Socially-responsible banking: insights from Bangladesh

Atiur Rahman, Ph. D.Governor

Bangladesh BankOctober 2013

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

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5.7% 6.

1%

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6.2%

6.0%

Real GDP growth y-o-y

Steady economic growth leading to higher per capita incomes

Note: (p) indicates provisional dataSource: Bangladesh Bank

GNI/capita of around $900 using 1995/96 base and with newer 2005/06 base GNI/capita is now $1044

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GNI Per Capita (US$)

Robust Growth Contributing to Significant Poverty Reduction

4Source: HIES 2005, 2010

Large reductions in poverty witnessed in the past decades…

Percentage of Population Below Upper Poverty Line

… more still needs to be done, especially for the extreme poor

Percentage of Population Below Lower Poverty Line

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

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

  1991 2010/ Latest

Fertility rate, total (births per woman) 6.72 2.25

Mortality rate, infant (per 1,000 live births) 96 38

Life expectancy at birth, total (years) 59.99 68.63

Malnutrition prevalence, height for age (% of children under 5) 76.70 43.20

Literacy rate, adult total (% of people ages 15 and above) 35.32 55.90

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

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

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42006 2007 2008 2009 2010 2011 2012

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6.75

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7.75

Policy Rate: Repo Rate (%) Reserve Money Growth [% y/y, RHS]

Source: Bangladesh Bank

Repo Rate (%) (LHS) and Reserve Money and Private Sector Credit Growth (y-o-y, %) (RHS)

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

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7.00

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a) Inflation (average vs. point to point)

12-Month Average

Point to point

Perc

ent

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b) Inflation (point to point)

General FoodNon-Food

Perc

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Stronger External Balances Underpins Macro Stability

Source: Bangladesh Bank

• 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

Items FY11 FY12 FY13

Export (% change) 41.5 6.0 11.2

Import Shipment (% change- c&f) 52.1 2.5 0.8L/Cs Opened (% change) 34.0 -4.0 -2.84

Remittances (% change) 6.0 10.2 12.6 FDI (in million USD) 775 1191 1300 Overall Balance (in million USD) -656 494 5128 Forex Reserve (in million USD, end of period) 10912 10364 15315 Exchange Rate (Tk./USD, end of period) 74.2 81.8 77.8

Financial Sector Stable, but Recent Trends Present New Challenges

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dec. 2012

02468

101214

7.5 8.4 8.7

5.6 6.7

9.6 10.111.6

9.311.4 10.5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dec. 2012

05

1015202530 28.0

22.117.6

13.6 13.2 13.2 10.8 9.2 7.3 6.110.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dec. 2012

05

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11.6 9.813.0 12.4 14.1 13.8 15.6

21.7 21.017.0

8.2

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dec. 2012

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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

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

SOCIALLY RESPONSIBLE FINANCING

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

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

Afghanistan

Bangladesh

India

Pakistan

SA

Developing

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0.48

6.48

6.41

6.39

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2.63

Number of branches per 100,000 adults (commercial banks)

Rural Branches/ Rural Population Urban Branches/ Urban Population

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

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.0

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48.755.2

58.8

Number of deposit accounts and its growth (y-o-y)

Number of bank deposit A/Cs (millions) Growth

PercentMill

ion

Overall impressive bank account access with low gender and income gaps relative to other South Asian countries

16

World East Asia and Pacific

South Asia Bangladesh India Pakistan Sri Lanka0%

20%

40%

60%

80%

50%55%

33%

40%35%

10%

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47%52%

25%

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41% 39%

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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+)

RESTRICTED

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

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

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

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

Green Banking - policy adoption phases

Phase-ITimeline: December 31, 2011

Introducing Green finance

Creation ofClimate Risk Fund

Introducing Green Marketing

Supporting Employee Training,

Consumer Awareness & Green Event

Reporting Green Banking

Practices

Online Banking

Policy Formulation & Governance

Incorporation of Environmental Risk

in CRM

Initiating In-house Environment Management

21

Phases of policy adoption..(Cont’d)

Phase-IITimeline: December 31, 2012

Improved In-house Environment Management

Formulation of Bank Specific Environmental

Risk Management Plan &Guidelines

Disclosure & Reporting of

Green Banking Activities

Rigorous Programs to Educate Clients

Sector Specific Environmental Policies

Green Strategic Planning

Setting up Green Branches

22

Incentives for banks to engage in ‘green banking’

o Improved CAMELS rating.o BB publishes the names of the top 10 banks

regarding their overall performance in green banking activities.

o BB considers green banking activities of banks while giving permission for opening new branch.

o BB gives permission for SME branch subject to installation of solar panel in place.

o Separate treatment in existing guidelines of RBCA for Environmental Risks in computation of Adequate Capital by BB.

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‘Green financing’ sectoral distribution

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Effluent Treatment

Plants

Biogas Plants HHK Solar Panel Bio Fertilizer Plant

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Green Financing by Banks(Taka in million)

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

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