that CSR has increased four-fold during the 2009-2012 period

26. Concluding thoughts • Bangladesh is now in a position to accelerate progress towards socially responsible financing due to new technology and learning from successful models / policies • Socially responsible financing objectives and initiatives can co-exist with other core Central Bank goals if designed appropriately • Socially responsible financing needs a catalytic Central Bank role but over time they ought to be ingrained in the business culture of the banks themselves • In order for Central Banks socially responsible financing objectives to succeed in the long run we need to be aware that potential trade-offs and concerns exist so that solutions are derived which take these into account • Post 2015 SDGs is likely to include socially responsible financial goals