Challenges of Green Banking in the Context of Bangladesh

Author Note

Mohammad Ashrafuzzaman Ashiq

Student of BBA, ULAB School of Business, University of Liberal Arts Bangladesh

Fawaz Shahir

Student of BBA, ULAB School of Business, University of Liberal Arts Bangladesh

CHALLENGES OF GREEN BANKING 1

Abstract

The aim of this study is to identify the major challenges that Green Banking is facing in
Bangladesh. The data for this research has been collected by taking interviews of several experts
in the field of Green Banking including academics and bankers. The study has identified many
internal factors that are hindering the growth of Green Banking in Bangladesh. The practice of
Green Financing has not yet matured in Bangladesh and eradicating these issues can be done
easily by the Government and other concerned agencies. The limitation of the study was that
only the lenders (and experts from academia) of green loans were interviewed. Due to the time
and financial constraints, the borrowers of green fund were not interviewed. This paper suggests
that a strong working relation should be crafted between the public sector and private sector to
achieve the fruits of Green Banking.

Keywords: Green Banking, Green Financing, Sustainability

CHALLENGES OF GREEN BANKING 2

Introduction

Green is the new buzzword in the world right now. In today’s society where climate
change has become the most frightening issue, Going Green is the only way to save the planet.
During the last century pollution has risen to a critical level. Sea level is on the rise, Carbon
emission is heavier than ever, resources are running out and most importantly climate change is
taking thousands of lives. Change is essential in the present scenario for our survival. And
continuous efforts are being made to the environmental management in a sustainable manner to
combat climate change. Climate change was the backdrop which introduced the concept of
sustainability in corporate environmentalism (Bergquist, 2017). Since the 1990s, slowly
companies around the globe started to understand the financial implications of environmental
pollution. And thus, the concept of sustainability in business practices started to emerge. Later
with the formulation of Equator Principles in 2003 and Green Investment Banks in subsequent
years, the concept of sustainability entered the finance world. The banking sector started to
participate in sustainability practices by promoting environmentally sustainable and socially
accountable investments. Since 2011, Bangladesh has also been a part of the movement to
restore environmental sustainability by institutionalizing Green Banking. However, while Green
Financing has been expanding in numerous directions globally, Bangladesh is still lagging
behind. Eight years of Green Banking practices and still the concept of Green Financing is not
even entirely clear to the stakeholders. The aim of this research is to isolate the factors that are
impeding the growth of Green Banking in Bangladesh. The paper discusses about the current
situation of green financing in Bangladesh and the challenges and problems in this sector. Few
recommendations have been proposed to mitigate the challenges as well. Bangladesh have a lot
of opportunities in Green Banking and to accomplish that, the challenges need to be addressed
immediately and systematically.

Literature Review

Green Banking was formally introduced in 2003 with a view to protecting the
environment with the introduction of the Equator Principles (EPs). Initially EPs were adopted by
a few leading banks, such as Citigroup Inc, The Royal Bank of Scotland, Westpac Banking
Corporation. In March 2009, Congressman Chris Van Hollen of USA introduced a Green Bank
Act with the aim of establishing a green bank under the ownership of the US government (Lalon,
2015).

In 1997 commercial banks in Bangladesh were asked to take controlling measures for
environmental pollution before financing a project (Ullah, 2014). Masukujjaman & Aktar (2014)
views Green Banking as sustainable banking with a role to safeguard the planet from
CHALLENGES OF GREEN BANKING 3

environmental degradation and has an aim of ensuring sustainable economic growth

(Masukujjaman & Aktar, 2014). “A bank becomes a Green Bank through the application of
environment friendly policies in every sector of its activities and through the elimination of
Carbon foot prints from its premises without changing main banking functions ( Rahman, Ahsan,
Hossain, & Hoq, 2013).”

Organization for Economic Co-operation and Development (OECD) defines a Green

Bank as “a public entity established specifically to facilitate private investment into domestic
low-carbon, climate-resilient (LCR) infrastructure (OECD, 2015, p. 3).” Bai (2011) argued that
green banking is similar to an ordinary banking with the aim of protecting the environment and
preserving natural resources. It is also so, called an ethical bank or a sustainable bank (Bai,
2011). GB provides a balance between ecology and society (Islam, 2018). Brockmann (2017)
said “...from a bank’s point of view, green finance goes beyond managing climate risks and
involves asking whether certain carbon emission intensive projects or sectors should be banned
from the portfolio or new lending.”

