Central bank's role in water-efficient production with low-cost green finance

As water stress intensifies across Bangladesh, industrial water use is facing closer scrutiny, particularly in the export-oriented ready-made garment sector, which remains one of the country's largest consumers of water.

In response, Bangladesh Bank has expanded its green and sustainable finance framework, aiming to steer industries towards water-efficient technologies while easing access to low-cost funding for factories and small and medium enterprises.

Replying to queries from The Business Standard, the central bank said it has introduced three refinancing schemes designed to improve access to finance for RMG-linked SMEs through participatory financial institutions.

Under the schemes, Tk7,000 crore has been allocated, with borrowers eligible for loans at a maximum interest rate of 5%, significantly below prevailing market rates.

The refinancing facilities cover a wide range of investments, including effluent treatment plants, wastewater and sewage treatment systems, liquid waste management, water-efficient wet processing, and broader water conservation and management measures.

Bangladesh Bank said the schemes are intended to encourage entrepreneurs to embed water efficiency into factory operations, with funds accessible through PFIs upon submission of standard credit documentation and satisfactory energy or natural resource efficiency assessments.

Alongside refinancing, the central bank has issued corporate social responsibility guidelines for banks and non-bank financial institutions, linking access to incentives with environmental compliance.

Banks and finance companies are required to conduct environmental and social due diligence assessments, while RMG factories must comply with environment and social risk management guidelines to qualify for refinancing support.

Bangladesh Bank's Sustainable Finance Policy, first introduced in 2020 and revised in 2023, provides the broader framework for these initiatives, listing 94 green products and projects across 14 sectors.

The policy includes the three refinancing schemes aimed at accelerating investment in water-saving technologies and wastewater recycling, again capped at a maximum client-end interest rate of 5%.

However, the central bank said it does not currently plan to expand the size of the refinancing funds, citing a tight monetary policy stance adopted to rein in inflation.

Instead, Bangladesh Bank is encouraging banks and finance companies to increase their own green lending, noting that such financing improves their standing under the central bank's sustainability rating system.

Introduced in 2020, the sustainability rating awards top-performing financial institutions each year across several categories, including sustainable finance indicators and green refinancing.

Bangladesh Bank also expressed confidence in the garment and textile sector's readiness to transition towards water-efficient production models.

Citing data from the Bangladesh Garment Manufacturers and Exporters Association, the central bank noted that Bangladesh has 268 LEED-certified garment factories, the highest number globally, with 68 ranked among the world's top 100 green factories.

These factories are required to ensure water efficiency on their premises and operate effluent treatment plants where necessary, while around 500 more RMG factories are currently seeking LEED certification.

To ensure accountability, Bangladesh Bank said green finance disbursement is subject to on-site inspections, with post-disbursement monitoring carried out by its Banking Supervision Department.

Despite progress, the central bank acknowledged that monitoring environmental compliance remains challenging for SMEs due to limited capital, technical expertise, weak data systems and difficulties accessing formal credit.

Many SMEs struggle to invest in pollution control or cleaner technologies and often lack the data needed to demonstrate compliance with environmental, social and governance standards.

Bangladesh Bank said it has been promoting sustainable finance since 2011 through guidelines and circulars, with the Sustainable Finance Policy integrating green finance, agriculture, CMSME and socially responsible finance under a single framework.

Banks and finance companies are required to allocate 5% of total lending to green finance, of which 25% must go to cottage, micro, small and medium enterprises.

The central bank also regularly organises training and awareness programmes for SMEs and has instructed banks to run similar initiatives, aiming to improve environmental compliance and access to green finance across the sector.