Why is green finance not picking up in Bangladesh?
Greening the economy is the prerequisite for attaining sustainable development goals. Transitioning to a green economy requires large-scale investment, with a principal role for the government to build an enabling environment for private sector financial institutions to scale up green investments.
As such, many countries established clear guidelines and mandatory regulations to direct public and private financing towards green products and projects, offering an encouraging atmosphere for domestic financial institutions.
Similarly, the central bank of Bangladesh, the Bangladesh Bank, has already prepared policy guidelines to boost green finance and sustainable finance. Bangladesh Bank set a minimum target of 5 per cent green finance attainment for every bank and NBFI working in Bangladesh.
Central bank data show Tk 7340 crore has been disbursed as green finance in 2021 by all the banks and NBFI of Bangladesh, which is merely 3 per cent of the total term-loan disbursement of that year. Bangladesh Bank calculates green finance based on the term loan disbursement only. As per the green finance taxonomy of Bangladesh Bank, there are 68 green products. If any of those products are financed in a term-loan structure, it is considered green finance. Further, Bangladesh Bank has introduced three refinance schemes for green products, which offer lower interest rates and higher tenors.
Despite the significant policy initiatives from the Sustainable Finance Department of Bangladesh Bank, green finance is yet at a very early stage in Bangladesh. Consequently, only green debt financing is slowly taking ground in the nation. However, financial actors other than the banking industry (Banks & NBFI) are not subject to regulations set by Bangladesh Bank.
Globally, alternative investments such as impact investors, venture capital (VC) funds, and private equity funds are the primary sources of financing green projects. Alternative investments typically have a long lock-in period, which aligns well with the appetite for green projects. Those alternative financiers have the potential to add value by providing specialised knowledge, industry connections, or management skills, therefore carrying additional benefits to the financial contribution.
Although the government has been encouraging overseas investors by reducing stamp duties since the introduction of Alternative Investment Rules in 2015, the number of overseas investors operating in Bangladesh is still low.
Mentionable that after the formulation of the Bangladesh Impact Investment Strategy Action Plan, no significant changes are visible yet in the market of alternative investments. To scale up green finance and meet the financing gap for sustainable development, the alternative investment market needs to be vibrant alongside the green debt financing of the banking industry.
In a developing economy like Bangladesh, the entrepreneurs of green projects expect soft loans or low-cost funds from the funding agency. Soft loan means funding with a lower interest rate, longer tenure, and higher grace period. The banking industry of Bangladesh uses low-cost refinance facilities of Bangladesh Bank to finance green projects, which is inadequate considering the demand in the market.
Other than refinance facilities, the banking industry uses depositors' money for financing green projects, which incurs higher interest rates at the borrower's end due to the high cost of funds. Alongside the high cost of funds, another challenge the banking industry encounters in financing green projects is the maturity mismatch because of the long-term nature of green projects.
Bangladesh is now the 35th largest economy in the world and experiencing higher GDP growth. To match the speed of the current economic growth, a considerable amount of green funds need to be mobilised. Foreign development partners (DFIs) and multilateral development banks (MDBs) can catalyse green finance in Bangladesh with the Bangladesh Bank and other regulators.
DFI can directly provide low-cost green funds to commercial banks to finance green projects. As a result, the banking industry can offer lower-interest loans to green projects using low-cost fund from the DFIs instead of depositors' money. The Green Climate Fund (GCF) could be a potential source of green funds for commercial banks.
Although the banking industry is the leading source of green financing in Bangladesh so far, the scalability of green projects has always been a challenge for banks and NBFIs. Generally, small-scale green projects lack proper documents as required by banks/FI for their due diligence. Besides, small-scale green projects do not have enough capacity to prepare high-quality project proposals in line with the banking industry requirements. In some cases, small-scale green projects are unable to utilise funds within the prescribed time frame.
In these circumstances, a blended mode of financing is a suitable financing model for small-scale green projects where impact investors, NGOs, DFIs, the government, and the banking industry can work jointly. In many parts of the world, the blended finance model is proven effective for small-scale restoration and other environment-friendly projects.
The government alone cannot support the green economic transition of Bangladesh. Similarly, the banking industry alone is unable to meet the high demand for green finance. A joint effort from the foreign development finance institutions, multilateral development banks, impact investors, venture capital, private equity funds, green bond market, NGOs, and the banking industry can take green finance to the next level in Bangladesh.
Although enabling an environment for green finance is the key, we must not forget to focus on capacity development at the end of entrepreneurs of green projects and financiers. Another barrier to the growth of green projects is the additional cost due to the extra requirement of monitoring, verification, and reporting on Environmental Social Governance (ESG) compliance compared to orthodox projects, which often discourages entrepreneurs.
Tax, subsidies, or any other monetary incentives, along with other regulatory support, will motivate entrepreneurs towards green projects.Author
Environmental Economist and Green Finance professional.