Zhixia, Hossen, Muzafary and Begum (2018) found that all scheduled banks (in
Bangladesh) have articulated their own green banking policy Guidelines approved by their Board
of Directors and have formed Green Banking Units on the basis of BB’s guidelines and have
Green Office Guide. They also pointed out the several challenges for GB in Bangladesh such as
lack of awareness and necessary capacity, relocation of industries (i.e., garments, textiles,
tannery), lack of interest among borrowers to go green and consider the environment for their
project (Zhixia, Hossen, Muzafary, & Begum, 2018). Green banking undertakes proactive
measures to protect environment and to address climate change challenges while financing along
with efficient use of renewable, non-renewable, human and natural resources (Lalon, 2015).

Bangladesh Bank, in the Annual Green Banking report of 2012, stated that “Green or
sustainable banking is not limited only to inhouse green activities, but extends to facilitating
green financing. Environmental Risk Management (ERM) guidelines is a part of green banking
and ERM is for assessing environmental risks and not intended to squeeze investment; rather it is
for sustainable finance.The policy guideline for green banking has been devised on the basis of a
green economy, which, in turn, is based on renewable energy , green buildings, clean
transportation , water management , waste management and land management.”

Methodology
The nature of this study is descriptive and qualitative. The aim of this research was to
gain in-depth knowledge on the challenges of Green Banking. In order to collect data several
interviews were taken of bankers and academics. The participants for the interviews were chosen
CHALLENGES OF GREEN BANKING 4

on account of the knowledge and experience they possess in the field of Green Banking. The
interviews were pre-scheduled and took place in the offices of the respondents. The data
collected from the interviews were transcribed and interpreted. The data was filtered, analyzed
and summarized in an organized manner to identify the challenges of Green Banking in
Bangladesh. Also, secondary data has been collected from annual reports of Banks and Financial
Institutions, various reports published by international organizations, newspaper articles and
websites. Additionally, different working papers, journals and articles have been studied to
enhance the literature of the study. A concentrated desk research was undertaken to assemble
published data. The collected data has been critically analyzed with the viewpoint of locating the
challenges in the Green Banking sector.
Green Financing in Bangladesh
In Bangladesh Green Banking is basically Green Lending where Eco friendly business
activities and energy efficient industries are given preference in financing by banks.
Environmental infrastructure such as renewable energy project, clean water supply project,
wastewater treatment plant, solid & hazardous waste disposal plant, bio-gas plant, bio-fertilizer
is encouraged and financed by banks. Consumer loan programs are applied for promoting
environmental practices among clients. A total amount of BDT 71.35 billion was disbursed
directly as green finance during Fiscal Year 2018 by 31 Banks out of 57 and 8 FIs out of 33. As
per Bangladesh Bank directives, banks and FIs are supposed to keep at least 5% of their total
loan disbursement as Direct Green Finance (Bangladesh Bank, 2018).

Figure 1 Sector wise Green Financing (Source: 2017-18 Annual Report of Bangladesh Bank)
CHALLENGES OF GREEN BANKING 5

Figure 2 Milestones of Green Banking in Bangladesh (Source: UK Aid)

Difference between Green Banking and Non-Green Banking

In general, green banking refers to regular banking with awareness towards the
environment. Green Banking activities include leveraging public and private capital to speed the
deployment of clean energy projects and solutions.

Table 1: Green Banking vs Non-Green Banking

Non- Green Banking Green Banking

The processes are time- consuming and also The processes are digitized, and it takes a few
have time constraints. minutes to complete transactions.

