Innovations, Finance and Banking in Bangladesh

1. Innovations, Finance and Banking in Bangladesh Dr AtiurRahman Governor, Bangladesh Bank Email: governor@bb.org.bd 17 December 2010 Kathmandu, Nepal

2. Outline • Introduction • Major Innovations in Bangladesh • Major Breakthroughs and Attainments • Innovation In Financial Inclusion To Accelerate Inclusive Economic Growth • Monetary Policy for Promotion of Inclusive Growth • Concluding Remarks…

3. Introduction • The path of social and economic progress is strewn with numerous constraints and barriers (e.g. resource scarcity, cultural attitudes, technical limitations, regulatory obstacles and so forth). Innovations are creative steps in getting around such constraints and barriers. • The long colonial past of Bangladesh stifled the spirit of innovative initiatives in the population. • The age groups attuning adulthood in the post-liberation decades have however displayed considerable ingenuity and creativity in innovating solutions to many seemingly crippling constraints that caused Bangladesh at her birth to be labeled a hopeless international basket case.

4. Introduction..(Cont’d) • As in the developed and fast growing emerging economies, it is important for Bangladesh to stimulate, support and carefully nurture the spirit of creativity and innovation. • To begin with, let us recount some major post-liberation social and financial innovations in Bangladesh that have gone great lengths in smoothening the path of further progress.

5. Major Innovations in Bangladesh • Governance Innovation: The Caretaker government is a Bangladeshi innovation in safeguarding democratic governance, with parliamentary elections conducted by interim non-party transitional governments. • Major economic reforms putting needed emphasis on private sector (both profit and non-profit). • Back-to-Back import LCs overcoming FX scarcity constraint in apparels exports: • The imported input based apparel exports began in Bangladesh in early 1980s when foreign exchange for import was scarce; The innovation of usance back-to-back import LCs got around this problem, spawning a globally competitive export industry .

6. Major Innovations (Cont’d) • The arrangement pays for input imports out of export earnings received. • Emphasis on low cost solutions of social development using public-private partnership e.g. EPI, ORS, non-formal primary education, community health clinics, etc. • Microcredit: Microcredit for self-employment of the poor pioneered by Bangladesh is an innovation now being replicated worldwide as a tool for combating poverty. • Women empowerment: Self employment and wage employment based on microcredit and apparels export for millions of women in Bangladesh have meant huge strides in women entrepreneurship.

7. Major Innovations (Cont’d) • Synergies from clustering and networking spawned a vibrant light engineering sector: • Clusters of small light engineering enterprises in Dhaka, Bogra and elsewhere in Bangladesh are fabricating spares (in many cases entire plants) of agricultural, irrigation, construction and other industrial machinery and equipment at fractions of import costs. • These enterprises have also innovated low cost light transportation vehicles for rural roads and waterways, powered by engines for irrigation pumps/power tillers.

8. Major Breakthroughs and Attainments • Pioneering micro-credit as a tool for combating poverty. • Building up a globally competitive apparels export sector from scratch. • Near self-sufficiency in food production; a good record of disaster management; Rapid decline in population growth from 3.0% in 1975 to 1.3% in 2010. • Sustained real GDP growth averaging 3.7% in 1980s, 4.8% in 1990s and 5.7% since then. • Impressive performer in attaining MDGs: • Life expectancy has risen from 50 to 63 since 1975; • Rapid decline in child and maternal mortality; • Literacy has more than doubled; • Gender parity in primary and secondary education is achieved. 8

9. Macroeconomic Fundamentals • Economic growth is resilient and impervious to shocks (both natural and external). • Private sector is the lead driver of growth. • Cost competitiveness in terms of low cost labor. • Growing exports and workers’ remittance inflows bolstering external sector viability. • Low external debt service viability, under six percent of export. • Resilient and well regulated banking and financial sector. 9

