Going green: Trends in sustainable banking

Green Banking refers to the provision of goal-driven institutional services that aim to stimulate a commercial approach towards environmental protection. This emphasises a corporate prioritisation to accelerate the economic transition to cleaner energy and sustainable financing. It is done by harnessing the power of innovation and technology – thereby going above and beyond portraying the enhancement of shareholder profits as the primary aim of the banking system. 

With the UN Sustainable Development Goals (UNSDGs) representing the prima facie developmental narrative for Bangladesh as an emerging economy, it has become imperative for local financial institutions to direct capital allocation to sustainability schemes that will frame future production and consumption patterns. To support this transition, a state-led macroeconomic focus towards green banking is necessary.  To the credit of the central bank, a policy ecosystem to navigate financial institutions towards eco-friendly attitudes, behaviours and corporate models, has successfully been initiated. 

It has been a decade since the Bangladesh Bank formulated two policy frameworks to encourage ethical practices in banking – the Green Banking Policy Guidelines for Banks and the Environmental Risk Management (ERM) Guidelines for Banks and Financial Institutions circulated in 2011. These have collectively kickstarted an administrative focus on sustainable banking schemes across the country. There is a  similar strategic recommendation for financial institutions to allocate at least 10% of their Corporate Social Responsibility budgets for internal Climate Risk Funds.   The same institutions have also been instructed to set up Solid Waste Management Systems, Rainwater Harvesting Schemes and Solar Power Panels in newly constructed infrastructural networks and buildings. 

These recent trends complement Digital Bangladesh's narrative - as portrayed by the Awami League Government – the primary behavioural change amongst consumer groups over recent years has been in the wide scale tilt towards digital and remote banking services. The usage of electronic banking tools has external benefits indirectly addressing impending environmental needs and synthesizing financial inclusion initiatives. More specifically, the growth of digital banking services reduces long-run average costs (particularly reduced paper costs and decreasing electricity expenses). It generates the opportunity for financial institutions to benefit from the internal economies of scale. 

Going green by investing in technology and promoting self-directed platforms is, therefore, an essential step for firms to take to break away from the bureaucratic red tape prevalent in the banking system. This will allow them to streamline financial services by putting customers and the environment at the centre of operations and strategic planning. 

Illustration: TBS

The numbers around these trends exemplify a remarkable transformation across day-to-day banking operations in Bangladesh. In August 2020 the Bangladesh Bank reported that the country had 2.74 million internet banking users. Electronic Funds Transfers increased by approximately 47% when compared to June 2019. Perhaps the most impressive statistic is the increasing usage of Mobile Financial Services (MFS) for salary disbursements and utility bill payments.  The total volume of MFS transactions increased from Tk 422.36 billion in June 2019 to Tk 473.7 billion in June 2020. Data from the World Bank indicates that the national internet penetration rate sat at roughly 13% for 2019. However, the number of internet users are expected to be higher in reality, given the prevalence of shared internet plans and the accelerated digitisation of day to day services. In summary, the vision and mission for Digital Bangladesh stand as a pillar for the growth of green banking services across the country and it is heartening to see that recent consumer patterns are positively aiding the transformation of the banking system towards sustainability.  

Nevertheless, the challenge to institute green banking policies is not simply in the arena of altering consumer behaviours – additionally, there is a dire need to redefine lending programs. In this regard, the Bangladesh Bank has recently stipulated that 2% of loanable funds issued by national banks and financial institutions must be devoted to what the central bank terms as green projects – with 15% of aggregate loans issued by respective banks meeting the broader definition of being sustainable. With a lower rate of interest and preferential lending terms to be assigned to green projects as per the directives of the central bank, the impact of such a policy instrument is expected to mobilize economic diversification across the aisle – especially for small business, tech companies and the ever-growing startup scene.  

Green banking tools will encourage sustainability projects within the private sector by tapping into a key monetary policy tool – reduced interest rates and the subsequent financial incentives for eco-friendly investors. It will also play an integral role in reshaping the business paradigm in Bangladesh. And for this reason, supplementary fiscal and supply-side policy measures are crucial to incentivize banks to adhere to Green banking techniques – subsidising the development of green businesses and providing tax breaks is an existing arena in which the Government has already put thought to. One hopes these trends in policy innovation and implementation continue with the full oversight of the central bank. 

Nevertheless, it would be unwise to not refer to the overall picture of the financial market in Bangladesh when discussing the potentiality of Green Banking. The scale of loan defaulting, outward laundering and the culture of institutional corruption has resulted in a loss of confidence and trust in the banking sector. We have witnessed this at a time when the Bangladesh Bank has promoted notions of sustainable banking through formulating progressive green banking regulations. Therefore at the core of pushing the financial system towards being more equitable, inclusive and eco-friendly, it is an inherent need to reform the overall banking sector. Stemming out corruption from publicly-owned banks and putting a halt to the culture of loan default is the first step towards true transformation.  Once the foundations of the system are strengthened, existing green banking regulations can be used to promote eco-friendly practices within the entirety of the banking system.

Lastly, each organisation is responsible for making its internal operations greener and more sustainable. For this reason, it is pivotal for Bangladeshi financial institutions to take ownership of the idea of making their culture, operational processes and day-to-day services environmentally friendlier. Developing organisational Climate Risk Funds to support communities which suffer from natural disasters or reducing carbon emissions are measures which can mobilise a conversation amongst financial service providers, to play a purposeful role in enhancing Green Banking measures collectively. 

Green financing underpins the future of a cashless and a more diversified economy.  Therefore we hope that Bangladesh invests its collective philosophy in putting the environment at the core of its developmental agendas in years to come. 

Mir Aftabuddin Ahmed is Toronto-based banking professional and a regular columnist for The Daily Star and Dhaka Tribune. Aftab is a member of the Youth Policy Forum (YPF – Bangladesh) and can be reached @ aftab.ahmed@alum.utoronto.ca