Everything is done manually, and so there are As computerization has been adopted at every
increased chances of mistakes and frauds. level, making it easier to track mistakes which
has zeroed down the chances of frauds.
Use of Paper increases banks’ carbon Due to digitization paper use has declined
footprint. resulting in reduction of carbon footprint.
Only visiting the branch can let the account ATMs and CDMs are used for withdrawing and
holders withdraw or deposit money which is depositing money. The account holder does not
tedious and at times inconvenient. need to wait for the branch to open up in order to
take money out of the account or deposit it.
Cash is the only medium for purchasing With the introduction of debit and credit cards,
goods or paying for any service. This requires the need for carrying cash is reduced to a
a lot of cash in hand and involves a risk of minimum. Moreover, with online payment mode,
theft or loss. the need for even carrying the cards has been
abolished.
CHALLENGES OF GREEN BANKING 6

Challenges of Green Banking in Bangladesh

Despite being introduced in 2011, Green Banking is still in a nascent phase in Bangladesh.
Only recently there has been a viable, feasible and speedier growth in GB and Green Financing.
Bangladesh faces tremendous challenges internally in this sector which has been hindering the
growth. People are still talking about GB rather than working. The challenges in this sector can
be classified in different categories.

 Challenges and interferences in execution of Green Banking policies

o Inability to come out of the pilot phase and slow progress.
o Lack of capacity and capacity building across FIs and GB stakeholders.
o Banks have been failing to meet the quota of maintaining 5% of total loan
portfolio for direct green financing.
o Absence of sector specific environmental guidelines for financing.
o Formulating appropriate policies such as sector division consistent with hazard or
environmental risk will be hard for BB as they have to labor in hostility from
strong corporate bodies.
o Inadequate compensation for positive externalities of Green Projects and
inadequate penalties for negative externalities of Green Projects.
o Among the 52 sectors Bangladesh Bank marked as eligible for direct green
financing, most of them do not have infrastructural strength to entail investment.
o Out of 56 scheduled banks in Bangladesh only 31 have published Sustainability
Report as per the Global Reporting Initiative (GRI) format despite being directed
by BB in their GB guidelines.
o Poor application of green financing policies among banks. In this regard Kazi
Anwarul Azam of NRB Global Bank said “There is a rush among loan officers to
provide as much green loans as possible to make sure that it shows on the books
for auditing…” (K.A. Azam, personal communication, July 22, 2019).
o There is no co-ordination among the concerned agencies.
o Mid-level and small-level factories are still reluctant towards adopting GB.
o Introduction of Green Industry is being delayed and also Red industries are not
being shifted to appropriate locations.
o Absence of proper monitoring and regulations by BB over FIs

1
Bank Asia, Prime Bank and Mutual Trust Bank are the ones who have published separate
Sustainability Reports https://www.daily-sun.com/arcprint/details/250882/Banks-not-maintaining-
sustainability-reporting/2017-08-28
CHALLENGES OF GREEN BANKING 7

 Accessing Green Finance from International Fund

o Inadequate understanding of the Global Climate Financing arrangements.
o Government’s slowness in identifying National Implementing Entities (NIEs) for
accreditation of the Green Climate Fund (GCF) 2.
o Bad track record of local agencies in project design, implementation and
monitoring.
o Too much dependence on Multilateral Implementing Entities (MIE), like the
World Bank, UN, and UNEP for lodging claims to climate financing forums.
o Lack of internal capacity to prepare strong project proposals.
o Inability to utilize funds properly and finish projects in given timeframe.
o Funding agencies do not have confidence in Bangladesh’s capacity to handle
projects3.
o Procrastination in submitting application for acquiring climate funds.
o Frequent changes of personnel in the governing bodies handling international
funds.
 Field-Level Green Financing Challenges
o No understanding of Financial Implications due to Environmental degradation
 Most financers ignore the long-term effect of environment on financial
outcomes.
 Green Projects bring returns far slower than polluting projects. Sifat
Monzur said “Customers must know and understand the financial
implication of going green…” (S. Monzur, personal communication, July
17, 2019).
o Bangladesh have failed to internalize Environmental Externalities 4. Most of the
for-profit business ventures focus on short-term earnings rather than long-term
impact on the environment. This happens due to weak enforcement of
environment laws and dysfunctional environmental regulatory system.
o Green Projects mature much late than a polluting project in terms of payback thus
creating a gap between the maturity from the investors’ perspective.