10. Cyclone 2B: Casualty: 400 people 8,000 cattle Very severe tropical Cyclone BOB 01 Asian Economic Crisis Very severe cyclonic storm BOB 06: 300,000 affected 8755 homes destroyed MFA Phase Out Oil Price reaches > $100/b Economic Crisis Tropical Cyclone 04B: Casualty: 650 people 17,000 cattle Most severe flooding in modern history: 66% of the land affected, 1000 deaths, 26,000 livestock lost, 16,000 km roads damaged Severe Floods: 36% of the country flooded, 36 mn people affected Cyclone Sidr: 3500 people killed Major floods: 500 died, 30% of the country affected Tropical catastrophic cyclone Natural Disasters External Shocks Linear Trend Line (Real GDP Growth) Growth is Impervious to all Shocks

11. Growth Demonstrates Remarkable Consistency • Bangladesh did not suffer from the boom-bust cyclicality evident in other emerging economies. This provides greater macroeconomic certainty. 11

12. Exports Represent an Important New Pillar of Growth • Ready made garments (RMGs) exports have doubled in the last 4 years despite the expiration of MFA in 2005 and collapse in global demand in 2008. • Besides RMG exports of a diverse range of primary and manufactured products are also growing. 12

13. Steady Current Account Surpluses Provide External Buffer • Rapid growth in remittances (500% growth in a decade ) helped Bangladesh to boost current account surpluses. 13

14. Well Contained Fiscal Deficits Strengthening Debt sustainability • Consistently moderate fiscal deficits are easily financed by concessional foreign borrowings and a deepening domestic government bond market.

15. Resilient FDI Despite the Global Crisis • Bangladesh’s increasing competitiveness continues to attract FDI despite the global slowdown. 15

16. Rapid Reserve Accumulation Provides Yet Additional Buffer • Bangladesh’s record accumulation of FX reserves coupled with stable flows associated with remittances has virtually insulated the country from balance of payment pressures. 16

17. Resilient Banking Sector Performance Despite Global Crisis • Bangladesh’s financial system has seen strong improvement in the operations as evidence from improving capitalization, reduction of NPLs and profitability. 17

18. Microcredit Operations in Bangladesh • Financial inclusion of the poorest, particularly their access to small-sized credit is a major tool in Bangladesh for combating poverty. • The Grameen Bank and the MFIs brought about a major breakthrough in reaching out to the rural poor with • lending models specifically including agenda imparting necessary minimal literacy and numeracy to aspiring member borrowers; • gender preference for female borrowers, in the expectation of improvement in their financial standing in the traditionally male dominated families.

19. Formation of MRA • The Government of Bangladesh (GOB) has constituted a Micro-credit Regulatory Authority (MRA) chaired by Governor, Bangladesh Bank to license, supervise and ensure sound functioning of the MFIs . • The MRA being chaired by Governor has given a huge boost to the credibility of the MFIs licensed and supervised by the MRA.

20. MFIs are extending microinsurance to microcredit clients • Many MFIs in Bangladesh have collaborated with insurance companies to offer modest sized covers at affordably low rates of premium such as: • Credit life insurance (‘debt dies with debtor’); • Accident insurance (for sicknesses and injuries requiring hospitalization etc.); • Property insurance (usually for livestock bought with MFI loans). • Typically the MFIs act as partner agents of the insurance companies, collecting premiums on their behalf.

21. MFIs are extending microinsurance to microcredit clients..(Cont’d) • A February 2007 survey posted in CGAP’s microfinance gateway reported: • 10 insurance companies in partnership with 61 MFIs offering different microinsurance products in 81 schemes; • Cumulative premium collections of over Taka 11.2 billion from about 4.5 million clients.

22. Innovation in financial inclusion to accelerate inclusive economic growth • Financial inclusion as a tool for reducing poverty and ensuring broad-based inclusive economic growth is receiving high policy priority in Bangladesh. • With formal financial institutions unenthusiastic in providing financial services to the poor due to high costs and risks, MFIs in Bangladesh went far in promoting financial inclusion. • Around four-fifths of the adult population now receive basic financial services from regulated and supervised financial institutions, MFIs and cooperatives.

