The award-winning Governor of Bangladesh Bank, Dr. Artiur Rahman, is credited with implementing socially responsible financing and financial inclusion for millions of the country’s unbanked population
Bangladesh’s fiscal policy of combining sound economics with social objectives has steered the country’s steady 6% growth rate over the last decade.
“The economy of Bangladesh has maintained a dynamic growth in the midst of repeated external shocks like the East Asian crisis and the subsequent global financial crisis,” says Dr. Atiur Rahman, Governor of Bangladesh Bank (the central bank), who is credited with implementing socially responsible financing and financial inclusion for millions of the country’s unbanked population.
One of the central bank’s most successful initiatives is the 10 taka program, where a bank account can be open with a deposit of only 10 taka, or the equivalent of 12 U.S. cents. Since November 2014, the number of taka accounts has climbed to around 15 million, with close to 10 million farmers joining the banking system.
By emphasizing fiscal stability and financial inclusion, Bangladesh Bank has been a potent force in the country’s economy, pushing lenders to provide credit and loans to farmers, small and medium-sized enterprises (SMEs), and female entrepreneurs.
“Our monetary policy strength is that we do not put money in the air, as many western countries have done. We put money on the ground so that some seeds are sown and we get products,” Dr. Rahman explains. “These are policies which can really reach the under-served. Basically we are not placing money in unproductive expenditure or in something speculative. Instead we are providing money to agriculture, green textiles, and SMEs.”
The rest of the developing world is taking notice. Bangladesh is ahead of its neighbors in the financial inclusion movement, ranking second in South Asia in the World Bank’s global financial inclusion index. And earlier this year, Dr. Rahman received kudos from the Financial Times’ magazine, The Banker, which named him 2015 Central Banker of the Year, for the Asia-Pacific region.
Policies of inclusion are an effective means for sustainable growth and a way to uplift the “missing middle,” he says. But commercial lenders are still wary of extending themselves to this group fearing difficulty in loan recoveries. A Bangladeshi bank official noted last year that the total non-performing loan (NPL) rate was 7.9% in the SME sector. A Financial Stability Report released earlier this year by the central bank noted a higher rate of NPLs was behind a decrease in earnings last year.
Still the sector continues to experience dynamic growth and is vital to the economy: 90% of private business is small enterprise, SMEs employ 25% of the overall workforce, and account for 25% of the country’s GDP.
Over the last five years credit and loans reached 2.2 million MSMEs, (micro small and medium enterprises), of which close to 110,000 were led by women and 300,000 by new entrepreneurs, according to Dr. Rahman.
“More importantly the MSME sector has successfully created employment for more than 1.5 million people during the span of the last five years,” says the governor, who hopes the Business Finance for the Poor in Bangladesh Project (BFP-B), a new financing initiative launched in February 2015, will reach thousands of budding entrepreneurs, giving them access to financing and business expertise and services to nurture and grow new commercial ventures.
“Even though we have great success so far, we need more intervention to support MSMEs, especially for new and female entrepreneurs,” explains Dr. Rahman. “I hope the BFP-B will play a key role in nourishing micro and small enterprises to enhance their productivity and help put our economy on a firm footing.”
Outreach in the agricultural sector, which makes up 16% of the country’s GDP, is also a consistent part of Bangladesh Bank’s strategy for sustainable growth. The bank expanded its agricultural incentives in an effort to enhance poverty reduction and food security.
Support for the agricultural sector not only helps lessen the impact of the domestic food supply volatility, but also helps the central bank do what it is supposed to do: control inflation, which has dropped to 7% from a high of 12% in 2011.
“Our agricultural lending has resulted in keeping the price of food within the purchasing capacity of the general public. We want to keep inflation under control. Price inflation is the biggest enemy of the poor,” Dr. Rahman explains. The central bank is also looking to the government to help keep inflation in check by holding gas and electricity prices.
Helping to keep the economy on track is the central bank’s $25 billion in foreign currency reserves, which have grown five fold since 2009 thanks to a 7.5% increase in remittances and improved export earnings. This in turn is improving the strength of the Bangladesh taka.
Bangladesh Bank is taking the lead in financing a cluster of green-rated factories. The initiative is especially important to the country’s enormous textiles industry, one of the largest in the world, second only to China. Textile factories in Dhaka currently consume 300 liters of water to produce 1 kg of fabric (the global standard is well below 100 liters per 1 kg of fabric). In an effort to stimulate green production, the central bank in March launched a $500 million fund aimed at helping factory owners meet the cost of implementing energy efficient measures that will not only lessen the impact on the environment but also improve productivity and profitability.
