Following the global financial crisis of 2009, there was a rising realisation that the financial sector needed to remain grounded and go beyond short-termism. It must be stable, resilient, and sustainable in the long run. It must also facilitate a country’s transition to a low-carbon green economy in the face of increasingly unpredictable climate change, which is no longer a local concern but rather a global one.
The 2009 crisis showed that financial institutions throughout the world were failing to finance sustainable economies. Fiscal policies also lacked the necessary inputs to encourage public and private investment in inclusive green economies. In a country like Bangladesh, where limited resources and high population density present considerable hurdles, promoting national economic progress needs novel ways. Among these, sustainable finance has emerged as a critical approach, presenting a road to financial stability and a better future for the country.
Some regulators, international organisations, local governments, and socially responsible private sector entrepreneurs believe that it is critical to raise awareness and allow financial systems to assist the green transition, leveraging policy innovations and existing best practices. Local regulators have made some aggressive efforts in this area. Bangladesh has been a pioneer in developing sustainable financing policies and laws to address crucial concerns such as climate change and global economic slowdowns. As a result, the recent coronavirus epidemic has made this policy position even more critical.
Bangladesh’s pursuit of sustainable finance refers to the process by which the financial sector makes investment decisions to transition to a sustainable economy while taking into account environmental, social, and governance (ESG) factors. Climate change mitigation and adaptation, biodiversity conservation, pollution avoidance, and circular economy development are among the environmental factors. Social factors include inequity, inclusivity, adherence to desirable labour relations, and investment in human capital and communities.
Public and private institution governance involves management structure, employee relations, executive remuneration structures, and dispute resolution in the interests of various stakeholders, as well as risk management. ESGs’ goals include directing private investment to support the transition to a climate-neutral, climate-resilient, resource-efficient, and fair-play economy, in addition to state funding. Bangladesh is well-known for creating a climate-resilient economy via collaboration with government and central bank programs.
Bangladesh’s financial industry is perfectly positioned to pioneer environmental stewardship and sustainable investment. The central bank’s sustainable financing program is a huge step forward for green growth, displaying a strong commitment to the People, Planet, and Profit principles. Both banks and non-bank financial institutions (NBFIs) have made substantial progress in this regard. The Bangladesh Bank’s Sustainability Rating 2023 recognised and supported this development, with 10 banks and three non-bank financial institutions recognised, highlighting the sector’s expanding importance.
Bangladesh Bank announced the Sustainable Finance Policy in December 2020 to guide and set objectives for this process. As a result, all scheduled banks and non-bank financial institutions have developed sustainable financing units. The central bank’s sustainable banking initiatives are broadly divided into four areas: policy formulation, monitoring the sustainable finance activities of banks and NBFIs, providing refinance support for various green products and sectors, and implementing environmental management practices.
According to Bangladesh Bank’s Quarterly Review Report on Sustainable financing for January-March 2024, overall sustainable financing stands at BDT 886,965.67 million, with banks holding BDT 853,373.76 million and NBFIs holding BDT 33,591.91 million. The overall amount of Sustainable Linked Finance is BDT 814,570.35 million, with banks contributing BDT 793,697.23 million and non-bank financial institutions contributing BDT 20,873.12 million. Notably, Sustainable Finance accounts for 31.85% of total loan disbursement, with banks providing 32.22% and non-bank financial institutions (24.60%). In addition, the total recovery from January to March 2024 was BDT 654,478.55 million, with BDT 13,669.90 million postponed.
Sustainable finance is separated into two sectors: sustainable linked finance and green finance. Sustainable Linked Finance is a large category that covers Sustainable Agriculture (BDT 73,118.03 million), Sustainable MSME (BDT 164,318.06 million), Sustainable Linked Socially Responsible Finance (BDT 59,732.49 million), and Other Sustainable Linked Finance (BDT 517,401.77 million). Green Finance generates BDT 72,395.32 million.
The overall number of sustainable financing borrowers is 1,316,763, with banks serving 1,310,901 and NBFIs serving 5,862. Banks have 653,831 male and 657,070 female borrowers, whilst non-bank financial institutions have 4,265 male and 1,597 female borrowers. Notably, the percentage of male and female borrowers is nearly equal, with 658,096 men and 658,667 females overall.
Banks serve 940,630 rural borrowers and 370,271 urban borrowers, while non-bank financial institutions (NBFIs) serve 1,812 rural borrowers and 4,050 urban borrowers. This suggests that banks primarily service rural areas, but NBFIs are more concentrated in urban areas, reflecting their urban-centric character. Notably, banks account for the great majority of borrowers (1,310,901), while NBFIs service just 5,862.
Sustainable finance’s performance has improved significantly year after year. Total sustainable financing reached BDT 825,516.74 million in 2021, BDT 1,307,622.35 million in 2022, BDT 1,973,691.40 million in 2023, and BDT 886,965.67 million in the first quarter of 2024. The percentage of sustainable finance compared to total loan disbursement has also increased significantly, from 8.04% in 2021 to 31.85% in the first quarter of 2024, demonstrating a strong increasing trend.
According to the central bank, 26 banks and 10 NBFIs met their aim of devoting 20% of total loan disbursements to sustainable financing during the January-March 2024 quarter. Sustainable agriculture, which is closely related to sustainable finance, entails supporting crucial sectors such as crops, storage, irrigation, and poverty reduction, all of which are vital to the economy. According to industry insiders, banks and financial institutions often engage in sustainable agriculture with a focus on gender equity, ensuring that loans are equally available to men and women—a commitment reflected in central bank reports. Today, banks and NBFIs increasingly believe that ethical financing in sustainable industries is more vital than the old profit-driven approach.
Bangladesh has set an example with innovative fiscal policies such as establishing the Bangladesh Climate Change Trust Fund and developing a climate change budget that allocates 8% of the national budget to integrated multi-ministerial climate activities. The government has also raised climate financing from other sources, including the Green Climate Fund, the Global Environment Facility, and other organisations. This policy is extremely consistent with the Social Development Goals (SDGs) and the Paris Climate Agreement.
Bangladesh Bank launched a comprehensive green banking project in 2011 to promote environmentally responsible financing, offering guidelines for assessing the environmental risk of borrowing proposals as well as greening internal procedures and practices inside banks. More than a decade ago, the Bangladesh Bank launched its sustainable finance programs, which included legislation encouraging financial institutions to seek ecologically sustainable, socially responsible, and inclusive financing to prioritise investments in sustainable projects.
Bangladesh Bank established a green fund to help small and medium-sized firms (SMEs) finance minor projects in green energy, wastewater treatment facilities, and biogas plants at a lower cost.
It also established a huge Green Transformation Fund to help the textile and leather sectors. With regulatory assistance, the state-owned Infrastructure Development Company (IDCOL) excelled at facilitating financing for the purchase and use of renewable energy technologies such as biogas, solar irrigation, and mini-grids.
It has been able to design a sustainable rating framework to track the progress of financial intermediaries in not only the designated green finance sector, but also in financing agriculture, cottage, micro, small-and-medium enterprises, socially responsible financing, R&D for sustainable product innovation, marketing, awareness, capacity building, and sustainable finance disclosures. A systematic identification method has also been implemented to identify and search for products/projects related to sustainability. Bangladesh Bank’s Sustainable Finance Policy is based on the government’s development strategy, worldwide commitment to sustainability, and the central bank’s strategic goals. The goal now is to put this strategy into action and generate additional chances for inclusive, sustainable businesses with the active participation of the younger generation, educational institutions, and other stakeholders.