23. Financial Inclusion..(Cont’d) • To cover the remaining one-fifth, BB is encouraging cost saving innovative partnerships of financial institutions, MFIs and mobile phone/smart card based technology platforms. • Besides BB, the post office department, and public utilities including the railway department has taken steps to introduce electronic money order, mobile phone based utility bill/ rail ticket price payment. • The Prime Minister’s office with its Digital Bangladesh program has taken some co-ordination initiative, which can be strengthened further. 23

24. BB’s financial inclusion initiatives • BB is taking strong initiatives to reach under-served and unbanked people with banking facilities. • Credit facilities have been extended to farmers and small entrepreneurs, who have been a ‘missing middle’ for long vintage . • BB’s financial inclusion initiatives continues strong support for adequate lending for agriculture, SMEs, renewable energy and other productive sectors. 24

25. Agriculture • An impressive agricultural credit policy declared, given priority to marginal farmers; ‘area approach’ method for farming; women are given priority. • A record target of Taka 126.17 billion for 2010-11, a 9.6% increase over 2009-10; Impressive record of disbursement (around 97% of the total target in 2009-10). • A first ever Taka 5.00 billion refinancing line against loans to landless sharecroppers in partnership with a recognized MFI. • Open credit disbursement programs. • Strong monitoring system in place. 25

26. Agriculture..(Cont’d) • 3-level (BB, Head office and branch office of concerned banks) monitoring system has been developed to watch credit disbursement and recovery process. • Mobile phone number of each borrower is being collected for direct monitoring from the Central Bank. • Bank accounts for farmers at free of charge with initial deposits of only Taka 10; already opened around 9.0 million accounts. These accounts are being used to disburse government input subsidies to the farmers. • These accounts will also facilitate small savings, revolving loans, remittances etc. • Emphasis on value added agriculture. 26

27. Stakeholder consultations on financial inclusion, down to grass root levels • Open agricultural credit program in presence of the Governor ensures greater transparency. 27

28. Innovative Central Bank-NGO collaboration in financing sharecroppers • Sharecroppers receiving training on the effective usage of credit. 28

29. Stakeholder Consultations..(Cont’d) • ‘Farmer and Development’ program organized jointly by Bangladesh Bank and BTV (national television of Bangladesh) with active participation of farmers. 29

30. Evaluation of agricultural credit • Field visit by the Governor evaluating impact of agricultural credit. 30

31. SME • BB has formulated elaborate guidelines for SME credit. • Establishment of industrial units following ‘Area approach’ and ‘Cluster approach’ method. • A separate department ‘SME and Special Programs’ has been launched to accelerate SME activities and also to enhance monitoring. • Refinance scheme of Taka 6.00 billion for small and medium enterprises; 15% of the refinance fund allocated for woman entrepreneurs. • SME credit up to Taka 2.5 million can be disbursed against personal guarantee to woman entrepreneurs. 31

32. Women Entrepreneurship • Banks are encouraged to expand lending to micro and small entrepreneurs with special focus on women. 32

33. Green Banking • Refinance scheme of Taka 2.00 billion for environment friendly investments like solar energy, bio-gas, and effluent treatment plant (ETP). • BB itself has already set up a 10 kilowatt solar panel. • A commercial bank has partnered with an NGO in working out a scheme of producing solar energy in 4000 remote households in haor areas in Sylhet. • Elaborate guidelines on Green Banking covering energy efficient office management, restrictions on lending to polluting industries, improved waste management and encouraging use of solar energy by financial institutions will be offering soon. 33

34. Green Banking..(Cont’d) • Governor inaugurated BB’s solar power system: a step toward encouraging green banking in Bangladesh. 34