“We have already allocated $200 million from the reserve for small and long-term green financing,” says Dr. Rahman. “A Green Textile factory has been established in Narayanganj by using money from this fund. With the support of World Bank we have also allocated $300 million for medium and long-term production in new and old industries.”
The central bank’s initiatives are serving as a model for commercial banks operating in Bangladesh. BRAC Bank became the first private commercial lender in the country to offer loans to SMEs in a structured manner, a challenge that required BRAC to change some of its fundamental lending protocols.
“(SMEs) did not have any formal accounting information, no balance sheets, many times, no bank accounts, no credit history and most of the time no collateral, and their success is vital to the growth of this nation,” explains Syed Mahbubur Rahman, CEO and Managing Director of BRAC Bank. “With a view to bringing this unbanked, under served segment into the banking population, BRAC Bank began providing small loans to these entrepreneurs.” According to Mr. Rahman, over the past 14 years BRAC has loaned $3 billion to 500,000 customers and participated in the creation of 2 million jobs, BRAC like all banks in the country is looking to improve and expand services through innovation and technology. “Innovation is a major focus, and we have been online since day one,” says the CEO. “We are on a mission to take the bank to the customers’ doors. Customers should not feel forced to come to the bank, we want to facilitate services so that customers can conduct banking transactions sitting at home or the office.”
One area of interest to BRAC is tapping into the customer base of bKash, the leading provider of mobile financial services. BRAC, the parent company with a 51% stake, is eyeing bKash’s 17 million customers, of which only 4% have bank accounts. The bKash system, one of the fastest growing in the world has aligned itself with micro business by providing a tool for users to send payments quickly.
“Now through bKash we are trying to bring the informal economy to the formal financial economy,” says Mr. Rahman.
Users of bKash are introduced a savings vehicle through the bKash ‘wallet’, which encourages users to save, allowing them to earn interest on money they don’t spend.
The area of mobile banking is a particular strong growth opportunity, and the latest instrument that is enabling low-income earners to send money securely from their working stations to their loved ones in rural villages. Phone-based banking is catching on like wildfire in Bangladesh, reducing time, travel, and the costs associated with handling money.
Almost 70% of Bangladeshis now have cell phones and the central bank has approved licenses for 28 banks to offer mobile banking services to facilitate growth and improve access to the under served.
A key economic driver is the remittances that the country receives from the 8 million Bangladeshis working abroad. Around $15 billion in remittances were funneled through the banks between July 2014 and June 2015. The practice has given
rise to the new NRB Bank (Non Resident Bank).
“I don’t believe in branch banking, rather I believe in automation and that is why we have already launched Internet banking, started call centers and launched global credit cards. We are also working in e-commerce,” says Muklesur Rahman, Managing Director of NRB Bank.
While NRB has embraced the Central Bank’s program of inclusion, NRB has its own unique vision for growing its business. “We have to go for financial inclusion, and I want to go in to rural areas with mobile banking, we’re planning to put kiosks in the small rural areas,” says the managing director.
The bank also wants to promote investment in Bangladesh through its non-resident customers. “Bangladeshis living abroad have created a platform, they’re asking their children and friends to invest here,” he explains. “People who have invested here are making money that will ensure and encourage other foreign investment.”
The non-resident Bangladeshi market is an important one for Exim Bank also, which became the first bank to establish an exchange house in London to facilitate money transfers.
Exim, the Export-Import Bank of Bangladesh, founded in 1999 as a conventional commercial bank, transformed itself in 2004 into a fully-fledged Islamic bank, offering services that appeal to the growing interest in Islamic banking. The change has made Exim one of the most profitable banks in the country, posting double-digit growth over the last few years.
Sharia compliant banking mobilizes financial resources and invests them in Islamic social and financial objectives, of which one of the guiding principles is to help the poor and destitute.
The bank offers a wide range of products tailored to Muslim customers. Interest or usury is prohibited in Sharia banking, so products like the Mudaraba cash account, which offers profit sharing, are popular with Islamic clients.
Also appealing to customers is the bank’s high earning account created for those over the age of 55, and the Haj account to help Muslims fulfill one of the fundamental pillars of Islam, a pilgrimage to Mecca.
Corporate social responsibility (CSR) is an operating principle at Exim. Among the charitable projects it supports, a scholarship program offering interest free funds to 300 middle school and scholarships to 3,000 students supporting their education from grade nine up to a Masters degree.
“We take care of students for their entire schooling, not just one year,” says Exim Managing Director and CEO, Dr. Mohammed Haider Ali Miah. “Exim is a CSR-friendly bank with a range of projects geared toward social development.”
The bank is looking to raise capital funds and expand its services. It recently received permission from the Bangladesh Securities and Exchange Commission to establish an Islamic Subordinated Bond.