2
Till date only 2 institutions in Bangladesh have been accredited as NIEs and Infrastructure
Development Company Limited (IDCOL) and Palli Karma-Sahayak Foundation (PKSF) data fetched
from http://nda.erd.gov.bd/en/c/page/national-implementing-entity-nie
3
In 2005 World Bank cancelled a project named ‘Biodiversity Conservation in the Sundarbans
Reserved Forest’ https://www.thegef.org/project/biodiversity-conservation-sundarbans-reserved-forest
4
As per OECD” Environmental externalities refer to the economic concept of uncompensated
environmental effects of production and consumption that affect consumer utility and enterprise cost
outside the market mechanism”
CHALLENGES OF GREEN BANKING 8

o Operational and Market risk associated with Green Projects increases the time to
gain expected return.
o Green Projects have a high transaction cost which leads to a delayed return from
them. Green Projects requiring high initial cost fail to arrange funding and some
of the low-scale green entrepreneurs even fail to prove credit-worthiness.
o Lack of awareness among investors, customers, entrepreneurs.
o Nonappearance of an efficient green banking database.
o Technology used in Green Projects are new in Bangladesh thus resulting in poor
handling and governance of the projects.
o Green projects and Green Financing are almost entirely reliant on Bangladesh
Bank.
o Green Marketing has not yet been efficiently adopted.
o Increasing number of Non-Performing loans.
o Lack of environmental disclosure of FIs as well as enterprises which increases
search cost for potential green investors.
o Green Products are not being offered to the public.

Figure 3 Challenges of Green Banking (Source: https://iasscore.in/upsc-prelims/green-finance)

CHALLENGES OF GREEN BANKING 9

Expected Outcomes from Green Financing

The present condition of pollution in Bangladesh is the worst in history. Bangladesh is

placed 179 on Global Environmental Performance Index 5. As per World Bank report in 2015
28% of deaths in Bangladesh are directly or indirectly caused by pollution (World Bank, 2018).
The same report also stated that Bangladesh loses around $6.5 billion every year due to urban
pollution. ‘The State of Global Air 2019’- a report published by Health Effects Institute (HEI)
stated that indoor and outdoor pollution caused more than 123,000 deaths in Bangladesh in the
year 2017 (Health Effects Institute, 2019). ‘World Air Quality Report 2018’ of IQAir stated that
Bangladesh has the most polluted air in the world and Dhaka is the second most polluted capital
of the world (IQAir , 2019). As per the Department of Environment (DoE) brick kilns make up to
more than 60% of the country's total air pollution (Shachi , 2018). The government has been
promoting modern technology for brick kilns like Hybrid Hoffrman and Tunnel technology
(HHK) which is being widely used in countries like China and under Bangladesh Bank’s
Refinance Scheme, new or old eco-friendly brick kiln would get funding for implementing
environment friendly technology.

The various initiatives towards achieving sustainable development are mostly in the
process of thinking, discussion, drafting, or at the stage of building awareness in Bangladesh.
After the success of Millennium Development Goals which were achieved in 2015, the United
Nations set Sustainable Development Goals in 2015 to be achieved by 2030. Green Financing is
closely related to achieving these goals. Green Investment is being strongly encouraged in
various forums (Saha, 2016). Bangladesh have been performing better than many countries in
achieving these goals except for three of them and Green Banking has been a big part of this
success (The Daily Star, 2019). Bangladesh was the first country among Least Developed
Countries (LDC) to formulate and implement strategy to combat climate changes by crafting
BCCSAP in 2009 (MoEF, 2009).

Recommendations

Bangladesh has definitely been seeing a positive and steadier progress in Green Banking
and Green Financing in the past few years. Sifat Monzur of IDCOL says “GB grew unbelievably
in the last 2-3 years in Bangladesh…” (S. Monzur, personal communication, July 17, 2019).
With the help of digital marketing people are becoming more and more aware of Green Banking
initiatives. Young generation prefer banking over internet and mobile apps. Government

5
https://epi.envirocenter.yale.edu/epi-country-report/BGD
CHALLENGES OF GREEN BANKING 10

assistance is also growing stronger with shifting of industries like Tannery Industry to Savar -
which was a big accomplishment. Presently Government of Bangladesh is working on
establishing numerous economic zones. Commercial banks now slow understand the concept and
importance of Green Financing and more and more personnel are being trained on GB. On the
whole, the future of GB seems positive however there are still many areas Bangladesh need to
improve on.