35. Solar Irrigation • Solar irrigation project supported by BB’s refinance window. 35

36. ICT/Automation • Introduction of E-commerce/E-banking – a giant stride towards digital Bangladesh. • Mobile Banking; quick receipt of remittance through banking channel with NGO linkages in rural areas . • Automated Clearing House at BB. On-line CIB; connectivity between BB and Head offices of banks and financial institutions. • Electronic fund transfer network will soon go live. • Enterprise Resource Planning (ERP) Solution covers digitization of procurement (e-tendering), cash management, recruitment process (on-line application) etc. 36

37. ICT/Automation (Cont’d) • IT platforms in banks and BB itself are undergoing continuous upgradation. 37

38. Mobile Phone Based Remittance Services in Bangladesh • Prompt delivery of workers’ remittances, at affordable costs, to recipients in rural areas away from bank branches has for long remained a challenge for banks. • Fast expanding mobile telephony in Bangladesh has opened up windows of opportunity for creative partnerships of banks and mobile telephone companies in devising cost effective arrangements for delivery of remittances. A number of MFIs have joined hands with banks and mobile telephone companies. • BB has been encouraging such bank-led partnerships which will bring win-win cases for all concerned; A number of such BB approved partnerships are already active.

39. Providing Financial Services to Unbanked Poor: some examples • bKash, a subsidiary of BRAC Bank, in partnership with telephone operators in Bangladesh is working to provide financial services via mobile phones to the unbanked poor, particularly in rural areas. • The bKash mobile wallet will be the customer account into which money can be deposited and out of which money can be withdrawn or used for various services. • Customers will be able to receive electronic money into their bKash accounts through salary, loan, domestic remittance, and other disbursements and eventually will cash-out the electronic money at any of the thousands of cash-out agents which bKash will assign.

40. Providing Financial Services to Unbanked Poor: some examples..(Cont’d) • Trust Bank (a commercial bank in Bangladesh) is taking initiatives to establish Pay-points in rural areas that will be used for domestic and international money transfer, disbursement of SME and agricultural credit, transferring government subsidies, pension funds and so forth. • The bank using MFI linkages is extending credit to the crop sector. • To include the unbanked members of the Armed Force into the financial services, the bank is offering special accounts offering digital payments of salaries, pension funds and E-card for the beneficiaries. • A few other bank-led financial inclusion initiatives are also in preparatory stage.

41. Monetary Policy for Promotion of Inclusive Growth • Monetary policy of BB aims at maintaining price stability while also supporting growth pursuits with adequate monetary accommodation for all productive economic activities. • Drafting of monetary policy is preceded by broad-based stakeholder consultations; post announcement feedback are also lately being obtained with BB participating in discussion sessions outside BB. • The monetary stance for FY 11 is designed to render meaningful support to government’s policies and programs aimed at placing the economy in firmer traction on path of faster inclusive growth and poverty reduction; while also maintaining monetary and price stability. • BB’s developmental stance without compromising mainstream regulation and supervision played well in coping with recent financial crisis. 41

42. Concluding Remarks • Belying the widely held perception as an international ‘basket case’ at her birth in 1971, Bangladesh has achieved remarkable development turnaround with relatively low investment level compared with the East Asian economies. • Over the last three decades, Bangladesh has raised its per capita income four-fold, cutting poverty by more than half, and is well on course in attaining most of the millennium development goals. • Recently rewarded by UN for already achieving one of MDG goals. 42

43. Concluding Remarks..(Cont’d) • With current trends of per capita national income growth, middle income country status for Bangladesh is not far off. • Bangladesh Bank will continue designing of monetary and credit policies targeted at supporting attainment of the country’s desirable growth targets, ensuring adequate credit flows to the productive sectors focusing on financial inclusion for the disadvantaged. • BB will continue to encourage various financial innovative experimentations without forgetting its core role of maintaining financial stability and containing inflation. • Mind it Grameen Bank was born in the womb of BB. • BB will continue to transit ‘confidence’ in the on-going uncertain time of financial crisis. 43

44. Many thanks