 A plan should be formulated to incorporate SMEs in Green Banking.

 Practice of Green Accounting should be introduced.
 An analytical and numerical framework should be introduced for companies to
assess harmful effects on the environment.
 Sector wise policies should be implemented and also new sectors like
Manufacturing, Transport, Urban Building Construction and Housing and Clean
Power Generation can be included in the purview of green products.
 A separate unit should be set up regarding Green Finance within the Ministry of
Finance regarding GB.
 A different body for guarantee can be created to bear the credit risk for medium
and small-scale customers.
 More and more focus must be given in capacity building to make sure that
Bangladesh achieves more grant under the Green Climate Fund and handles
grants and Green Projects more professionally.
 Bangladesh Bank can provide financing and technical assistance to FIs for
adopting technology.
 Tenure of the loans provided in Green Refinance Scheme should be increased to
10 years as returns in Green Project are achieved very slowly.
 The target of direct green finance disbursement can be adjusted as percentage of
total term loan disbursed rather than total loan disbursed.
 More focus can be given to venture capitalists to finance green projects.
 Successful models like Agent Banking and Micro Finance can be incorporated in
GB.
 A coalition scheme among banks might eradicate high transaction cost for small
green entrepreneurs.
 BB should be stricter in monitoring Banks’ and FIs’ GB activities. Every bank and
FI should publish sustainability annual report.
 Green Banking products like Green Bond, Green Savings Account etc. should be
introduced. Products like green savings account open a doorway for general
CHALLENGES OF GREEN BANKING 11

people, to be part of green banking. Kazi Anwarul Azam mentioned that GB

comes from people first (K.A. Azam, personal communication, July 22, 2019).
 Green Buildings should be promoted in corporate sector with low cost financing.
 BB should publish the names of top performing Banks and FIs regularly 6.
 Stock Exchanges should adopt green and sustainable practices.
 Banks and financial institutions should publish an annual list of non-performing
loans for environmental reasons as measure to quantify financial implications of
environmental risks.
 Concept of Sustainable Finance should be taught to Business Students.
 Data related to Green Banking should be handled and kept sophisticatedly. An
online databank should be created.

Concluding Remarks

Slowly but steadily the economy of Bangladesh is improving. With gradual rise in GDP
and exports Bangladesh recently graduated from LDC to Developing Country 7 . Now is the
perfect time for Bangladesh to thrive in Green Banking. Greening the finance sector has long-
term effect on achieving the SDGs. For a country like Bangladesh Green Banking is a very
crucial step in achieving the SDGs. Bangladesh Bank is one of the few central banks in the world
to initiate Green Banking as a policy. As a member of the Sustainability Banking Network
(SBN)8 BB’s role in Green Banking has been exemplary. Such a step shows the government’s
concern for the environment and urges the private sector to work on saving the environment.
Despite going through immense challenges Bangladesh has been performing quite satisfactorily
in Green Banking activities. With more scrutiny and regulations GB in Bangladesh can advance
even more in the coming future.

6
BB only published the list once in 2012
7
https://www.un.org/development/desa/capacity-development/2018/04/10/leaving-the-ldc-
category-booming-bangladesh-prepares-to-graduate/
8
https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/sustainability-at-
ifc/company-resources/sustainable-finance/sbn_members
CHALLENGES OF GREEN BANKING 12

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Acronyms

ATM Automated Teller Machine

BB Bangladesh Bank

BCCSAP Bangladesh Climate Change Strategy and Action Plan

CDM Cash Deposit Machine

DoE Department of Environment

ESRM Environmental & Social Risk Management

EP Equator Principles

FI Financial Institutions

FY Fiscal Year

GRI Global Reporting Initiative

GoB Government of Bangladesh

GB Green Banking

GCF Green Climate Fund

GDP Gross domestic product

LDC Least Developed Countries

LCR Low-Carbon, climate-resilient

MoEF Ministry of Environment and Forest

MIE Multilateral Implementing Entity

NIE National Implementing Entity

OECD Organization for Economic Co-operation and Development

SME Small and Medium-sized Enterprises

CHALLENGES OF GREEN BANKING 18

SDG Sustainable Development Goals

UNEP United Nations Environment Program